Forward thinking in net-zero investing: four myths debunked

Cutting through the noise around net zero

2025 has been a year of contradictions in the net-zero landscape. Weather and climate-related extreme events are at an all-time high¹, yet regulatory rollbacks – particularly in the US – have cast doubt on policy momentum. Despite these headwinds, we believe the climate transition will not be derailed because there is a broader shift toward a lower-carbon economy, driven not only by environmental concerns but, increasingly, by economic and efficiency incentives.

Data evidence is fuelling the momentum for decarbonisation: more companies are setting Science-Based Targets and 90% of renewables now cost less than the cheapest new fossil option². 

Yet, persistent myths continue to shape – and sometimes distort – net-zero investment strategies. Below, we challenge four common misconceptions and outline why investing in climate transition leaders is an effective path to portfolio alignment and value creation.

Myth 1. Net-zero alignment requires divestment from high-carbon sectors.

Using a forward-looking transition approach ensures investors can tap into investment opportunities, stay diversified by investing in all sectors and contribute to real decarbonisation across the economy.

Divestment alone is not sufficient – and often not optimal – for achieving real-world decarbonisation or portfolio resilience. Low-carbon approaches may reduce exposure to climate sensitive sectors, but by only focusing on low-carbon sectors they miss  investment opportunities, fail to contribute to real emissions reductions and concentrate risk in low-carbon sectors.

In our view, the most impactful way to promote decarbonisation is by identifying and favouring companies that look set to decarbonise faster than their peers. Our forward-looking approach identifies companies across the economy – even in high-carbon sectors – whose credible, Paris Agreement-aligned progress on decarbonisation might not yet be recognised by the market but whose eventual decarbonisation is essential to reducing real emissions.

Our proprietary Implied Temperature Rise (ITR) tool assesses companies’ net-zero alignment and expresses it as an intuitive temperature metric – indicating the level of global warming that would result if every actor in the economy were managing its emissions with the same level of ambition as the considered company or portfolio. This allows us to identify mispriced transition leaders, including in hard-to-abate sectors, invest across all sectors of the economy and provide capital to transitioning firms in order to speed the transition to net zero.

Read more: TargetNetZero Equities: rethinking a core allocation aligned with net zero

Myth 2. Forward-looking metrics are too uncertain to reliably guide investment.

All metrics carry uncertainty. The key is to quantify and incorporate that uncertainty into portfolio construction to optimise the portfolio.

Every metric carries inherent uncertainty – whether it's a weather forecast or an inflation projection. The same applies to extra-financial data. Uncertainty can stem from the quality of historical disclosures or from estimating a company’s likely ability to meet its decarbonisation targets in a moving world.

However, we can minimise the impact of such uncertainty by properly measuring  it, leveraging all the available information that is used in an ITR model. Since our ITR model is proprietary, we know the exact inputs and modelling assumptions, facilitating a more exacting measurement of uncertainty. Monte-Carlo modelling allows us to estimate such uncertainty and incorporate it into our portfolio construction, thereby creating a more robust portfolio to target net zero.

We also seek to align our portfolios to their climate-related targets in the most optimal way because we believe an optimised portfolio incorporates elements of potential return enhancement.

Myth 3. US climate policy rollbacks could make 2°C portfolio alignment unachievable in global strategies.

Even if US companies return to historical emissions trajectories, disciplined stock selection and increased reliance on European and Asian companies can preserve climate alignment in a global strategy.

We analysed the potential impact of policy reversals on companies’ ITR scores, and modelled three scenarios to assess the impact of shifting corporate behaviour:

• Ambitions become reality: Companies fully deliver on their disclosed decarbonisation targets
• Business as usual: Companies revert to historical emission trajectories, disregarding future targets
• Baseline: A middle-ground scenario that reflects current expectations. It combines historical emissions with future targets.

The impact of US climate rollbacks on the benchmark would be meaningful: a business as usual scenario would raise the ITR of the MSCI World from 2.5°C to 2.7°C⁴. However, we believe that a full abandonment of climate commitments is unlikely. Therefore, to reflect more realistic outcomes, we modelled intermediate credibility shifts, allowing us to assess sensitivity across a range of outcomes between full target achievement and complete rollback.

Even under our study’s most extreme assumption – where US companies revert entirely to historical emission trends – we were able to construct a global portfolio aligned with a 2°C pathway by increasingly relying on European and Asian companies. To maintain diversification and manage macro risk, rather than shifting allocations between regions, we would instead emphasise stock selection within regions – favouring transitioners and reducing exposure to laggards within Europe and Asia. Tracking error contribution from these regions would increase, but the overall tracking error remained well below 1%⁵.

Fig 1. Keeping TNZ portfolio ITR below 2°C while preserving diversification⁶

This analysis underscores the resilience of our strategy: by incorporating credibility scenarios and maintaining disciplined portfolio construction, we can continue to align portfolios to climate goals without compromising diversification or risk controls.

Read more: Keeping equity portfolios aligned to decarbonisation as US climate policy reverses

Myth 4. The climate theme is crowded and offers limited upside potential.

The dominance of low-carbon strategies ignores the opportunities in high-carbon companies with credible plans to decarbonise. Our track record demonstrates the net-zero theme has upside potential for active investors and can add value to portfolios.

Most climate strategies are variants of a low-carbon strategy, including the Paris Aligned benchmark indices. This has driven broad devaluation of high-carbon companies, regardless of their transition potential. We believe this creates upside for firms that are actively decarbonising and delivering on climate commitments, even if they are currently high emitters.

Our approach goes against the crowd of low-carbon investing by favouring transition leaders in high-carbon sectors – companies with credible, Paris-aligned plans to reduce emissions. These firms are essential to real-world decarbonisation and could deliver material value to portfolios.

In 2024, our TargetNetZero equity strategies demonstrated this potential. The NetZero component, which uses ITR to align portfolios with a 2°C pathway, was a clear contributor to excess returns – particularly in our global strategy⁷.

Fig 2. Contribution to excess return of the NetZero component, 2021-2025⁸

Read more: Capturing market upside while benefitting from net-zero tilts

The path to net zero

The transition to a lower-carbon economy continues to reshape investment landscapes due to efficiency and economics. By focusing on climate leaders and integrating uncertainty into portfolio construction, investors can maintain alignment with net-zero goals while identifying meaningful opportunities for long-term value. Clarity and precision in portfolio construction are key to navigating the noise.