The world must become “nature positive” by 2030, and forward-looking companies must only use carbon credits very carefully, according to Hans Mehn, a partner at Generation Investment Management.
Mehn recently spoke with Julie Nash, senior program director of food and forests at Ceres, about decarbonizing investment portfolios and the role of natural climate solutions.
This Ceres Q&A is the first of a series for ESG Clarity, featuring investor perspectives on climate change and climate action.
The scientific case for limiting global warming to 1.5°C is clear. However, we are combatting several challenges, including high inflation, economic uncertainty and political upheaval. How is this likely to impact investor and company commitments on climate?
Not only is the scientific case crystal clear, but the business and broader societal cases for a just transition to a low carbon economy are, too. Many stakeholders have committed to net zero by mid-century or sooner, including the majority of countries, financial institutions with $130trn in assets, and thousands of cities, businesses and more. This shared objective is historically unprecedented and highlights its importance and urgency.
A transition of this nature will inevitably face countless challenges and will need continued commitment and action to move forward at the necessary pace. The inflation and uncertainty arising, for example, from political brinksmanship around oil and gas supply is not a reason to slow down or pause. It is yet another reason to urgently reduce our dependency on fossil fuels, rather than entrench it. It is important that the goal of limiting warming to 1.5°C is seen in the broader context of increasing economic resilience and sustainability. We know that clean energy also enhances energy security, that sustainable agriculture improves the long-term health of productive lands and so on.
We need investors, businesses and governments to fulfill their commitments. We need individuals to act as consumers, voters and activists. We need courts to step in when promises are not upheld with actions. We need to continue this vital transition with urgency and determination.
Net zero by 2050 seems a long way off; what can investors do today to fulfill these commitments?
That requires an enormous transformation of our society and economy, and it isn’t as far away as it sounds. Investors need to have already assessed their exposure and defined a pathway to cut emissions by 50% by 2030 – half the job in less than eight years.
Portfolio companies need to have science-based targets with a clear path to reducing emissions in line with the Paris Agreement goals, and investors should support and assess companies along this pathway.
In addition, there is an imperative to recognize the link between climate and nature, as well as the many other benefits nature brings. The milestone for ending deforestation is 2025, and we need to change the way we work with nature to systematically restore our natural capital – in other words, become “nature positive” by 2030.
Finally, investors must hold companies accountable immediately. This includes requesting companies develop transition pathways, assessing their progress and engaging wherever possible. When companies don’t take swift or meaningful action, it is critical that investors back up their expectations through proxy voting.
Can you talk more about the role of nature in reaching net zero?
Nature annually absorbs about half of manmade carbon emissions, so we will not reach net zero without halting the degradation of nature, as well as investing to better manage and restore it. More broadly, recognizing the time value of carbon is crucial to limiting warming to 1.5°C. For example, deforestation results in a pulse of emissions in the year the trees are cut but also deprives us of their carbon-absorbing capacity for decades to come. Natural scientists tell us that, in the tropics, the true carbon cost is six times higher than the reported emissions from land conversion.
Net zero is not just an end state, but also a matter of the emissions that take place along the way. Companies and investors should explore all ways of reducing emissions sooner and supporting existing carbon “sinks.” This will be critical to stay within the cumulative emissions budget required to limit warming to 1.5°C.
Many companies are using carbon credits for offsetting. What guardrails are needed when companies use carbon credits, and what can investors do to ensure that companies are following these guardrails?
It is imperative that carbon credits and offsetting are undertaken credibly and responsibly. This must begin with a strong commitment to reducing emissions, including a net zero target for 2050 or sooner, an interim science based target or equivalent covering Scopes 1, 2 and 3 and a transition plan for achieving those targets.
As companies demonstrate progress, only then can they turn to carbon credits with credibility, and they must seek credits with high standards around additionality, durability, community and biodiversity impacts. Investors have an important role in assessing the nuances of these activities and can make use of resources like the VCMI Provisional Claims Code of Practice, which outlines clear guardrails for companies making claims, and Ceres’s investor guide.
Companies’ focuses can and should be different. An enterprise operating in a carbon-intensive, hard-to-abate sector may best focus its efforts on developing and deploying low-carbon business solutions at scale. However, a company in an area with high margins and a modest carbon footprint can go well beyond reducing its own emissions and play a meaningful broader role, including through purchasing high quality carbon credits.
Companies can offset with projects that reduce emissions or remove carbon dioxide. There is a trend toward technological solutions that remove carbon dioxide. Is there a role for investing in projects that reduce emissions and natural climate solutions?
Companies and investors must do both. Today, technological carbon removal solutions with clear additionality and long durability are expensive and operating at low volumes. Resources and innovation need to flow to these areas to drive down cost curve and increase scale. Equally, there are nature-based solutions for both the avoidance and removal of carbon, which are here today at planetary scale and affordable costs. These solutions may not have the same duration as their technological counterparts, but with appropriate guardrails, they serve a critical role in limiting global warming to 1.5°C.
