Understanding the fundamental differences between carbon neutrality and Net Zero strategies represents a critical investment decision for institutional portfolios seeking to reduce carbon emissions and address climate change risks.
According to a Morgan Stanley article, the voluntary carbon offset market is projected to grow from USD 2 billion in 2020 to USD 250 billion by 2050.
Given this anticipated growth, institutional investors should carefully evaluate which climate commitment framework best aligns with their portfolio decarbonization goals and stakeholder expectations.
The strategic choice between these approaches significantly impacts Environmental, Social, and Governance (ESG) scoring, regulatory compliance, and long-term value creation potential for sustainable finance portfolios.
First off, let’s start our way with defining, what “carbon neutral” and “Net Zero” are and how they work.
In a carbon neutral organization there is a commitment to evaluate the carbon dioxide (CO₂) emissions produced. This is coupled with finding ways to reduce those emissions and with compensating for these by reducing emissions elsewhere, or by removing an equal amount of CO₂ from the atmosphere. This balancing practice is known as Carbon Offsetting and could involve planting new trees or investing in renewable energy, or with for example bioenergy carbon capture and storage (BECCS).
Net Zero on the other hand means that a company reduces its absolute emissions across its whole supply chain, in order to support the target to limit global temperature increases to 1.5 degrees Celsius, as agreed in the 2015 Paris climate summit.
While the Net Zero term is considered “the gold standard for corporate climate action”, it isn’t about one term being better than the other; both refer to different actions that are essential parts of the whole as we combat climate change.
First of all, let’s uncover the term ESG to fully understand why it’s important. ESG stands for Environmental, Social, and Governance: a framework used by investors, stakeholders, and companies to assess non-financial risks and opportunities across three critical areas:
ESG evaluations help identify risks that traditional financial metrics may overlook, and they serve as leading indicators of long-term corporate resilience and performance.
To help standardize ESG assessments, many organizations assign an ESG score to companies based on their performance across these three pillars. This score quantifies how well a company is managing its environmental impact, social responsibility, and governance practices. A high ESG score often signals that a company is more resilient to long-term risks and better positioned for sustainable growth, while a lower score may indicate potential vulnerabilities or lack of transparency in key areas.
While ESG scores are not a perfect measure, they offer valuable insights for investors aiming to align portfolios with sustainability goals or avoid reputational and regulatory risks.
Carbon neutrality offers a practical starting point for ESG-focused companies, allowing them to offset their annual greenhouse gas (GHG) emissions with verified carbon credits while laying the groundwork for deeper climate action.
Carbon neutrality represents a balancing approach where organizations achieve carbon neutrality by offsetting their GHG emissions through verified carbon credits to achieve net-zero emissions. To achieve carbon neutrality, companies typically follow the scope classification defined by GHG Protocol. In general, they are required to report and reduce Scope 1 emissions (those they directly control, such as fuel burned by company vehicles) and Scope 2 emissions (those they indirectly consume, such as purchased electricity or steam).
While the GHG Protocol recommends evaluating Scope 3 emissions — indirect emissions across the value chain — reporting them is optional. However, since Scope 3 emissions often represent a significant, and in many cases the largest, share of a company’s total carbon footprint, focusing only on Scope 1 and 2 may not fully reflect the organization’s overall environmental impact.
Carbon Neutrality Coverage vs Investment Expectations:
Investment Limitations: Limited regulatory future-proofing, potential greenwashing exposure, narrow carbon emission scope.
Net Zero and carbon investment strategies require portfolio companies to achieve net zero through significant emission reductions, often incorporating carbon capture technologies and comprehensive GHG emissions management.
The Science-Based Targets initiative (SBTi) validates Net Zero commitments through rigorous emission reduction pathways aligned with global temperature targets, providing institutional investors with credible due diligence frameworks for evaluating corporate climate strategies.
Science-Based Targets Initiative (SBTi) is the leading validation standard for companies seeking to achieve net zero and align with net zero by 2050 global targets.
This methodology requires companies to establish emission reduction pathways consistent with limiting global warming to 1.5°C, providing institutional investors with credible frameworks for assessing long-term climate strategy effectiveness.
SBTi Net Zero Standard specifically addresses comprehensive emission reduction requirements including near-term science-based targets covering all emission scopes and long-term Net Zero targets requiring significant emission reductions before neutralization. The validation process requires independent assessment of corporate emission reduction methodologies that institutional investors rely upon for due diligence purposes.
Corporate participation in SBTi initiatives signals institutional-grade climate commitment that enhances ESG scoring. Institutional investors benefit from standardized assessment criteria enabling portfolio-wide climate performance evaluation.
Key SBTi Requirements for Investment Evaluation:
Fig 1: Net Zero Strategy
Climate risk management becomes significantly enhanced under Net Zero strategies as portfolio companies address comprehensive carbon emission sources including supplier networks and product lifecycles that represent material financial risks under evolving regulatory frameworks.
Achieving Net Zero is not just about balancing emissions — it involves a genuine transformation of operations. Organizations that commit to net zero are expected to significantly reduce greenhouse gas emissions across all categories, while complementing these efforts with high-quality carbon offsets. This shift requires clear, science-based roadmaps, supported by verified transition plans, to ensure that progress is both transparent and credible.
In addition, the net zero approach aligns with international climate goals, like the Paris Agreement and the 1.5 °C target: only if substantial investments are made in renewable energy, energy efficiency, and breakthrough climate technologies.
Here’s how Carbon Neutral and Net Zero strategies stack up:
| Investment Criteria | Carbon Neutral Strategy | Net Zero Strategy |
| Investment Risk | Low reputational risk – often perceived as less impactful, but vulnerable to greenwashing claims | High credibility with comprehensive risk management through science‑based targets and supply‑chain decarbonization |
| ESG Scoring Impact | Moderate improvement – suits basic ESG portfolios and reputational management | Substantial enhancement across all ESG dimensions via deep emissions cuts and transparency |
| Capital Requirements | Low to moderate investment – relies on offsets rather than internal investment | High capital needed for deep decarbonization, renewable energy, tech upgrades |
| Long-term Value Creation | Limited competitive edge – may offer short-term reputational gain only | Substantial innovation opportunities – first-mover advantage and enhanced market position |
| Regulatory Alignment | Meets current compliance but may fall short on evolving rules | Future-proof regulatory alignment through net‑zero roadmaps, reporting, and science‑based frameworks |
As part of its evolving Corporate Net-Zero Standard Version 2, SBTi recently concluded a public consultation (March–June 2025) involving over 850 stakeholders. A key focus of this revision is the potential integration of carbon credits into corporate net-zero strategies.
SBTi acknowledges that while direct emissions reductions remain the priority, high-quality carbon credits, particularly those supporting Beyond Value Chain Mitigation (BVCM) – can play a complementary role. These include credits from emissions avoidance, emissions reduction, and carbon removal projects. The revised standard proposes recognizing interim carbon removal targets and encourages companies to invest in mitigation activities beyond their value chains, such as nature-based solutions and emerging carbon removal technologies.
Approving the use of carbon credits within the SBTi framework would:
This approach reflects a growing consensus that carbon markets, when governed by robust standards, can be a strategic tool in achieving net-zero, without compromising the integrity of science-based decarbonization.
Carbon credits investing requires sophisticated due diligence frameworks as institutional investors navigate quality variations between carbon offsetting projects and their implications for ESG portfolio performance.
Fig 2: Carbon Removal Solution – Biochar Production System
High-integrity carbon offsets demonstrate clear additionality, meaning the associated greenhouse gas reductions or removals would not have occurred in the absence of the project itself. They also provide permanent carbon sequestration through nature-based solutions, such as reforestation, or engineered carbon removal technologies.
In contrast, carbon neutral strategies typically rely heavily on carbon credits purchases to achieve Net Zero emissions. They create concentrated exposure to offset market volatility and quality risks.
Net Zero approaches utilize offsets strategically for residual emission neutralization after achieving deep emission reductions. They reduce overall portfolio exposure to offset market risks while ensuring higher-quality carbon removal technologies receive investment priority.
The evolving regulatory landscape increasingly distinguishes between emission avoidance offsets and carbon removal offsets, with Article 6 of the Paris Agreement and Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) compliance frameworks prioritizing permanent carbon removal over temporary emission reductions.
ESG disclosure requirements under Task Force on Climate-related Financial Disclosures (TCFD) frameworks mandate transparent carbon offset accounting that institutional investors must incorporate into portfolio risk assessment processes.
Due Diligence Criteria for Carbon Offset Investments:
ESG compliance standards provide institutional investors with structured frameworks for evaluating corporate climate commitments and their alignment with global temperature targets.
The Greenhouse Gas Protocol (GHG) establishes foundational measurement methodologies for Scope 1, 2, and 3 emission accounting that enable consistent carbon footprint assessment across investment portfolios. Climate disclosure requirements continue expanding through TCFD frameworks that mandate scenario analysis and climate risk assessment for publicly traded companies.
The Task Force on Climate‑related Financial Disclosures (TCFD) is a global initiative launched in December, 2015 by the G20 Financial Stability Board (FSB). Its mission was to develop a standardized framework that helps companies disclose climate-related financial risks and opportunities – so investors, insurers, and other stakeholders can assess how well organizations are equipped for the transition to a low-carbon economyThe EU Taxonomy regulation creates specific criteria for sustainable economic activities that institutional investors must consider when constructing ESG portfolios targeting environmental objectives. Regulatory frameworks increasingly differentiate between interim climate targets and long-term Net Zero commitments, requiring institutional investors to evaluate the credibility of corporate climate pledges through independent verification mechanisms.
Investment-Relevant ESG Standards Comparison:
| Standard Framework | Portfolio Impact | Compliance Requirements | Investment Relevance |
| GHG Protocol | Standardized emission measurement | Mandatory for public disclosure | Foundation for carbon accounting |
| SBTi Net Zero | Science-based target validation | Voluntary but investor-expected | Gold standard for net zero commitments |
| TCFD | Climate risk disclosure | Mandatory in major markets | Critical for risk assessment |
| EU Taxonomy | Sustainable activity criteria | Mandatory for EU participants | Essential for sustainable finance |
The regulatory landscape for climate disclosure creates compliance requirements that institutional investors must anticipate when constructing ESG portfolios. TCFD implementation becomes mandatory across major financial markets. It requires portfolio companies to disclose climate-related risks and governance structures. EU Sustainable Finance Disclosure Regulation creates specific obligations for financial market participants to demonstrate ESG factor integration into investment processes.
Corporate climate commitments reveal significant discrepancies between stated ambitions and actual progress.
| Company | SBTi Validation Status | Scope 3 Inclusion | Capex / Investment Plans | Offset Quality / Strategy | Investment Risk Assessment |
| Aldar Properties (UAE) | Roadmap aligned with science-based goals; aims Net Zero by 2050 covering Scope 1–3 | Comprehensive (Scope 1–3) | Strong: interim 2030 targets; invests in operational and value chain reductions | Focus on actual emissions cuts versus offsets; high-quality approach | Moderate – high ambition but early stage strategy; strong governance |
| DP World (UAE) | Committed to SBTi-aligned Net Zero 2050 roadmap | Partial focus on own operations and logistics supply chain | Moderate–high: investing in sustainable supply chain enhancements | Not offset-focused; emphasizing operations and logistics decarbonization | Moderate risk – logistics exposure and transitional investment |
| PwC Middle East | Science-based Net Zero goals by 2030 globally, including ME operations | Covers internal operations and suppliers; no public on other Scope 3 | Strong decarbonization via 50% cut in Scope 1–2, shift to renewables | Primarily internal reductions; reputable consultancy-led practices | Low to moderate – transparent targets in professional services sector |
| Masdar (UAE) | A flagship renewable company with clean-energy alignment | Implied comprehensive (by nature of business) | Very strong – invests heavily in renewables, hydrogen, global projects | Not offset-centric; primary operations are green; high-quality emissions control | Low risk – purely in the renewable energy sector |
| Walmart (USA) | Zero emissions goal by 2040; missed 2025/2030 Scope 1–2 targets | Scope 3 ~95% of footprint; no binding reduction target | Moderate: Project Gigaton achieved early; some operations investments | Offset usage unclear; value-chain engagement via suppliers | High risk – missing Scope 3 targets, regulatory scrutiny |
| Chevron (USA) | No SBTi validation; reports Scope 3 voluntarily since 2018 | Scope 3 ~91% of emissions | Moderate–high: ~$300M in GHG reduction projects; carbon-intensity cuts only | Likely intensity-based; little focus on offsets or absolute cuts | High risk – fossil reliance, intensity |
Institutional investors should prioritize Net Zero-aligned strategies for core ESG portfolio holdings and utilize carbon neutrality as an interim stepping stone for portfolio companies transitioning toward comprehensive climate action.
The investment decision framework should evaluate target company readiness for deep decarbonization based on capital availability, operational complexity, and stakeholder commitment levels.
Portfolio construction strategies should balance immediate climate impact through carbon neutral holdings with long-term value creation potential from Net Zero leaders positioned for competitive advantage under evolving climate regulations.
Due diligence processes must incorporate comprehensive climate risk assessment examining transition risks, physical climate impacts, and regulatory compliance exposure across portfolio holdings.
Integration of climate considerations into investment committee decision-making requires specialized expertise in climate science, technology assessment, and regulatory analysis that institutional investors must develop internally or access through external advisory relationships.
Fig 3: Strategic Framework for ESG Portfolio Decision-Making
Implementation Steps for ESG Climate Strategy:
Offset8 is a global emissions investment and management group founded in Abu Dhabi, United Arab Emirates. At COP28, Offset8 announced the Middle East's first carbon market fund with target size of $250m.
Offset8 seeks to finance nature-based solutions in Africa and Southeast Asia, as well as provides financing in the form of prepayments and offtake contracts for the delivery of verified carbon credits, with subsequent sale of the carbon credits under compliance markets (e.g., CORSIA and regional ETS), Article 6 of the Paris Agreement or voluntary purposes.
Offset8 Capital has an existing pipeline of approximately 70 projects: the investment portfolio includes such projects as CORSIA-eligible iRise (Malawi's largest reforestation and clean cooking program), Sawa (Indonesia's largest biochar carbon removal project), and others.These projects undergo rigorous verification, ensuring institutional investors receive premium carbon credits that meet evolving regulatory requirements. Our commitment to carbon neutrality across Scope 1, 2, and 3 emissions aligns with Science-Based Targets initiative requirements, demonstrating institutional leadership while providing credible expertise for client engagement on climate strategy development.
Net Zero strategies represent the definitive pathway for institutional investment leadership in climate action, delivering superior ESG performance and long-term value creation compared to carbon neutral approaches that serve as valuable interim steps. As regulatory frameworks strengthen and stakeholder expectations intensify, institutional investors should prioritize comprehensive climate strategies that demonstrate authentic commitment to global temperature targets.
*Disclaimer: This commentary is for informational purposes only and should not be considered financial, investment, or regulatory advice. Offset8 Capital Limited is regulated by the ADGM FSRA (FSP No. 220178). No assurances or guarantees are made regarding its accuracy or completeness. Views expressed are our own and subject to change
Net Zero commitments are not currently mandatory However, many countries have established Nationally Determined Contributions (NDCs) under the Paris Agreement, and governments impose penalties or regulatory constraints on companies that exceed their allocated emission limits. In such cases, companies must reduce or offset their emissions to remain within government-set thresholds. As regulatory frameworks continue to evolve and stakeholder expectations grow, adopting Net Zero targets is increasingly seen as best practice for institutional ESG portfolios.
Carbon neutrality provides moderate ESG performance improvement through immediate environmental impact demonstration, though Net Zero strategies deliver substantially higher ratings through comprehensive climate risk management.
Carbon neutral strategies require lower upfront capital through offset purchases, while Net Zero demands substantial investment in operational transformation with superior long-term value creation potential.
Institutional offset evaluation requires assessment of additionality, permanence, third-party verification, and regulatory compliance to ensure high-quality carbon credits supporting portfolio sustainability objectives.
