The time value of carbon

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The time value of carbon

News Global Equity Long-term Equity
6 mins read time 18 Aug 21
Esther Gilmore
Esther Gilmore Partner & Global Head of Client Team
Esther Gilmore
Partner & Global Head of Client Team

Esther Gilmore

Esther Gilmore joined Generation Investment Management in 2007 and is Global Head of the Client Team. Previously, Esther was an analyst at Sustainable Asset Management, a sustainability consultant at Matrix+ International and a financial analyst at ING Barings and Barclays.

Esther received a BCom/BA from The University of Queensland, a master’s degree in Environment from The University of Melbourne, and a Graduate Diploma in Applied Finance and Investment from the Financial Services Institute of Australasia.

Esther serves on the Global Advisory Council of Tobacco Free Portfolios and is a member of the European Council for Global Conservation, The Nature Conservancy.

Kate Bettinger
Kate Bettinger
Kate Bettinger

Kate Bettinger

Kate Bettinger joined Generation Investment Management in 2021 and is a member of the Client Team. Previously, Kate worked at TPG and Hall Capital Partners.

Kate received a BA and MA from Stanford University and serves on the board of Point Blue Conservation Science.

Mark Mills
Mark Mills
Mark Mills

Mark Mills

Mark Mills joined Generation Investment Management in 2005 and is a member of the Client Team. Previously, Mark founded a business in partnership with Zurich-based Sustainable Asset Management (SAM), and established and managed SAM’s operations in Australia. He was also head of sales and marketing for County Investment Management, formerly a subsidiary of Australia's largest bank, National Australia Bank. Mark was also a founding director at Credit Suisse, responsible for sales and marketing for its investment management operations in Australia, a bond research analyst at CS First Boston Australia and worked in software engineering including for NEC and Logica.

Mark received a BSc in Computer Science from the University of Melbourne and was the recipient of a post graduate research scholarship from the Japanese government at Yokohama National University. Mark speaks fluent Japanese.

Mark serves as chair of the Australian Wildlife Trust and is a founder and chair of the Investor Working Group for Sustainable Palm Oil.

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In Brief

Our corporate governance framework has been in place since the Firm's inception and it is key to accommodating our growing client base and the toughening regulatory environment - it dedicates strong controls for managing client assets and allows for operational control and risk management to be independently reviewed.


Decisions made by investors today will have huge impacts on future wealth. A quote often wrongly ascribed to Albert Einstein is that “compounding in financial markets is the 8th wonder of the world. They who understand it, earn it ... they who do not... pay it.”. We think companies that take early action on greenhouse gas emissions will enjoy a similar benefit. And those that delay, will pay for it. Investors should take note.

undervalued climate action

Climate action today is undervalued

In this piece, we explore the concept of the Time Value of Carbon (TVC): The Time Value of Carbon is the concept that greenhouse gas emissions cut today are worth more than cuts promised in the future, due to the escalating risks associated with the pace and extent of climate action.

We believe this is of fundamental importance for investors, since our work depends on accurately assessing the value that companies can create far into the future, based on the assets and liabilities that they have today. It is also of great importance for the world, since any further delay to climate action will lead to devastating impacts.

The Time Value of Carbon arises from the ruthless maths of climate science. We need to think in terms of carbon stocks, as well as flows, because carbon dioxide (CO2) continues to warm the planet for many decades after it is released. Globally, we emitted around 40 billion tonnes of CO2 in 2020 despite the economic impact of the pandemic.1 At this rate, we will exceed the carbon budget for 1.5 degrees of warming by 2030.

Differences across climate models mean that the carbon budget lies in a range, but on one recent estimate it is just 230 GtCO2 for a 66% chance of keeping to 1.5 degrees warming above pre-industrial levels in 2100, or 440 GtCO2 for a 50% chance.2

Uncertainty gives us further reasons to act now. 1.5 degrees has become the benchmark for climate action, in part because scientists believe a temperature rise beyond this level would increase the risk associated with long-lasting or irreversible changes. Potential tipping points in the climate system include disintegration of polar ice sheets, shifting monsoon rains and dieback of the Amazon rainforest – which would in turn release enormous volumes of carbon into the atmosphere.3

Against this backdrop, it clearly makes sense to cut emissions today, rather than in ten years’ time. A company that stops emitting CO2 this year creates a benefit for the climate system each year into the future. Companies that start to cut in 2030 will have spent another ten years drawing from the global carbon budget, and by then the 1.5 degree goal could be out of reach. This is why long-dated climate goals with no short term action are unacceptable. It is also why we believe that near term action creates considerable value.

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1. Listed companies are responsible for 40% of global GHG emissions

Our estimate ranges from 22.0 to 23.1 GtCO2e per year. At the higher bound, this represents over 40% (40.2%) of global GHG emissions at 57.4 GtCO2e.[i] At the lower bound, it is 38.3%.

For Scope 1, we use CDP data and remove non-listed companies.[ii] Our analysis then builds on this to incorporate additional Scope 2 and some Scope 3 emissions. We display the distribution of the emissions by major category in the chart below. The chart shows our higher-bound estimates (see Appendix 2 for details).


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The chart shows the Scope 2 and 3 emissions that are ‘incremental’ to the estimate of listed company Scope 1 emissions. These are the Scope 2 and Scope 3 emissions that we believe can be attributed to listed companies without the risk of double counting.  For instance, it should not be taken to mean that listed companies play a minor role in coal-related emissions. For listed electricity producers, these would fall under Scope 1.[iii]

2. Value chains play a key role

We have assessed GHG emissions in listed company value chains. This leads to an estimate that is almost double our Scope 1-only calculation, based on CDP data. Similarly, it is double the Scope 1-only calculation published recently by MSCI.[i] Other published estimates, based on Scope 1, also lie in the range 15-20%.[i]

This confirms that cutting GHG along the value chain must be a priority for companies and for engagement by investors. CDP calculates that supply chain emissions are typically 5.5 times larger than a company's direct operations.[iii]

Two critical areas are highlighted in the chart above. The first is oil. We include oil produced by listed global oil majors that is consumed by non-listed entities, such as households and small and medium-sized enterprises (SMEs). We also add the oil consumed in vehicles manufactured by listed companies, so long as it is produced by non-listed companies.

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We believe this approach reveals important and relevant insights which other investment frameworks may leave undiscovered – and that these insights ultimately lead to superior, risk-adjusted investment results. This makes us think differently about what drives and influences the performance of companies. It compels us to ensure that rigorous sustainability analysis is fully integrated into every investment decision we take.

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We believe this approach reveals important and relevant insights which other investment frameworks may leave undiscovered – and that these insights ultimately lead to superior, risk-adjusted investment results. This makes us think differently about what drives and influences the performance of companies. It compels us to ensure that rigorous sustainability analysis is fully integrated into every investment decision we take.

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Net zero will be the law of the land in the major economies sooner rather than later, where this isn't already the case.1

Waiting to put net zero arrangements in place is putting capital at risk and increasing the chances of being caught out by sharp policy adjustments in key markets.2

Asset owners are already working together on net zero with the support of the Net Zero Asset Owner Alliance (NZAOA) and the Paris Aligned Investment Initiative.Many companies are also signing up to net zero goals and over one thousand have joined the Science Based Targets initiative (SBTs are broadly consistent with net zero by 2050, if they follow the 1.5 degree methodology).4

Until now, a net zero club of asset managers has been notable by its absence, despite the best efforts of investor groupings including Principles for Responsible Investment (PRI), Institutional Investors Group on Climate Change (IIGCC) and Ceres. We believe closing the asset manager gap is essential. In the great majority of cases it is managers that make capital allocation to specific companies or other kinds of assets. Managers with significant investment positions and capital allocation responsibility are also uniquely well placed to effect change through engagement with companies REFERENCE 6.

In July 2020, Generation committed to align our investment portfolios with net zero emissions by 2040. We made this commitment to our clients because leadership on the climate crisis is necessary and we believe that managing climate risk and opportunity is inseparable from our fiduciary responsibility.

In the months following our own commitment, we worked with peers and partners, in particular the IIGCC, to establish a new Net Zero Asset Managers initiative (NZAM) – a coalition of like-minded managers committed to investing in line with net zero emissions by mid-century.

At launch in December 2020, the initiative had 30 founding signatories from around the world, with a combined $9 trillion of assets under management, recruited as a result of the work of IIGCC and Ceres with their members and the support of the High-Level Climate Champions for Climate Action.5


As we describe in this piece, organisations across the worlds of business and investment will need to commit to net zero and, to the extent possible, to align their methodologies and approaches.

NZAM signatories have made specific REFERENCE 1 commitments for their own investments, and will work closely with their asset owner clients in this process. Signatories commit to engage companies on net zero, but also to push for net zero commitments and aligned actions across the wider investment ecosystem.


The framework for NZAM reflects both the necessity and urgency of climate action as well as the specific nature of asset management.6

The full commitment and question and answer document are available here. We touch on some of the key elements of the framework in this section. REFERENCE 2


Key challenges for the next phase of net zero investing

Maintaining the integrity of net zero commitments is crucial for the climate – and for the business case for net zero investing. As investors move onto a net zero path, they will need to consider seven key challenges.

Integration with the investment process

Tracking to net zero impacts investment both through capital allocation choices and engagement. Building the right processes to do this over time in line with credible interim net zero goals is key. Engagement resourcing, breadth and forcefulness must match the scale of the task. Reporting on progress over time with transparency of methodologies and assumptions is crucial to build confidence and momentum.

Value chain

Some of the most important and exciting efforts to decarbonise involve companies working with upstream suppliers or customers – for instance to use 100% renewable energy, electric vehicles or zero carbon materials. But today, disclosure of value chain (Scope 3) emissions is poor. This should be a priority for investor engagement.

Offsets and Carbon removals

We believe that companies relying on a large share of offsets to meet net zero targets will come under intense scrutiny. Some long term carbon removals may be needed to balance the last remaining chunk of greenhouse gas emissions by mid-century, but rules and standards are still emerging. Removals should be used only where there are no alternatives to eliminating emissions. Reporting separately on decarbonisation and removal pathways should become the norm.7 Net zero commitments should focus on portfolio Scope 1, 2 and 3 greenhouse gas emissions, not avoided emissions.8

Systems in transition

We believe ‘system positive’ companies have an impact through their products and services and how they shape the industrial ecosystem. Investing in some system positive companies may increase portfolio emissions over the short term. Over time, such companies will accelerate the emergence of a net zero economy and help make net zero aligned investing possible.

Disruptive change

The path to net zero will be a story of disruptive change and S-curves in zero carbon goods and services. Capital allocation to deep decarbonisation initiatives can take time to bear fruit. The models and pathways typically used today in net zero assessments struggle to capture these dynamics and underestimate the potential for deep decarbonisation. We hope to see many companies reach net zero emissions long before mid-century.

Hidden risks

Some net zero scenarios lean heavily on ‘technologies’ such as biomass energy to carbon capture and storage which have unsustainable land use implications. If you remove these, the path to net zero appears steeper. Slower than expected short term progress on emissions would also lead to a requirement for steeper cuts in the coming years. Cutting emissions early is crucial. Interrogating a range of scenarios, as TCFD recommends, is also part of the solution.

Evolving science

Scenarios are subject to change as the science of climate change evolves. For instance, estimates of the carbon budget for 1.5 degrees continue to be refined.9 Recent analysis has also pointed to an increased non-CO2 warming effect from aviation.10 Net zero investing must be agile enough to incorporate these advances at global and sectoral level. Innovation in ‘climate services’ could help bridge the gap between net zero investor goals and climate research.11


We hope that by launching at this time, we can help to mobilise climate action in the run up to COP26.

There is an open door for other asset managers to join the Net Zero Asset Managers initiative and we believe the initiative can and will grow significantly. We believe that momentum on net zero investing is at a tipping point. Notably, the world’s largest asset manager, BlackRock, announced its commitment to net zero in its January 2021 client letter.

We have designed NZAM to be an agile and fast evolving body, but clearly it will need a strong governance regime and secretariat. We are delighted that NZAM is supported by the Investor Agenda, and that its designated partners include the PRI, IIGCC, Ceres and the other regional investor groups on climate change, as well as CDP. To streamline disclosure, the intention is to seek to build on existing reporting frameworks such as PRI’s annual reporting.

UN Climate Champions have been important supporters and co-conveners of NZAM from the beginning, including those on secondment from PRI and Legal & General Investment Management. The champions will play a key role in raising further awareness in the investment community and building bridges between this initiative and the many other strands of climate action in the finance sector and beyond in the run up to COP26. We are delighted that COP26 President, Alok Sharma, and the Prime Minister's Finance Advisor for COP26, Mark Carney, have already issued a written call to CEOs of global private financial institutions to sign up to the Race to Zero ahead of COP26, including through NZAM.

Establishing this ambitious framework is a vital step for the investment sector, but the real work starts now. All NZAM signatories will incorporate the framework into their investment processes, as we drive towards an investment sector truly aligned with a 1.5 degree pathway. At Generation, we look forward to working closely with our clients, asset manager partners, companies and other stakeholders on this critical journey.

Important Information

The ‘Insights 04: Race to Zero' is a report prepared by Generation Investment Management LLP (“Generation”) for discussion purposes only. It reflects the views of Generation as at March 2021. It is not to be reproduced or copied or made available to others without the consent of Generation. The information presented herein is intended to reflect Generation’s present thoughts on net zero and related topics and should not be construed as investment research, advice or the making of any recommendation in respect of any particular company. It is not marketing material or a financial promotion. Certain companies may be referenced as illustrative of a particular field of economic endeavour and will not have been subject to Generation’s investment process. References to any companies must not be construed as a recommendation to buy or sell securities of such companies. To the extent such companies are investments undertaken by Generation, they will form part of a broader portfolio of companies and are discussed solely to be illustrative of Generation’s broader investment thesis. There is no warranty investment in these companies have been profitable or will be profitable.

While the data is from sources Generation believes to be reliable, Generation makes no representation as to the completeness or accuracy of the data. We shall not be responsible for amending, correcting, or updating any information or opinions contained herein, and we accept no liability for loss arising from the use of the material.