How can the net-zero theme add value for investors?

The net-zero journey in 2025

Although the journey to net-zero emissions appeared to slow somewhat in early 2025, our conviction in decarbonisation remains strong. The new Trump administration’s executive orders and statements might be seen as risking a disruption to the net-zero transition. However, decarbonisation is happening primarily for economic, industrial, engineering and efficiency reasons, rather than normative or political ones, in our view.

Though the tone of the US administration’s messaging may be hostile to the transition, we believe the removal of political uncertainty, a pro-business environment, a focus on deregulation and reshoring could well prove positive for private investment in infrastructure, grid and networks, semiconductor manufacturing and smartification.

Read also: Sustainability in the new Trump era

Thematic interest in net zero also 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. 

Portfolios aligned to the transition

We believe the transition is therefore unlikely to be derailed and remain committed to implementing a disciplined and truly diversified investment approach that provides exposure to the decarbonisation theme and the innovative companies driving it. As a result, aligning clients’ portfolios to this transition now should still benefit them down the road, in our view.

Within our TargetNetZero range, we favour companies that are decarbonisation leaders, but invest across all industries, including in high-carbon sectors. This allows us to maintain exposure to all areas of the economy close to benchmark, making our portfolio more resilient to sector rotations. There are transitioners across all sectors, and our forward-looking approach seeks to capture transition opportunities in the wider economy.

Combined with robust risk management, this approach has consistently positioned us to navigate economic and market shifts effectively, ensuring alignment with the benchmark performance.

Does NetZero performance herald a trend?

The performance of our TargetNetZero equity strategies in 2024 shows how the strategy captured the performance of benchmark indices while also benefiting from a disciplined portfolio construction and risk management framework that provided 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.

The excess returns of TargetNetZero strategies stem from three portfolio building blocks: NetZero, carbon reduction and ESG¹ 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 last 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 was 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 performance that more than offset its drawdowns over the year in the Global equity universe². 

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 strategies³

Read also: 3 years of TargetNetZero Equity: a genuine transition approach

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.