Net Zero: The role of bonds in the transition

Investment risks include: Value Fluctuation, Debt instruments, Interest rates, Derivatives, China securities, Sector, Contingent convertible bonds and ESG. Further details on investment risks can be found at the end of the article. For complete information on risks, refer to the legal documents.

Any investment decision should take into account all the characteristics of the fund as described in the legal documents. For sustainability related aspects, please refer to www.invescomanagementcompany.lu.

The concept of achieving net zero carbon emissions by 2050 has become a central goal for governments, corporations, and environmental advocates worldwide. This ambitious target aims to balance the amount of greenhouse gases emitted with the amount removed from the atmosphere, effectively neutralizing the impact on global warming. However, the question remains: is net zero merely an aspiration, or is it an achievable reality?

The Paris Agreement, adopted in 2015, marked a significant milestone in global climate policy. Nearly 200 countries committed to limiting global warming to well below 2°C above pre-industrial levels, with efforts to limit the increase to 1.5°C. Achieving net zero by 2050 is a critical component of this commitment². To meet the Paris Agreement targets, global CO2 emissions need to drop by approximately 45% from 2010 levels by 2030 and reach net zero around 2050. However, the latest IPCC Sixth Assessment Report³ suggests that we would be in breach of a 1.5°C threshold within 7 years from the beginning of 2024 at the current level of emissions⁴.

In another study, Mckinsey’s simulation of a “Net Zero 2050” scenario suggests that such a transition would require an additional $3.5 trillion in incremental annual spending on physical assets⁵. These up-front transition investments are significant and expected to be unevenly distributed across sectors and geographies but, at the same time, also present growth opportunities.

How our portfolio stocks are transitioning

The power sector stands out as having one of the clearest decarbonisation paths. Companies like Enel, an energy and distribution company, have set out to achieve their net zero targets by 2040 by displacing fossil-based generation with low-emissions power⁶. In 2022, the company decreased its  direct greenhouse gas emissions from power generation by 37% compared to 2017 and they achieved 100% renewable construction sites⁷. They also reported that they plan to invest a further 17 billion Euros by 2025 to meet their target of zero emissions.

Heidelberg Materials, a heavy building materials company, is another example of a company who have made strides towards achieving net zero emissions, a notable achievement within a sector facing technological barriers to decarbonisation. The company is expanding its portfolio of sustainable products and in their 2023 annual report⁸ shared their objective to secure 50% of its revenue from these products by 2030. They have been implementing circular economy principles by reusing and recycling materials, which helps reduce waste and lower emissions.

Within the banking sector, NatWest Bank was the first major UK bank to join Partnership for Carbon Accounting Financials (PCAF) in 2020 and is already ahead of its target for achieving net zero carbon emissions reduction⁹. NatWest reported that they have achieved 100% renewable energy consumption globally, according to RE100¹⁰, and has communicated that they aim to further reduce its emissions for its direct owned operations by 50% by 2025. This was against a 2019 baseline, which aimed to reduce emissions in accordance with the Greenhouse Gas Protocol¹¹.

Corporate commitments and global challenges

Many multinational corporations have set net zero targets, recognising the importance of sustainability for long-term business viability. Companies like Microsoft, Apple, and Unilever have pledged to achieve net zero emissions, driving innovation and setting industry standards. Advances in renewable energy, energy storage, and carbon capture technologies provide hope that net zero is within reach. Innovations in these areas are essential for reducing emissions and transitioning to a low-carbon economy.

Transitioning to a net zero economy requires substantial investment and systemic changes across various sectors. Developing countries face significant economic and social challenges in adopting low-carbon technologies and infrastructure.

While technological advancements are promising, many solutions are still in the early stages of development or deployment. Scaling up these technologies to meet global demand is a complex and resource-intensive process.

Effective climate policies and regulations are crucial for driving the transition to net zero. However, political will and international cooperation are often inconsistent, leading to fragmented efforts and slow progress.

Achieving net zero by 2050 is undoubtedly a formidable challenge, but it is not beyond reach. The aspiration of the transition to net zero serves as a powerful motivator for innovation, collaboration, and action. While significant obstacles exist, the opportunities for progress are equally compelling. By harnessing technological advancements, implementing effective policies, and fostering global cooperation, the goal of net zero is to transition from aspiration to achievable reality. The journey towards net zero is a collective effort that requires commitment, resilience, and a shared vision for a sustainable future.

At Invesco, we offer products focused on investing in high emitting sectors that we believe could provide outperformance opportunities as well as a greater impact on overall emissions once they are aligned and transitioning to net zero. For example, since inception, we’ve increased our bond holdings that are either aligned or aligning to net zero alignment within the Invesco Net Zero Global Investment Grade Corporate Bond fund from 52% to 70% compared to only 38% of the broader index.

Any investment decision should take into account all the characteristics of the fund as described in the legal documents. For sustainability related aspects, please refer to www.invescomanagementcompany.lu .

Team view:

We recognise that transition to net zero is complex and multifaceted, impacting economies, societies, and environments worldwide. However, making targeted investment decisions may help in achieving this goal.

Enel, Heidelberg Materials and NatWest Bank are held across the range of Invesco’s Net Zero Global Investment Grade Corporate Bond strategies based on their peer-leading credentials [and our fundamental analysis]. Enel has reaffirmed and reported their commitment to completely shut down all its carbon powered generation by 2027 and reach zero emissions of greenhouse gasses by 2040¹² when all power sold by the company will be generated by 100% renewable sources. Meanwhile, Heidelberg has been continuously improving operational efficiency to reduce energy consumption and emissions across its production processes. And similarly, NatWest has continued to integrate climate-related decision-making in business activities.

This piece is a follow up to Net Zero Global Bonds: Supporting enablers in the journey to a low-carbon economy published in May 2024.