Net Zero: Searching for returns and real-world change

Sustainability Director Daisy Streatfeild argues that the global economy is off course to hit net-zero emissions by 2050. Efforts need to target financing reduced emissions and real-world impact.

Apr 11, 2024

5 minutes

Daisy Streatfeild

The finance industry’s multi-billion dollar drive to deal with climate change is not working. Real-world emissions are rising, despite net-zero targets pointing in the other direction. In the latest whitepaper by Sustainability Director Daisy Streatfeild, Net zero investing: Searching for returns and real-world change, she argues that if we do not change course, we risk inadvertently doing more harm than good, whilst failing to achieve optimal returns.

Most asset owners have set interim targets either at a top-down portfolio level or for specific asset classes. Planetary Pulse, our global asset owner survey, shows nearly half (49%) of asset owners have an emissions portfolio-reduction target in place1. Some 95% of (NZAOA) members have set emissions reduction targets covering their listed equity and corporate fixed income portfolios2. However, despite practices evolving, it is still unclear if this is delivering the impact intended.

The challenges of reducing portfolio emissions

Since 2015, emissions from listed companies, or those captured in corporate debt indices, have risen 22% according to MSCI Net Zero Tracker3. Divesting assets does not appear to influence the trajectory of high-emitting companies.

Daisy Streatfeild, Sustainability Director, Ninety One: “More than half (53%) of asset owners expect it to get more difficult to achieve emissions reduction targets, while delivering the best possible returns4. A shrinking investment universe that reduces portfolio emissions will exclude industries and sectors that have the potential to transition to low-carbon business models, as well as deliver strong financial returns. In addition, strategies prioritising reduced portfolio emissions are struggling to keep up with traditional benchmarks.”

How can we solve this?

Streatfeild continues: “From an investment perspective, we need to shift focus from reducing financed emissions to financing reduced emissions. This will enable allocation of investment to those who need it the most and allow the finance industry to invest at the scale required for transition and for climate solutions that deliver decarbonisation. Investors also need to engage with high emitters to influence transition plans, recognising that net-zero pathways differ for sectors and regions.”

Portfolio managers need to preserve and safeguard return objectives alongside achieving net-zero goals. This requires focusing on investments that have maximum impact, while managing risk and maintaining diversification across sectors and regions, as well as optimising returns by avoiding restrictions that do not help deliver impact.

Reframing net zero

There are a range of components that investors can consider to reframe their net-zero approach, increasing impact and delivering returns. These include:

  • Add dedicated climate solution and transition sleeves, which enable targeted allocations to generate impact through reducing and avoiding emissions, provide diversification and complementary performance profiles.
  • Refine net-zero strategies for existing allocations to equities, corporate fixed income and sovereigns to more effectively use engagement and capital allocation to maximise impact, manage risk and maintain return objectives. This includes differentiated approaches for active and passive exposure.
  • Adding or enhancing allocations to private markets and real assets given the very significant potential for delivering real economy impact.
  • Impact can be further amplified by increasing active allocations, increasing emerging market allocations, and increasing allocations to transition investments and climate solutions.

We have summarised a practical example of adjustments to portfolios and asset class strategies, based on a generic 60% equities, 40% fixed income, in the appendix. The full detailed analysis can be found in the report.

Streatfeild concludes: “The global economy is off course to hit net-zero emissions by 2050. At this stage, our efforts need to target financing reduced emissions and real-world impact. Investors should be looking to increase emerging market allocations, supporting sustainable economic growth and reducing emissions.”

“By focussing on portfolio purity (a reduction of their own portfolio carbon emissions), without delivering real-world carbon reduction, asset owners are not stimulating the kind of change needed to tackle the climate crisis.”

Institutional investors reviewing net zero alignment need to question whether the restrictions in place to limit portfolio emissions and helping or hindering real economy impact. Each allocation within a portfolio can take steps to enhance its contribution to real-world alignment with net zero whether directly through climate solutions and transition investing or through engaging and allocating to align.

View the full report

1 Ninety One Planetary Pulse Survey 2023.
2 Members intermediate targets published on Net Zero Alliance website
3 Planetary Pulse Survey 2023.
4 MSCI based on the MSCI All Country World Index (ACWI) IMI Scope 1 emissions as published in MSCI Net Zero Tracker in November 2023.


A summary of practical example portfolios devised by Ninety One, based on a generic 60% equities, 40% fixed income portfolio. However, this approach can be tailored to fit all portfolio shapes and sizes including those with allocations meeting regulatory requirements such as coverage ratios.

Climate solutions and transition sleeves:

Climate Solutions Equities: Existing equity allocations may have some exposure to climate solutions, however the opportunity set in global equity indices is limited. A climate solutions universe based on companies with products and services that avoid carbon has only a 15% overlap with the MSCI All Country Index. This highlights both the diversification potential and the need for dedicated allocations.

Transition Equities: Transition investing allocations require detailed transition plan analysis and strategic engagement to monitor delivery of these plans. There are 158 sub-industries within GICS, the most detailed classification level. By selecting 51 sub-industries covering power, buildings, mobility, industry and agriculture we can create a proxy for the transition universe. These sectors generate c.90% of Scope 1 & 2 emissions within global listed companies and represent 20% of market capitalisation. There is likely significant return potential as companies successfully implement their plans and become increasingly attractive to the market as long-term investments.

Transition Debt: While green and sustainability-linked bond issuance has grown steadily over recent years, high-emitting sectors remain largely absent from these markets. Industries that sit at the crux of the problem, namely the five transition areas we have focussed on: power, buildings, mobility, industry and agriculture, require significant investment through debt to finance their transition plans. Dedicated investments in emerging market transition debt provides strong return potential supports a just transition and are one of the most effective ways to directly finance the reduction of real-world emissions.

Active Equities: For equity portfolios, real-economy impact is achieved where companies within the portfolio decarbonise their operations and value chain to reach net-zero emissions. Active equity allocations allow investors to contribute more robustly to real-economy transition through a more rigorous assessment of alignment and undertaking active engagement and stewardship. Similarly, an investor can also accommodate increasing allocations to climate solutions and transition investing.

Passive Equities: All passive strategies are evolving, generally passive equity allocations will be more constrained than actively managed equities in assessing alignment, adjusting allocations, and using engagement and stewardship within this process. If passive allocation allows tilts, an optimal approach would be to add an alignment potential overlay for forward-looking alignment metrics while maintaining sector and regional exposure.

Active Credit: Like equity portfolios, active credit allocations can be directed towards assets that are more aligned or are contributing to the net-zero transition. Increasingly credit markets will support innovation. Although engagement is a potentially important strategy, the utility and impact will depend on the size of the investor in the market, and credit rating of the bonds. Engagement is likely to be an effective strategy for dominant market players and for High Yield bonds.

Passive Credit: These allocations should be optimised for alignment within constraints as set out for passive equities. This could include underweighting or excluding assets with increasing transition risk. If passive allocation allows tilts, an optimal approach would be to add an alignment potential overlay.

Domestic Sovereign Allocation: A major part of many asset allocations will be an institution’s domestic government bond market. These are often defensive allocations or are matching liabilities. The main tool for investors is therefore engagement. Further opportunities might exist via related development finance institutions issuing in local currency and sovereign green bonds issued in the domestic market.

Global Sovereign Allocation: Broader sovereign allocations provide many more opportunities to improve real-world net-zero alignment. There is significant opportunity within global sovereign strategies to allocate towards alignment and invest directly in solutions and transition through sovereign green and sustainability-linked bonds (SLBs). Tools like those being developed by ASCOR or the Net Zero Sovereign Index allow investors to better assess whether a sovereign investment or sovereign portfolio is aligned to a net-zero pathway that works for the world.

Private Markets: Private markets are a growing asset class for institutional investors, and have very significant potential for delivering real economy impact. Allocations to private markets are a critical part of the funding equation for net zero and can access innovative technologies and infrastructure projects that amplify real-world impact. Private lending can also be linked to credible transition plans in hard-to-abate sectors with measurable outcomes. This is particularly prevalent in emerging markets where origination is far less crowded and where considerable funding gaps exist.

Infrastructure and Real Estate: Infrastructure and real estate are often significant sources of GHG emissions. Decarbonising these assets is an important opportunity for real economy decarbonisation impact. Where investors make direct investments in these assets, investors can increase allocation to assets that are already aligned to net zero or have the potential to align e.g., through retrofitting, and ensure assets are managed to decarbonise. Opportunity for impact may be more limited for brownfield assets.

Authored by

Daisy Streatfeild

Jeannie Dumas

Communications Director (ex-Africa)

Laura Henderson

Communications Manager

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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