Capturing market upside while benefitting from net-zero tilts

2024 in review: the importance of prudent portfolio construction

Our annual review last year had an optimistic outlook for 2024, anticipating a gradual reduction in inflation would trigger an easing cycle from central banks. In our view, these conditions supported the climate transition and, indeed, last year turned out to be favourable for net-zero investments¹. However, the year also underscored the importance of prudent portfolio construction to benefit from this environment while not missing out on other opportunities. 

A wave of interest rate cuts across developed countries in 2024 created fertile ground for risky assets, particularly US equity indices, which enjoyed yet another year of double-digit returns. Behind the rally, however, lay a large disparity between the performance of different stocks, meaning portfolio allocation decisions were key to capturing upside opportunities. In 2024, the number of stocks in the MSCI World Index outperforming the index as a whole broke another record and reached a 20-year low². So-called ‘US exceptionalism’ and the dominance of large-caps continued to influence returns. These themes were further strengthened by the resurgence of interest in artificial-intelligence (AI) technology. 

Thanks to our disciplined portfolio construction and risk management framework, our TargetNetZero equity strategies were able to benefit from these themes in line with their benchmark indices, while providing investors with additional, material exposure to the net-zero transition. A key highlight in 2024 was the value added to the portfolios by the net-zero theme, particularly in the global TargetNetZero strategy.

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Does NetZero performance herald a trend?

In the same way that  we strive for greater transparency in non-financial data disclosures, we are also committed to providing a clear and detailed analysis of our strategy's performance. To that end, we leverage a performance attribution model that we developed in-house, which allows us to break down our excess returns into building blocks. 

The excess returns of TargetNetZero strategies stem from three portfolio building blocks: NetZero, carbon reduction and ESG³ exclusions. The NetZero component is the core of our investment process. It implements our proprietary, forward-looking methodology that assesses alignment of portfolios to the climate transition in the form of Implied Temperature Rise (ITR). We align our portfolios to a below-2⁰C scenario. Carbon reduction further enhances a portfolio by targeting the immediate reduction of its emissions relative to the benchmark. Finally, exclusions are implemented to avoid investment in controversial businesses.

In risk terms, the NetZero component is dominant, and this year it played a pivotal role in securing the outperformance of the global TargetNetZero strategy. The basis of this outperformance was our successful stock selection within traditionally carbon-intensive sectors such as Industrials and Utilities.

Figure 1 shows the performance of the NetZero component of the TargetNetZero Global and Europe strategies, both including and excluding the Energy sector, since inception in April 2021. The underweight in Energy has been a headwind to the strategy, primarily due to the strong performance of this sector in 2022. In 2024, both components added value, with ex-Energy recording an exceptional performance⁴ that more than offset its drawdowns over the year in the Global equity universe.  

The surge in NetZero begs the question of whether this is the beginning of a long-awaited trend where our forward-looking approach bears fruit. In our view, it is too early to draw any conclusions, however, it is very reassuring to see that the strategy delivers in line with expectations.

FIG 1. Performance of NetZero component since inception of TargetNetZero strategies⁵

Boosting short-term value potential

The NetZero component represents the strategy’s core performance engine and we expect it to be a long-term source of value. In 2024, we introduced two key advances in our portfolio construction process that aim to boost performance over much shorter time frames.

Dividend optimisation materially reduces the cost of dividend tax. Taking advantage of monthly portfolio rebalancing, the strategy reduces allocations to stocks that pay dividends in the upcoming month. This is done without impacting portfolio's climate and risk characteristics.

Drawing on our expertise in active systematic strategies, we integrated a systematic alpha overlay to dynamically capture opportunities in equity styles across various regions and sectors. The overlay provides an additional layer of diversification and boosts the resilience of our portfolios to economic and geopolitical shocks while maintaining a steadfast focus on achieving net-zero objectives. 

The net-zero journey in 2025

In early 2025, the journey to net-zero emissions appears to be slowing somewhat, yet its significance and inevitability are increasingly clear. Thematic interest in net zero continues to grow, spurred by both global events and heightened public awareness. In 2024, ‘excessive heat’ emerged as the second trending term globally, after the US election, according to Google Trends. This underscores a stark reminder: climate events are not just scientific projections but lived realities that demand urgent action.  
No matter what political changes lie ahead, we believe the transformation of the global economy to a net-zero model will continue, due to a combination of powerful economic factors, technological advancement and policy commitments. As a result, aligning clients’ portfolios to this transition now should still benefit them down the road, in our view. 

In 2025, expected US tax cuts, higher uniform tariffs and a transactional approach to foreign policy will most probably influence equity markets worldwide. If US inflation rises, as many expect, the Federal Reserve will have less capacity to cut rates, which could be challenging for equities in general and some equity styles.

In this environment, we remain committed to implementing a disciplined and truly diversified investment approach for the transition to net zero.