The imperative to decarbonize the global economy in response to climate change has given rise to the concept of “transition finance.” In this report, we delve into the financial strategies necessary to move away from fossil fuels and toward a sustainable future.
Investors typically adopt two approaches: portfolio decarbonization and financing the transition of higher emitters toward low-carbon business models. Both aim to lower the carbon footprint of a portfolio in the long run but use different economic strategies to achieve this goal. The active decarbonization approach rebalances the portfolio away from high emitters, while the finance the transition approach focuses on investing in transition opportunities, i.e., companies that are leading the way in their respective sectors and transitioning their business models. This report underscores the importance of combining these approaches to balance the benefits of each.
Capital allocation strategies for portfolio decarbonization
Illustration of portfolio construction approaches for low- and high-emitting companies. Source: MSCI ESG Research.
