Business as usual won’t cut it when it comes to corporate climate action.
So says U.N. Secretary-General António Guterres, who at the recent COP29 climate conference called on companies to set comprehensive decarbonization plans that align with the global goal of limiting the rise in average global temperatures to 1.5°C (2.7°F) above preindustrial levels this century.
That’s the scientific threshold for the planet, but what on earth could it mean for a company?
In the lexicon of climate finance, terms like “net-zero,” “1.5°C-aligned,” or “Paris-aligned” are often used interchangeably to describe companies’ climate commitments. Their meanings, however, differ significantly. And they matter.
Knowing the difference can help investors and companies alike assess corporate climate performance and lessen the risks of greenwashing, not to mention support the efficient allocation of capital, as Jesica Andrews of the UN Environment Programme, Giorgis Hadzilacos of M&G Investments, and I detail in a recent article.
It’s about the emissions journey, not the net-zero destination.
Net-zero refers to balance between the amount of greenhouse gases (GHGs) emitted into the atmosphere and the amount removed. A company (or the global economy) can achieve net-zero by cutting its emissions as closely as possible to zero and then removing any emissions that remain either through natural carbon sinks such as forests or carbon-capture technologies.
Many companies aim to reach net-zero by 2050, in line with the ambition to contribute toward reaching such balance by the second half of this century, a key aim of the Paris Agreement.
The agreement, which was adopted in 2015, aims to constrain global warming to well below 2°C (3.6°F) above preindustrial levels, with efforts to limit it to 1.5°C, the threshold science tells us can prevent the costliest warming. While midcentury is just 25 years from now, such targets can feel far away.
Paris alignment, on the other hand, refers to a company’s adherence to a carbon budget or pathway that is consistent with the goals of the Paris Agreement. Companies that are said to be Paris aligned are on a decarbonization trajectory that would keep their cumulative emissions over time within this carbon budget, contributing to the global effort to constrain warming within agreed-upon limits.
Key distinctions between the concepts lie in timing and cumulative emissions. A company could set a target for achieving net-zero by 2050 but might not be Paris aligned if the company plans to overspend its share of a carbon budget allocated to its industry in the near to medium term. In other words, a company could be on track for net-zero by 2050 but still contribute to overshooting the current carbon budget necessary to limit global warming in 2030, 2035 or 2040.
A company can meet its net-zero target while overshooting its carbon budget
Source: Hadzilacos, Séné, Andrews
Using tools that assess companies’ Paris alignment based on their carbon budgets can quantify the significant difference between the number of companies that have a net-zero 2050 target and companies that are assessed to be 1.5°C-aligned. My co-authors and I will detail in a future post some of the tools used by companies and investors to assess such targets and pathways.
Share of listed companies with companywide net-zero targets and 1.5°C alignment
Source: MSCI ESG Research, data as of December 2024. Universe of listed companies represented by the MSCI ACWI IMI.
What’s in a name? Potential capital misallocation.
Distinguishing between net-zero targets and Paris Alignment can help investors evaluate companies’ climate claims. While both aims are important, Paris alignment often requires companies to develop detailed transition plans that show immediate reductions in emissions and priorities in capital spending over the near and medium term, as it focuses on cumulative emissions rather than future promises. 2050 may be far away, but the work necessary to get closer to 1.5°C starts now.
That clarity can benefit companies and investors alike. Labeling and tracking climate commitments with accuracy avoids greenwashing and reduces reputational or regulatory risks. It equips investors to assess whether (and how) the companies they invest in are addressing climate risk and positioning their businesses for the energy transition, enabling investors to allocate capital efficiently in line with their unique strategies.
