South Africa: Emerging Markets Need an Inclusive Approach to Net Zero


Net zero portfolios may frustrate net zero in the real world.

Our firm is committed to achieving net zero emissions by 2050. At the same time, we decline to pretend that decarbonising portfolios is the same as decarbonising the real world.

Take the standard MSCI index of global equities. A portfolio manager needs to simply double the weight of Apple, Amazon, and Facebook to achieve the 7.6% annual reduction demanded by the most ambitious UN scenario. On the other hand, doubling allocations to three of the largest clean energy solution providers in the world--Enel, Nextera, and Iberdrola--would actually increase emissions by 5%. In both cases, I am referring to Scope 1 and 2 emissions.

Blunt net zero targets are not just perverse at the sector level. Worryingly, they are strongly correlated with regional allocations, and therefore disproportionately burden emerging markets (EM). Doubling the weight to EM stocks increases emissions by 10%. Doing the same thing in sovereign bond indices increases emissions per GDP by 22%. With those results, the temptation will be to halve and quarter allocations instead.

This problem only gets harder since 90% of future emissions growth is coming from the developing world. It becomes tragic when one...

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