When is a target not a target? The argument for a Net Zero Emissions Investment Act for Businesses and Banks

Across the world, countries are beginning to put in place legislation to become Net Zero by 2050 (or before). But despite the vital role of businesses and investors in achieving Net Zero Emissions, government have not yet proposed giving them any accountability for delivery. An expensive mistake.

Highest emitters are apathetic about government targets

Decades of failed climate negotiations and toothless targets have resulted in great cynicism and apathy about government climate targets within the very businesses and investors which generate and fund the most emissions. For many, this means its business as usual save for a few PR’able renewable energy investments, which are a drop in a very polluted ocean.

Necessity is the mother of invention

But it doesn’t have to be this way. Contrary to popular belief, big business and investors aren’t staffed by evil genii hell-bent on destroying the planet. Given clear rules and objectives business has huge power to innovate and deliver things on a speed and scale that the public sector could only dream of. So we need to make a simple but revolutionary change to the way companies are governed.

We need to give businesses and banks an essential societal goal – Net Zero 2050 – and put it on a par with shareholder value.

We need a Net Zero Emissions Investment Law

This law would require all businesses and banks to meet the same target Net Zero target that government has set for society. This would be replicated in every country which makes Net Zero legislation. Simple, fair, essential.

But this wouldn’t just be about another layer of toothless targets. Because the act would bring into force a new set of accountancy rules which would require business to set out a Net Zero plan in their annual report and accounts and to set out the costs in their audited accounts to get there.

If we enacted this legislation for companies incorporated in the UK, we’d already have an impact on emissions way beyond UK’s direct emissions (which are around 1% of global emissions). If we extended the legislation to include companies financed in the UK both via listing rules and new powers for financial regulators we could address over 15% of global emissions.

Investing in Net Zero

The new plan and accounts might include new investments in new zero carbon transport fleets, upgrades to buildings, provisions for eliminating or offsetting business travel and creating new zero carbon products and supply chains. Importantly, for the highest emitters, the fossil fuel companies, this would involve writing down any assets which emit carbon after 2050 or making provisions in the accounts for adequate capture or offsetting of these emissions, paid by the company.

This plan and costing would be audited along with the rest of the annual report. The auditor may sign it off or require the company to demonstrate how funding gaps will be met, for example through new debt, equity or through dividend reduction.

Carbon insolvency

The auditor would also have the power to recommend that the company is ‘Carbon Insolvent’, incapable of operating profitably within the safe limits our society has set.

A process of responsible wind down, facilitated by the regulator would follow. This process would ensure that the short term energy needs of society could still be met whilst returning as much money as possible to shareholders and ensuring stranded assets, such as oil rigs, don’t become public liabilities.

There are some dinosaurs out there that would go extinct and their value, for example on the LSE, is far from insignificant. But for these companies the question is when, not if, they will fail. This law attempts to give us the best chance to manage the process responsibly so that it is not yet again ordinary people, pension holders and vulnerable workers, who suffer the most from irresponsible corporate and finance sector management.

Many companies will face a period of higher costs to invest in the future but over the longer term, important to pension investors in particular, these investments will pay off.

If we don’t manage this transition much more proactively and effectively, Mark Carney at the Bank of England predicts a $2tn carbon bubble will burst. This is an order of magnitude larger than that mortgage derivatives bubble which burst and caused the last global financial crisis and a decade of austerity in the UK. If we drive this ‘carbon bubble’ out of the system now, the innovation it will create will more than replace that value in the medium term. Society can decarbonise and prosper if we act together NOW.

Creating a mandate for Zero Carbon

Those growing number of companies that have already made Science Based Targets will be keen to support this legislation, hoping to level the playing field and continue to compete and profit for the benefit of shareholders and customers.

For the high emitters, I believe that many good people working in these companies will also breath a sigh of relief. This legislation would legally require their investors to accept that it is no longer possible to require the higher, short term returns from oil and gas vs renewables at the expense of our society. It would remove the paralysis that this short term capitalism is creating. It would open up the opportunity for a rapid redeployment of capital to green projects which will add value to society and business.

No alternative.

The current toothless international and government targets are not creating a shift of capital and decarbonisation at anywhere near the rate required to achieve them. Instead, billions of dollars continue to pour into oil and gas stocks whose equity story continues to amount to ‘lets keep doing this lucrative but dangerous thing until they tell us to stop’. This law would be the signal for that STOP.

Its time to have a grown up conversation about the costs and benefits of action on climate and how those will be met. Its time for businesses and banks to join with the societies they are there to serve and to play their part in the innovation and investment which will create a safe and prosperous zero carbon world. Its time for Net Zero Business and Banking to be bought into law.