Podcast: What is net zero and why does it matter to investors?

Madeleine Cobb, Head of Corporate Sustainability, talks to Carol Storey, Active Ownership Manager, about why net zero is important to us, how companies can achieve their net zero goals and what we’re doing at Schroders through our own operations and as an investment manager.

Madeleine Cobb (MC): Welcome to our second edition of the Making An Impact podcast, where today we're going to talk about net zero: what it's all about, and why it matters for investors.

I'm Madeleine Cobb, Head of Corporate Sustainability. And today, I am going to be talking to Carol Storey, who is one of our active ownership managers with a focus on climate, so the perfect person to talk to about this. So first off, Carol, let's just start off with, well, what does net zero mean?

Carol Storey (CS): That's a really important question. So the end goal of net zero is to not add further to the amount of greenhouse gases in the atmosphere.

Now, when we're looking at different companies' climate commitments, it can actually be quite confusing, as net zero, the term, hasn't been clearly defined. And many companies are using other terms like climate neutral, which actually has a slightly different meaning.

There are organisations, like the Science Based Targets initiative (SBTI) that are working to provide a much more solid definition and criteria around this term. But really, the core principle is that we ourselves have to reduce real emissions from our business activities, and also, our wider value chain as much as possible, first and foremost.

MC: Thanks very much, Carol. I think that's really important to clarify a little bit around the net zero definitions, because it can be confusing. So why does net zero matter to us? Why is it an important issue?

CS: Well, there's widespread scientific and political consensus that the impact of rising greenhouse gases on our climate is going to be very severe.

The climate agreement goals are to limit global warming to well below two degrees, preferably 1.5 degrees, compared to pre-industrial levels. And our own analysis shows that the climate transition can affect financial markets.

Physical risks, such as increasing frequency and severity of heat waves and floods, and things like transition risk from changes in regulation, and disruption in new technologies, can actually increase the cost for companies. And they could decrease company valuations if they're not managed well.

On the other hand, there are business opportunities for companies, if they are well positioned in the transition to a lower carbon economy. And at Schroders, our role is to protect the capital of our clients from these risks, and really to take advantage of those opportunities.

MC: And so, thinking about what companies can do, how do they achieve their net zero goals then?

CS: Yeah, that's a great question. And actually, what a company needs to do depends very much on the sector.

For a simple people based business, it might be about switching to renewable electricity. It could be about renting green building space and reducing business travel. For a utility, it might be about decommissioning old coal plants and building up renewable capacity.

But actually, there are many sectors where it's a bigger challenge. For example, heavy industries like cement will rely much, much more on technological innovation to decarbonise their business.

What all companies can do is get started by making a commitment to become net zero by mid-century, by setting targets covering their emissions from their operations, but also their wider value chain. And publishing a detailed plan setting out how they're going to reduce emissions and meet their net zero goals.

Madeleine - can you tell us about what Schroders is doing?

MC: So we're really proud to say that those core asks you have of other companies, we are doing ourselves. We have set science based targets, which have been recently validated by the Science Based Targets initiative, which is a great achievement for us as a financial institution, because it does cover our finance activities as well.

But as you mentioned, really, our main actions are around making our buildings more energy efficient, buying renewable electricity, looking at our company car fleet to transition them to hybrid and, ultimately, electric. And as you said, we are working with our own value chain, having the influence we have as a business, not just as an investor, with our own suppliers. So there's lots going on.

We published our Climate Transition Action Plan (CTAP) in December, at the end of last year which does outline in a little more detail the activities we're doing as a business, but also as an investment manager.

So back to you, Carol. Some of those actions you said industries and companies can do, so how can we influence them to make those changes, at the speed we need them to?

CS: I don't think there is a part of Schroders that isn't contributing to our net zero goals. And Madeleine, you've just mentioned some of the steps that we're taking in our operations.

On the investment side, there are actually three parts to our plan. The first is to measure our exposure to emissions, through our investments. And realign our portfolios to a pathway that is consistent with our wider net zero goals.

The second is to actually track and hold investee companies to account, through our engagement programme.

And finally, the third is to find new climate focused solutions, through the products and services that we provide to clients.

One of the things I'm working closely with investors on is that second point about engaging companies. This is so important as we expect a lot of real world reductions in emissions to come from companies transitioning to low carbon business models, rather than from us simply divesting from high emitting sectors.

And I think one of the things that sets us apart from other asset managers is our deep understanding of businesses. This means we can have a really effective dialogue with the people that are leading investee companies and help support their transition.

On a much more practical note, we've set out our climate engagement and escalation framework in the transition plan, the CTAP that you mentioned earlier. This covers what we're actually asking companies to do, how we're going to prioritise companies for engagement, how we'll measure our progress, how we'll vote in AGM season. And actually, what we will do if a company can't or won't transition.

MC. Thank you, Carol. You've given us, as I know, a small insight. I know there's an enormous amount of work going on, across a real breadth of the business. So it sounds really busy, but really exciting. So good luck to you and everyone in trying to achieve our goals. Thanks very much.