Betting everything on net zero – interview with Thomas Hohne-Sparborth

Article published in Handelszeitung, 28 September 2023

The European Union’s ambitious target of protecting the environment via a 55% reduction in CO₂ emissions by 2030, on the road to full climate neutrality by 2050, is supported by a wide array of decarbonisation measures. These relate to the real economy, the financial markets and monetary policy.

In a June 2023 referendum, Swiss voters backed the Climate and Innovation Act – this new law requires Switzerland to cut its energy consumption to net zero by 2050. Businesses and property owners will receive financial support and other incentives from the federal government to drive the transition to climate-friendly business models and buildings operations.

This groundbreaking legislation comes on the heels of the Swiss ordinance on climate disclosures, which was passed in November 2022, and is already in force. It affects large companies that have 500 or more employees and total assets of at least CHF 20 million, or annual revenue of at least CHF 40 million. These firms must implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) from 2024, and provide extensive reporting on their financial performance.

This TCFD-compliant financial information in turn helps investors apply Swiss Climate Scores – a set of best-practice indicators for investors based on the TCFD recommendations. These scores bring greater transparency to the climate impact of financial investments, helping users assess how closely investment funds are aligned with the Paris Agreement. They also encourage investment decisions that will help achieve these targets.

One such Swiss Climate Score is the “Implied Temperature Rise” (ITR). This indicator, which is expressed in degrees Celsius, estimates the global temperature rise that would take place if the entire economy had the same climate performance as the asset in question – be it a property, a company or a portfolio.

Read also: How to select companies for net-zero portfolios

Transition risks

Of course, the growing demands on companies to disclose their emissions policies and move towards net zero also harbour risks, and will not be achieved without friction and some major upheaval. There is no avoiding this process, however, as failure to act could be penalised on many fronts. Companies that resist disclosing their climate performance face the prospect of heavy fines from Bern or Strasbourg. They could also suffer a loss of demand as customers make a conscious shift towards environmentally-friendly goods and services. This risks playing into the hands of direct competitors who provide greater transparency, have a stronger focus on decarbonisation and live up to customers’ green expectations. What is more, reform laggards face being reliant on ever-more costly emissions credits in the carbon trading system – when they could instead be investing in decarbonising their business models and avoiding potential liability issues arising from a failure to cut emissions.

Read also: Two challenges, many solutions for investors: where biodiversity protection meets decarbonisation

Investors are looking beyond carbon footprints

For an investor who wants to focus on net-zero objectives and climate policy, and gear their portfolio towards net-zero emissions, an investment strategy that considers carbon footprints alone will not be sufficient. After all, a carbon footprint only captures retrospective data, providing information on emissions that have already taken place. However, an investor wanting to concentrate on decarbonisation between now and 2050 needs to understand a company’s potential to reduce emissions in future. A forward-looking approach, considering the following aspects is imperative:

- The credibility of a company’s decarbonisation plans and strategy
- The analysis and breakdown of emissions into:

• Scope 1 (direct emission of GHGs (greenhouse gases) by the company)
• Scope 2 (indirect emission of GHGs by its energy suppliers)
• Scope 3 (indirect emission of GHGs in the upstream and downstream value chain)
• Scope 4 (avoided emissions of GHGs)

- The impact of new technologies and political measures on decarbonisation
- The company’s progress towards emissions-reduction goals as soon as new data is available

Forward-looking information like this allows investors to constantly re-evaluate the risks and opportunities associated with carbon reduction, and to keep refining their portfolio’s alignment with the transition to net zero.

Read also: Going beyond ESG – sustainable investing explained