Is net zero a pipe dream without total inclusion?

There is an incontrovertible and sobering fact about the drive to net zero. Any effort that doesn’t work for the whole world will fail everywhere. A path that favours developed markets at the expense of others will lead to a partial net zero, which is no net zero at all.
Unfortunately, too many countries, companies and investors see achieving this goal by mid-century as a divided race against metrics rather than as a united race against time.
That’s why it’s imperative that the upcoming COP26 climate conference align and accelerate global efforts to do right by the planet. Buzzwords aside, it must generate agreement on a practical and fair transition path for all of the world’s 7.9 billion people, most of whom live in emerging markets and will depend on dirty energy sources or industries for a long time to come without support.
The problem is clear. We are facing a massive gaming of the system, where it is possible to appear “clean” on a technicality while leaving emissions unchanged in the real economy. Many public companies and investment managers are focused on a simplistic reduction of their own reported carbon emissions, allowing them to sidestep questions about their environmental impact and avoid becoming a target of climate activism. It looks good on paper — and many surely mean well — but does it really affect the kind of change needed to achieve global goals?
For example, some resource companies are divesting from carbon-intensive legacy businesses in order to get rid of the hassle. This could put those assets in the hands of less scrupulous owners, unaccountable to the public and with no plan to invest in reducing emissions. Fund managers can play the game too, striving for “portfolio purity” by picking and choosing investments that make them look green without having to advocate for real-world carbon reduction. This explains why green equity funds tend to be overweight in technology stocks.
With this sort of math, we see perverse outcomes. For example, allocating more to three of the largest clean-energy producers — Iberdrola SA, Enel SpA and NextEra Energy Inc — can actually hurt a fund’s rating for carbon intensity versus a known benchmark because these providers still burn fossil fuels.
Similarly, a typical global equity portfolio can reduce its reported carbon intensity by 3% simply by slashing by 50% its exposure to Indonesia and the BRICS (Brazil, Russia, India, China and South Africa). This provides an incentive for institutional investors to avoid these countries, depriving emerging markets of capital at the very time they require an additional $2.5 trillion a year to finance their move to a greener economy.
Worse, emerging markets might even be punished for relying on their existing energy systems to generate the revenue needed to finance their transitions. Take the carbon border taxes proposed as part of European Union’s ambitious “Fit for 55” package, and suggestions by European Commissioner Valdis Dombrovskis that trade policy could be used to enforce compliance with EU environmental standards.

—Bloomberg