The Logic of Net Zero Investment Portfolios: Positioning Long-Term Investors for Financial Outperformance

Abstract

The transition to a net zero carbon economy is imperative for mitigating the impacts of climate change and its unpredictable risks. This paper examines the strategies adopted by the world's largest long-term investors to achieve net zero emissions in their portfolios by 2050 or earlier. Despite the nascency of the net zero investing landscape, leading initiatives, such as the Net Zero Asset Owners Alliance, have set interim targets to significantly reduce absolute emissions by 2030. By reviewing the net zero plans of 33 global asset owners, this paper identifies four primary approaches: divestment from high-emitting assets, re-weighting investments based on carbon exposure, reducing emissions in existing investments through stewardship and retrofits, and investing in net zero or net-negative emissions solutions. The effectiveness, advantages, and limitations of each strategy are analyzed, along with their impact on portfolio emissions, the real economy, and portfolio performance. The paper also explores complementary approaches such as policy advocacy and data enhancement. Concluding with strategic guidance and recommendations, this paper aims to assist asset owners in successfully crafting and implementing net zero portfolios that align with global climate goals. 

Keywords: Net Zero, Institutional Investment, Climate Change, Portfolios