More and more countries and individual businesses are making Net Zero commitments, moving beyond carbon neutrality to removing human-induced CO² emissions from the atmosphere.
Carbon neutrality and net zero emissions are often used interchangeably, but there is one key difference. Carbon neutrality can be achieved by balancing greenhouse gas (GHG) emissions with offsets via buying carbon credits. This means carbon neutrality can be achieved without reducing emissions.
Essentially, net zero carbon challenges “business as usual,” while carbon neutrality allows emissions to remain the same. These commitments necessitate understanding terminology, emissions baselines, setting targets, and managing progress. The classification system for greenhouse gas (GHG) accounting, created by the Greenhouse Gas Protocol, measure carbon footprint using three categories of emissions:
SCOPE 1 – Direct GHG emissions attributable to operations owned and/or controlled by a company, including vehicle fleets and facilities.
SCOPE 2 – Indirect GHG emissions from purchased or acquired electricity, heating, and cooling.
SCOPE 3 – Indirect GHG emissions not covered above, such as supply chain emissions, business travel via non-owned vehicles, and emissions associated with the “use phase” of products.
Reporting and disclosure related to Scopes 1 and 2 is more mature. However, the deepening scrutiny associated with net zero targets means that “Scope 3 investment risks are mounting. These risks may come from new regulation of a company’s high-emission products and shift in end-product market demand driven by climate concerns.”¹
Investors have traditionally focused on Scope 1 and 2 emissions, but as the state of Scope 3 reporting improves, investors like Gitterman are looking to manage Scope 3 risks. Scope 3 is the biggest area for innovation in carbon reduction, especially because for some companies and industries, Scope 3 emissions dominate their overall carbon footprint.
Seeking Low-Carbon Solutions?
Our SMART Fossil Fuel Free Models were launched in 2016. They are a family of global climate aware investment allocation strategies that screen for fossil fuel and utilize carbon foot-printing tools to guide investment decisions. On the equity side of the portfolio, we use Morningstar’s Global Equity Classification Structure to identify key industries partaking in direct fossil fuel investment.
The SMART Fossil Fuel Free models divest from these industries, with the exception of specific diversified water utilities. This is due to our belief that water investments have a strong sustainability thesis, specifically as it relates to UN Sustainable Development Goal #6: Clean Water and Sanitation.
On the fixed income side, we carry out divestment from fossil fuel on a best effort basis, depending primarily on direct dialogues with fund managers and a quarterly analysis of bonds with fossil fuel involvement. We go beyond simple divestment of energy sector companies to understand the carbon footprint of the portfolio using Scopes 1, 2, and 3.