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00:00
Bob Smith: Good day. I'm Bob Smith, Chief Investment Officer at Sage Advisory, and I'm joined today by my colleague Andy Poreda, Senior Analyst in our ESG research team. We’re here to talk about the concept of net zero. Many of us have heard the term net zero, but how many investors really understand the meaning and goals that define this concept and how they might relate to their investment portfolios today, as well as in the future? Our ESG research team, led by Andy, recently released a very interesting report entitled “Net Zero Heroes: Understanding Corporate Challenges, Realities, and Goals.” From countries and companies, to individuals, tackling climate change is at the top of everyone's agenda. One way we can help to do this is to reach net zero. So, what does it mean to be net zero? We've all heard the term net zero. But what exactly does it mean? Simply put, net zero refers to the balance between the amount of greenhouse gas produced and the amount removed from the atmosphere, we reach net zero when the amount we have is no more than the amount taken away. Why is net zero important? Reaching net zero is important as it's the best way we can tackle climate change by reducing global warming. What we do in the next decade to limit emissions will be critical to the future, which is why every country, sector, industry, and each one of us must work together to find ways to cut the carbon we produce. So, let me ask you, Andy, when does the world need to reach net zero? And why?
01:45
Andy Poreda: Bob, I think that's a great question. I think first to talk about why we need to reach net zero the first thing to highlight is that in 2018, the Intergovernmental Panel on Climate Change, also known as the IPCC, met and showcased a report that if the earth exceeds one and a half degrees Celsius above pre-industrial levels, any excess warming is going to cause extreme sea level rising, biodiversity challenges that can affect things like our food sources, and also things like extreme drought and other forms of extreme weather. So, I think that's the big thing to note is that even just a little bit above this one and a half degrees Celsius will have catastrophic damages, and I think that really raised the alarm. So, that is something that really was brought up by this report. Now, the other part of the report was, how do we get society to prevent warming in excess of one and a half degrees Celsius? So, this is where this concept of net zero came about. Essentially, what the IPCC has proposed is that we need to have a reduction glide path of our emissions, both the emissions output, in that the offsetting of things like trees and other stuff to take carbon out of the air or other greenhouse gases out of the air. Basically, we need to have this reduction glide path and then ultimately get to this idea of net zero to prevent that one and a half degrees warming from happening. Now, we know that can't happen overnight. It's basically a marathon over how fast we have to do this, but we have to start now. The IPCC set 2050 as the target date where, if we can get to net zero carbon neutrality by 2050 as a society following a constant glide path, we will then be able to prevent this one and a half degree warming from exceeding and trying to keep it below that so that we can continue to have a healthy Earth.
03:43
Bob Smith: Thank you for that Andy. It sounds to me like it's pretty much a global affair. A question that I would ask is it do all countries need to reach net zero at the same time? Is this a matter of concern to us? An important part of the whole equation of net zero, we know that the major emitters, like the United States, Europe, India, China, need to reach net zero in their greenhouse gas emissions by 2050 or it will be hard for the math of this problem to work, regardless of what every other country does on the planet. We know that only about 20 countries have signed on so far to net zero policies that are enshrined in law or in some major policy agreements, and that there are about 120 countries that are committed to doing something on net zero in having targets through their membership in the Climate Ambition Alliance. That includes pretty much all the least developed countries, but only a handful of the highest emitting countries. So right now, around 10% of the global emissions are covered by some form of an adopted net zero target, according to the World Resources Institute. Andy does this have to change? And if so, how quickly do you think it's going to change?
05:08
Andy Poreda: Well, Bob, I think you brought up the big question and difficulty in fighting climate change – if a country like China who is responsible for a huge portion of the world emissions does not get to net zero by 2050, that means another country may have to get there sooner and also commit to more carbon offsetting measures to get a net negative like we're seeing some companies that are actually pledging to do. I think that's the big difficulty, that for every country that doesn't make it, somebody else is going to have to pull their weight even more so or we're going to go right past that one and a half degree Celsius warming, and all this work will be for not, so I think it is very important. I think this discussion is something that we're going to see play out when we have these worldwide discussions moving forward, especially later this year when COP 26 (UN Climate Change Conference) meets. I think that'll be one of the discussions, if a country isn't going to get to net zero, what are the other more capable countries going to do to enact that offset?
06:10
Bob Smith: I think it's fair to let everybody know that Bhutan, the Himalayan country, is the first country on our planet to actually be carbon net negative as of last year. They have the first-place position in becoming net zero and have gone the extra mile by being net negative. So, hats off to Bhutan, and I hope that many others follow soon after. Now let's talk a little bit about how we can actually achieve net zero. We know that policy, technology, and behavior probably need to shift significantly across the board from where we are today. Energy efficiency and fuel switching measures are critical for industry, transportation, and so forth. Halting deforestation, restoring degraded lands, are ways that we can have meaningful impact to reduce emissions. I'd like to have Andy explain in detail the four major categories for how we can evolve and work towards net zero on a more global basis.
07:24
Andy Poreda: Absolutely, Bob. I think you hit the nail on the head, I do think policy is going to help push what stakeholders are doing to help with climate change in a very meaningful way. We can see that even in the United States here, when we have a tax credit on electric vehicles that helps make it easier for a consumer to buy an electric vehicle, which ultimately then has environmental benefits moving forward. So, those types of measures, as well as proposed things like carbon taxes will be very vital in helping to shape what everybody does moving forward. I like to think of what we can do for fighting climate change from a carbon emissions perspective into four different levers that stakeholders can utilize. I think the first one that anybody can have a part in doing is reduction measures. That means, if I set my thermostat to 78, instead of 70, I'm able to save a lot of carbon emissions, because the source of my air conditioning is most likely, a percentage of it, from a fossil fuel-based product. So, that type of reduction is going to be essential to look at for everybody and what they can do to reduce their emissions. I think the best one that's really going to be the future and the game changer is going to be the innovation side of things, that technology that Bob spoke to. That innovation is going to be done a lot of different ways, but it could be an innovation such as advanced algae-based biofuel that can be produced on a large scale and would have a huge impact on our emissions, or it could be something like nuclear fusion being created to help be a power source. Those types of innovations are going to be the big discussion as to how much money we spend as a society to ultimately get benefits maybe 10 to 20 years from now, because it's not going to happen overnight, but I think that's going to be the key component. If we really want to fight climate change, how much money we spend on innovation is going to be a key discussion. Then there's a couple other ones that are interesting and proposed as possible game changers as to ways that we can also fight climate change. There is this idea of carbon capture. I know Elon Musk put a tweet out just a few weeks ago about how he is going to give $100 million reward to the best idea for this carbon capture technology, and I think that's another type of innovation, but there are ways for us to pull carbon out of the air and either put it into the ground or use it in some other way. These types of technology could be able to help us quickly and on a wide scale take these emissions and fight climate change on its own. The other part that's just been talked about which is another carbon capture type of idea, is carbon offsetting. These are projects that can be used like planting trees, which help take carbon out of the air or prevent more carbon from being produced. It could even be in places like Guatemala, where residents use open fire stoves, you can then help somebody get rid of that open fire stove, you're helping decrease carbon emissions. So, these types of projects have been and will probably also be vital in fighting climate change. I think of it those four things together, reduction, innovation, carbon capture, and carbon offsetting are the ways to look at what each stakeholder can do.
10:49
Bob Smith: Yeah, Andy I think that those four different categories or methods to achieve net zero are very important. I think it'd be worthwhile to point out also from the World Resources Institute, they have identified a number of key ways or solutions to reduce greenhouse admissions and their top five I thought were pretty straightforward and definitely have some investment implications in there, both in terms of what to avoid and what to embrace. Number one on their list is to phase out coal fired power plants as one of the leading causes of greenhouse gas emissions. Number two is investing in clean energy and efficiency technology. We’ve seen that over the course of the last couple of years here as some of the best performing companies or organizations that are related to that concept of clean energy and efficiency technology. Three is retrofitting buildings. I think that what we're really talking about is how buildings are powered, how they're run, what the materials are that are being used to repair them and construct them and so forth. Number four on their list was to decarbonize things like cement and cement production – steel, because thermal coal, and the carbon emissions that come from the creation of steel as we currently do it here in the United States and around the world. Lastly, the production of plastics, which, as we know, is a petrochemical base substance. The creation of plastics not only have a harmful effect, in terms of greenhouse gas emissions, but in terms of the other damage that is created by single purpose, or single use plastics, and how they find their ways to our oceans and river ways and waterways. Fifth on their list was, fairly emphatically, the shift to electric vehicles. Here again, over the course of the last year in particular, we've seen a fairly dynamic shift in the interest of investors to really become more involved with the notion of electrification of vehicles, whether they're autonomous or self-drive. But it’s clear that over the course of the next decade, this will be a major contribution to the reduction of greenhouse gas admissions.
13:27
Bob Smith: I want to thank you for listening to the first of our two-part series, and I hope that you'll join us for part two of our podcast where we discuss net zero from a corporate and investment perspective and get into some of the technical issues of this rather complex concept known as net zero. I want to thank you for listening to us today. I hope we've left you with a better understanding of the concept of net zero, because climate change is real, it is here, and I hope that we can all join forces and become net zero heroes together. Thank you.
14:05
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