Net-Zero Portfolio Pathways
Driven by climate change, the race to net-zero is heating up. Guided by the Paris Agreement, countries are aiming to reduce CO2 emissions and tackle climate change. With this trend reshaping industries around the world, could this open up new forward-thinking trading opportunities?
The Race to Net-Zero
As per the Paris Agreement of 2015, 196 parties have implemented a net-zero strategy. What is net-zero? In simple terms, it means striking a balance between carbon emitted and carbon removed from the atmosphere. The net-zero target is 2050, which means governments, and, in turn, major companies, are working to reduce their carbon emissions and up their environmental focus.
As such, data regarding carbon emissions by industry will become an increasingly important metric for CFD traders and spread betters over the next three decades. With more businesses moving towards carbon neutrality, building a net-zero innovation portfolio could move you in line with current trends.
What Would a Net-Zero Carbon Portfolio Look Like?
A net-zero innovation portfolio falls under the definition of ethical investing. By focusing on CO2 emissions by country and industry, you’re investing in the future, in every sense. The countries and companies that embrace the Paris Agreement climate pledge will be at the forefront of innovation. As such, any company with a net-zero strategy could raise its stake in the court of public opinion, unlock new opportunities, receive specialist funding, and more.
Put simply, companies that commit to net-zero could move ahead, while those that don’t risk being left behind. Therefore, by focusing on companies that have well-defined carbon-neutral strategies, you can build a net-zero carbon portfolio and, in theory, future-proof your trades.
Adding stocks from traditionally low-emission sectors, such as software, as opposed to high-emission sectors like transport and energy, is also another way to build a net-zero carbon portfolio. Based on these two elements, a balanced net-zero innovation portfolio contains low emitters and companies that have pledged to become low emitters.
Greenhouse Gases
You can’t answer the question, 'what is net-zero?', without defining greenhouse gases. The simple definition of a greenhouse gas (GHG) is that it’s a gas that absorbs and emits radiant energy. Specifically, this radiant energy is within the thermal infrared range.
There are five primary greenhouse gases: carbon dioxide (CO2), ozone (O3), water vapour (H2O), methane (CH4) and nitrous oxide (N2O). As a quintet, these gases trap radiant energy which, in essence, creates a layer of insulation around the earth. This insulation lets heat in but doesn’t allow it to escape. Thus, these gases create conditions reminiscent of a greenhouse and heat up the earth’s surface.
Country Fact Sheet
Which countries are in the Paris Climate Agreement and which companies have pledged to achieve net-zero by 2050? The Paris Agreement was adopted by 196 countries. As of 2021, there were 194 states, plus the European Union, signed up to the net-zero pledge. Some of the countries in the Paris Agreement are: China, the US, Canada, the UK, Germany, and France.
The dropdown menu below provides an interactive overview of carbon emissions by country. It demonstrates how countries and, in turn, companies within these countries, are moving towards net-zero. Based on the latest data available, are we on track for the Paris Agreement? The answer is that it depends on the companies and the sectors you focus on.
Carbon Emissions by Country
For example, China’s CO2 emissions have increased from 2,172 kilotons in 1990 to over 11,000 kilotons in 2022. In contrast, the US, another superpower, has remained fairly consistent over the same time period and is now starting to drop with CO2 emissions averaging 4,500 kilotons.
11,948
19,807
38,928,346
Using Data to Create a Net-Zero Innovation Portfolio
A balanced net-zero portfolio should consider low emitters and improving sectors. The former could provide immediate opportunities to capitalise on the global net-zero pledge. The latter could provide opportunities to speculate in new innovations.
Any company that pioneers new environmentally friendly technology has an opportunity to gain some market share and, in turn, become a positive contributor to the industry . With the CMC Markets trading platform, you can use the data offered in this guide to trade in net-zero companies.
Join the companies taking action
The SBTi’s target dashboard lists company and financial institution commitments and targets since 2015. It provides a summary of each organisation’s status regarding its commitment or targets
Companies Committed to Net-Zero
The data regarding CO2 emissions by country correlates to carbon emissions by sector. For example, US companies such as Ford, CVS Care and Walmart all have net-zero commitments. The same goes for companies in other countries actively promoting the Paris Agreement.
Therefore, there are potential links to be drawn between countries pushing hard to meet the Paris Agreement and companies within these countries. As a potential trader looking to build a sustainable net-zero portfolio, cross-referencing these two data sets is crucial.
Carbon Emissions by Sector
Data on national and individual emissions can be combined with data on carbon emissions by industry. A look back at our chart showing industry trends reveals some interesting insights. For example, after peaking in 2018, the building sector is now slowly reducing its carbon emissions. Similar trends can be observed in the transport and industrial combustion sectors.
Target Dashboard
Summary
SBTi publicly discloses temperature alignment based on the ambition of a company’s scope 1 and 2 targets. Scope 3 targets are also evaluated during the target validation process. We thoroughly review scope 3 ambition to ensure it meets the temperature alignment or supplier engagement specifications outlined in the SBTi criteria. We are carrying out a comprehensive review of our scope 3 target setting methods and criteria to ensure they are fully aligned with the Net-Zero Standard. This work will be finalized by the end of 2022.
Organizations whose target status is ‘targets set’ have had their targets independently validated by the SBTi.
Organizations whose target status is ‘committed’ have made a public commitment to set a science-based target aligned with the SBTi’s target-setting criteria within 24 months.
Organizations adopting the Net-Zero Standard are required to set both near-term and long-term science-based targets.
Long-term science-based targets are only set by organizations who are aligned to the SBTi’s Net-Zero Standard. These organizations must produce close to zero emissions no later than 2050.
Starred organizations are members of the Business Ambition for 1.5 campaign - an urgent call to action from a global coalition of UN agencies, business and industry leaders, in partnership with the Race to Zero.
Due to the developing status of our guidance, the SBTi has updated its fossil fuel policy and has paused fossil fuel company target validation and commitments until further notice.
Build Your Net Zero Portfolio
Sustainability, CO2 emissions, and environmental issues have long been a concern. Now, thanks to the Paris Agreement, these ethereal concerns are being addressed with real action. Governments have implemented policies and companies are making practical changes to tackle climate change.
These changes have and are likely to continue to create new opportunities for traders as we move closer to 2050. Moving in line with modern ways of thinking and creating a net-zero portfolio is one way to capitalise on these new opportunities. There are no guarantees when it comes to trading. However, if you want to embrace the zeitgeist, trading in companies with established net-zero strategies might make sense.
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