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The economics of decarbonisation make the net-zero transition Trump-proof
Mona Shah
Senior Sustainability Strategist
Ilona Echenard
Sustainability Strategist
key takeaways.
While the world is overshooting the Paris Agreement’s 1.5°C target – and the Trump administration’s policies create fresh headwinds – the solid economics of decarbonisation have already set the transition in motion
Long-term trends show that emissions in the West have already peaked. Developments in China and India, where emissions are still rising, will therefore be more important to the transition than regressive policy changes in the US
Our TargetNetZero approach offers investors diversified, style-agnostic core portfolios aligned with decarbonisation in all sectors of the economy and a materially lower carbon footprint than benchmarks.
Net zero is dead, long live net zero!
According to the International Energy Agency (IEA), global energy-related CO2 emissions grew by 1.1% in 2023 to reach a new record high of 37.4 billion tonnes – an increase that highlights the challenges faced globally in reducing emissions. Yet although the world is currently on track to overshoot the 1.5°C global warming target set by the Paris Agreement, headline figures obscure the clear progress being made.
Breaking down emissions by region, the US, the European Union and Japan’s emissions have been on a clear downward trend over the last 25 years, both on a total and per-capita basis. However, while we note China’s unique position as a leader in climate technology, rising emissions in China, India and other developing markets mean that overall global emissions continue to increase.
FIG 1. While overall global emissions are still rising, emissions in the West are on a clear downward trend1
Meanwhile, even the most seasoned spin doctor would struggle to portray the prospect of a second Trump presidency as positive for the transition to net zero. However, in the context of the solid economics and strong overall momentum behind decarbonisation in the West, the impact of the Trump administration’s climate scepticism will ultimately be less important than the approach taken by China and India.
As these long-term emissions trends show, while the transition will not be linear, the global economy is decarbonising, with developed nations leading the way.
Decarbonisation is an economy-wide phenomenon that creates both risks and opportunities. It is especially relevant for high-emission firms in sectors like steel and manufacturing, where implementing lower-emission business models will reshape industries. To participate effectively in the transition, investors need to look beyond the current carbon footprints of firms in an effort to understand their future emission trajectories, in the context of their specific industries and regions.
Applying this analysis across sectors enables a diversified exposure to decarbonising firms across the economy. This creates a resilient, core portfolio based on solid investment fundamentals and aligned to a net-zero future. It captures the market returns of this major economic transition while mitigating its risks. This is our TargetNetZero approach.
LOIM TargetNetZero Global IG Corporate (TNZ credit) is a long-only global corporate credit strategy designed for investors focused on reducing climate transition risks while capturing the opportunities generated by the shift to net zero. Launched in April 2021, it invests in selected securities chosen using our proprietary sustainability tools and methodologies. The strategy aims to allocate to issuers demonstrating that they are on a clear path towards a net-zero economy, contributing to addressing transition risks while capturing the opportunities created by the transition.
Our TNZ credit strategies provide clients with core, low-tracking-error fixed income exposures designed to match the performance of broad benchmarks while aligning with a global warming trajectory of 2°C or lower. With three-year track records, these strategies show robust risk-adjusted returns and portfolio decarbonisation. The franchise manages over USD 1.8bn2 through public funds and bespoke mandates for both wholesale and institutional clients. As one of the only asset managers offering forward-looking decarbonisation solutions powered by a proprietary Implied Temperature Rise (ITR) metric, we fully own, understand and manage the decarbonisation metric used to construct our portfolios. This allows us to unpack ITR data points in real time, leverage them to engage with portfolio companies, and provide tailored ITR-based analytics and reporting to clients.
Our forward-looking approach to decarbonising portfolios enables us to deliver better climate and investment outcomes than traditional benchmarks, in our view. We invest across sectors and geographies in companies pursuing credible decarbonisation strategies, constructing diversified portfolios with minimal biases. The TNZ credit portfolios are grounded in a pragmatic and risk-controlled approach to climate-mitigation investing, resilient to sustained periods of negative sentiment on the transition and its prospects. By investing across all sectors, these products are designed to match mainstream benchmarks, providing a robust climate and investment response to debates around the opportunity cost of investing for the transition. We have consistently achieved our goals of aligning portfolios with the Paris Agreement's stretch target of two degrees, delivering performance in line with reference indices, and containing ex-post tracking error to below 2% (see Figure 2).
Despite the political challenges posed by the Trump administration, the transition to a decarbonised economy remains fundamentally resilient and robust. Market forces, state-level support, technological advancements and corporate commitments will combine to ensure continued progress on decarbonisation. Our TargetNetZero philosophy offers investors a strategic approach to building all-weather, decarbonisation-focused portfolios that align with sustainable growth while also ensuring resilient returns, regardless of the changing political environment.
FIG 2. Performance of the LOIM TNZ global credit strategy (%)3
FIG 3. Summary risk indicator for the TNZ global credit strategy4
Case study: Stora Enso5
Finland-based Stora Enso is a global leader in paper and forest products with a strong focus on sustainable solutions. It uses renewable materials and invests heavily in sustainable forestry, innovative biomaterials and energy-efficient technologies to reduce environmental impact throughout its supply chain. Specifically, the company6:
Provides packaging made with recycled fibres for food, beverages and transport
Enhances resource efficiency through continuous optimisation, a dedicated investment fund and ISO 500017 certified energy management systems
Invests in renewable energy, such as using biofuels at production sites
Includes independent sustainability criteria in its Supplier Code of Conduct (SCoC) to ensure robust and responsible supply chain management8
Issued a EUR 500 million green bond in 2020, with proceeds allocated to certified forest land acquisition and production of lower emission cross-laminated timber (CLT)
Has a decarbonisation plan validated by the Science-Based Target Initiative targeting a 50% reduction in absolute Scope 1, 2 and 3 CO₂ between 2019 and 20309
We believe Stora Enso will play a crucial role in the transition due to its focus on sustainable forest management – and its strong commitments could give it a first-mover advantage. The company has issued 10 green bonds, focusing on activities including acquisition of FSC and PEFC certified sustainable forest and silviculture to improve biodiversity. It has also invested in more sustainable products like CLT, which can replace concrete and steel in construction – of which it is the largest producer globally.
The market forces driving the transition to net zero
Despite the potential rollback of environmental regulations in the US, market forces and technological advancements will continue to drive the adoption of cleaner energy solutions.10 While policy may act as a headwind, a series of drivers should combine to maintain the momentum of the net-zero transition:
Structural drivers: Electrification, automation, water use efficiency and reindustrialisation are being driven by secular trends unlikely to change under Trump
Onshoring: Domestic manufacture shortens supply chains and reduces dependency on foreign imports, offsetting the risks associated with the removal of subsidies for solar and wind energy
Energy security and affordability: In the wake of the global energy crisis triggered by the war in Ukraine, controlling diverse sources of cheap, reliable energy is a shared goal across the political spectrum11
Utilities and generation: Demand for renewables is driven by the need for reliable and efficient energy solutions to support economic growth and boosted by price competitiveness, regardless of subsidies12
Global market dynamics: China is investing aggressively in clean energy technologies; to remain competitive in international markets, the US is likely to continue to invest in clean energy regardless of domestic policy shifts13
Economic and geopolitical leverage: Ongoing investment in both fossil fuels and renewables is key to maintaining and expanding America's energy dominance and the economic and geopolitical leverage it provides14
Data-driven demand: Incremental increases in demand for power from data centres, driven by cloud computing, crypto mining and the rise of AI, can generate economic and infrastructural benefits that support the renewable energy sector
Consumer Preferences: The transition to environmentally friendly products is gradual and driven to a significant extent by EU regulations and consumer preferences, rather than being solely dependent on US policies.
The key factor that we believe would help significantly is a bipartisan consensus on energy policy based on a truly forward-looking approach. A properly conceived and agreed long-term strategy will make energy cheaper and costs more predictable, delivering not just environmental gains but also social and economic benefits.
The new US administration’s plans to roll back environmental regulations, withdraw from international climate agreements, and repeal key provisions of the Inflation Reduction Act (IRA) pose a clear threat to the progress made in decarbonising the economy. However, our conviction is strong that decarbonisation is underpinned by sound economics, and that state-level initiatives and market forces will drive the transition forward despite the current US Government’s antipathy to climate action.
Evidence from the first Trump administration supports this thesis. For example, between 2009 and 2016, the cost of solar power fell from USD 350 per megawatt hour (MWh) to USD 55/MWh. During the first Trump administration, this trend continued unabated, with levelised costs falling to a low of USD 36/MWh by 2021, while the cost of batteries and electric vehicles (EVs) also continued to fall – in the same period, based on data from the IEA, the number of EVs in the US increased fivefold. Meanwhile, despite the administration’s policy support, at least 11 coal power companies went into bankruptcy, unable to compete with new sources of energy (according to analysis by Lazard, the levelised cost of coal today is USD 69-168/MWh, compared to USD 29-92/MWh for utility-scale solar).
Ultimately, we believe the transition to a more sustainable economy will happen because of the demonstrated cost advantages of these technologies, which are driven by innovation cycles, the modularity of technologies, and basic engineering principles.
Our conviction is strong that decarbonisation is underpinned by sound economics, and that state-level initiatives and market forces will drive the transition forward
Investing in decarbonisation does not mean sacrificing returns
Unlike many low-carbon strategies, TNZ credit pursues real-world decarbonisation within a core exposure that can be used as a building block in portfolio construction. With a three-year track record, we have applied our proprietary methodology to select companies across all sectors with ambitious and credible decarbonisation trajectories. Some of these companies are currently high emitters, but their strategies to decarbonise and progress in reducing emissions make them transition leaders, in our view. Our proprietary ITR metric is science-based and approved by the Task Force on Climate-related Financial Disclosures15 and the Glasgow Financial Alliance for Net Zero16, providing real-world decarbonisation.
We believe this approach offers far better diversification and stronger potential returns than Paris Aligned Benchmarks, which often focus narrowly on exclusions.
To learn more about our TargetNetZero fixed-income strategy, click here
view sources.
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1 IEA, “The changing landscape of global emissions.” Accessed 16 April 2025. For illustrative purposes only.
2 LOIM at 31 March 2025.
3 LOIM at 31 March 2025. Strategy inception date: 26 April 2021. Performance shown is a composite of the strategy. Past performance is not a guarantee of future results. For illustrative purposes only. Composite and benchmark fefinition. The strategy is a long-only global corporate strategy launched in April 2021. It mainly invests in securities within the Bloomberg Barclays Global Aggregate Corporates index based on proprietary sustainability processes, aiming to reduce the risk of climate transition. Moreover, the strategy seeks to select and allocate to issuers with the objective to form a universe compatible with the fight against global warming. It integrates a wide range of climate objectives covering the risk of transition, the opportunities and the physical risk linked to climate change. It aims to invest in issuers which can contribute to a reduction in global CO2 emissions and the eventual achievement of net zero CO2 emissions by 2050. This will include issuers already targeting such net zero CO2 emissions by 2050, as well as issuers that may not yet have set such targets but that progressively may be brought into alignment, including through regulatory action, investor engagement and market changes. The Investment Manager will aim to ensure a faster rate of reductions in CO2 emissions in the portfolio when compared to the Bloomberg Barclays Global Aggregate Corporates index. The achievement of these aims are dependent on regulatory, technological and commercial developments external to the Investment Manager and there can be no guarantee that they will be achieved in respect of the above referenced aims. Risk management is performed by fund managers at a portfolio level, alongside independent teams who oversee investment, counterparty and operational risks. The composite benchmark is IO BAR GL AGG CORP HDG $. The composite currency is USD. Management fees and other information. All returns are presented gross of fund total expense ratio. The maximum TER for LOF - TargetNetZero Global IG Corporate, Syst. Multi Ccy Hdg is 0.70% based on the IA share class (investment above CHF 1 million), with a management fee of 0.45%. Withholding tax on income is treated on a cash basis, whereby recoverable withholding tax, dependant on where a client is domiciled, is added back performance when occurring. Further information on calculation methodologies and composite management procedures is available upon request.
4 This summary risk indicator (SRI) is a guide to the level of risk of this product compared to other products. Where there are less than five years’ worth of data, missing returns are simulated using an appropriate benchmark. The SRI may change over time and should not be used as an indicator of future risk or returns. Even the lowest risk classification does not imply that the Sub-Fund is risk-free or that capital is necessarily guaranteed or protected.
5 The case studies provided in this document are for illustrative purposes only and do not purport to be recommendation of an investment in, or a comprehensive statement of all of the factors or considerations which may be relevant to an investment in, the referenced securities. The case studies have been selected to illustrate the investment process undertaken by the Manager in respect of a certain type of investment, but may not be representative of the Fund's past or future portfolio of investments as a whole and it should be understood that the case studies of themselves will not be sufficient to give a clear and balanced view of the investment process undertaken by the Manager or of the composition of the investment portfolio of the Fund now or in the future.
6 All company figures provided by Stora Enso.
7 ISO 50001 is an international standard for energy management systems.
8 Stora Enso’s SCoC includes criteria from the Forest Stewardship Council, Programme for the Endorsement of Forest Certification, and ISO4001 (an international standard for environment management systems).
9 Science-Based Targets Initiative.
10 ‘Subsidy Wars’, International Monetary Fund, June 2023.
11 ‘World Energy Outlook 2024’, International Energy Agency, 2024.
12 ‘Recent analysis on the impact of tax incentives for residential energy efficient equipment’, Office of Energy Policy and Systems Analysis, U.S. Department of Energy, 30 November 2017.
13 ‘Economic Impacts and Market Distortions of Subsidies Across Sectors’, Accounting Insights, 12 September 2024.
14 ‘Subsidy Wars’, International Monetary Fund, June 2023.
15 “Measuring Portfolio Alignment: Assessing the Position of Companies and Portfolios on the Pathe to Net Zero,” Blood, D. and Levina, I. Published by the Portfolio Alignment Team in 2020.
16 “Measuring Portfolio Alignment: Enhancement, Convergence and Adoption,” published by GFANZ in August 2022.
important information.
For professional investors use only
This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice.
