Article 7 September, 2021

Netting to zero

R&M's Head of ESG explains how the business is turning talk into action following its commitment to achieve net zero carbon emissions.

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Since mid-December 2020, fund managers with responsibility for over $40 trillion have committed to becoming net zero carbon1 and in the same month we had the five year anniversary of the Paris Agreement.  As the dust settles on all of this, it will be interesting to see the solutions that start to emerge on how to actually achieve these hypothetical cuts to greenhouse gases by the middle of this century.  More so when we consider there’s almost 60bn tonnes of carbon emitted into the atmosphere worldwide per annum2, an amount that has been steadily rising since 1990 with increasingly visible physical effects of climate change3.

As signatories to the fund managers’ commitment, public supporters of TCFD and members of the Internatiional Institutional Investors Group on Climate Change (IIGCC - this is the European version of Australia’s IGCC), we give a brief overview of the journey to Net Zero covering three areas:  Understanding emissions, Stages to Net Zero, and Regulatory context.

Understanding emissions

Understanding emissions “Scopes”, as defined by the Greenhouse Gas (GHG) Protocol, is an essential first step.

The GHG protocol sets the standards & principles for measuring and managing carbon emissions and has divided all emissions from businesses into operational boundaries,  defined as Scopes 1, 2 & 3 as outlined in Figure one.


As a financial firm, for R&M, with three office locations, minimal purchase of power and no physical distribution of products, our own Scope 1 & 2 emissions are tiny.  Scope 3 indirect emissions include 15 areas of activity that depend on an organisation and for us are by far the most material (80%+) and important to report. For a fund manager, Scope 3 is the Scope 1 and 2 emissions from the companies in which we invest. Some studies have shown that these financed emissions from investee activities can be up to 1,000 times bigger than the investor’s own.

R&M stages to net zero

We should remember it’s net zero, not gross zero. There will still be emissions and the R&M solution is all about identifying and managing them.   Adding the word ‘to’ in the middle of ‘net’ and ‘zero’ helps clarify the objective.  Our solution has three distinct stages:

Data. We need our investees’ emissions data i.e. the Scope 3 detail. The GHG Protocol sets the standards to measure and manage emissions, and the Partnership for Carbon Accounting Financials (PCAF) has launched a global standard for measuring  and reporting GHG emissions associated with loans and investments, which provides detailed instructions for listed equity and fixed income.Based on ‘follow the emissions’, with a scale for quality of inputs from those that are independently verified by CDP4 to estimates by the emitting firm itself and phasing in Scope 3, PCAF provides valuable guidance for carbon accounting. Our proportional ownership share of a given company is multiplied by its emissions, and this is the quantity of emissions we are responsible for.

Reduction. This is where we engage and collaborate with investees to lower emissions and to disclose. Important here is the idea of ‘net gain’.  If a real estate investor is planting 100 trees that each absorb 20 tonnes of carbon, engagement for planting 100 trees is of limited value as this was going to happen anyway; engagement to encourage an extra 100 trees to be planted, providing saplings, explaining the carbon capture properties of roots, soil etc. is much more valuable and provides a gain.

Offset. Just like R&M is carbon neutral, investees offsetting emissions is required. There can be no net zero without carbon sequestration, and this can be natural (trees, oceans, peat bogs) or mechanical (sucking the carbon out of the air as it’s emitted and storing underground). We are seeing a wide range of offsets emerging for purchase, covering both types and with varying ‘credit quality’.

Regulatory context

Ahead of the UN COP climate conference in November we are seeing a lot of activity and calls from businesses and lobbying groups for more stringent deadlines and actions.  Indeed, at the time of writing this, Australia’s energy, business and oil and gas lobbies are joining calls from key international allies for their government to set a net zero emissions deadline ahead of the Glasgow meeting.  To provide some context of how UK and European lawmakers are helping the cause of net zero:

  • In the UK, the Treasury will issue its first green gilts with a £15bn issuance on September 20th. As with all ESG bonds, the use of proceeds will be crucial, and the framework released in June suggests contribution towards the UK’s own net zero target, with certification provided by the International Capital Markets (ICMA) Green Bond Principles. The UK is one of only a few countries to have its net zero target in law, with the Committee on Climate Change advising on and setting carbon budgets.
  • The EU’s ‘Fit for 55’ (‘a 55% reduction in emissions by 2030’) introduces a carbon border adjustment mechanism import tax and targets for lower emissions / more renewable energy, alongside the ‘EU vs. greenwashing’ regulation (or: SFDR).  While still being debated through the European Parliament, the idea that carbon must be priced and a previously not-considered externality must be internalised is bold and ambitious.

What we are doing at River and Mercantile

At River and Mercantile, we are turning talk into action for the three stages outlined. Our net zero focus for the rest of this year and into 2022 is:

  • Evolving the business model for net zero (governance, data and reporting)
  • Engaging key stakeholders
  • Embedding our exclusions (in particular coal) and climate policies: learn more
  • Identifying the initial funds & mandates in scope for emissions reduction by 2030. And then for these funds, setting the baseline emissions (as at Dec 2019), followed by top-level tilts towards or away from certain sectors, bottom-up understanding of an investee’s emissions pathway, ongoing engagement with investees and monitoring their emissions reductions and offsets.

1Carbon neutrality refers to achieving net-zero carbon dioxide emissions. This can be done by balancing emissions of carbon dioxide with its removal (often through carbon offsetting) or by eliminating emissions from society (the transition to the "post-carbon economy"). It is used in the context of carbon dioxide-releasing processes associated with transportation, energy production, agriculture, and industry.

2Source UN Environmental Program and Intergovernmental Panel on Climate Change (UNEP), 2019,

3Source IPCC, 2013.

4Previously the Carbon Disclosure Project

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