Advancing net zero progress in emerging market equities

Decarbonisation as a transformative economic force

Historically, developed economies have contributed most of the world’s CO₂ emissions. Today, however, rising emissions are increasingly driven by China, India and other emerging economies.

As these economies and populations grow in the coming decades, their demand for energy, infrastructure and materials will rise sharply, making their decarbonisation pathways decisive for meeting the Paris Agreement’s goal to limit warming to below 2°C.

In this context, we believe decarbonisation should be viewed as an economy-wide transformation influencing power, transport, industry and real estate, rather than a narrow ‘clean-tech’ theme. 

Despite a later start, EM net zero momentum is building

EM countries differ noticeably in their current energy supply mix, as well as in their opportunities to decarbonise. This diversity defines their decarbonisation trajectories and must be considered when investing in the climate transition in the region.

Generally, emerging markets began the shift to a more sustainable economic model later than most developed countries, are transitioning more slowly and remain relatively carbon-intensive. Competing development priorities, policy uncertainty, currency risks and difficulties in raising foreign investment add to the challenges for these countries, raising the cost of capital and slowing deployment.

The Climate Action Tracker, an independent project that tracks and classifies government’s climate actions, ranks many emerging economies climate strategies as either ‘highly’ or ‘critically’ insufficient (Figure 1). This points to a broad-based alignment gap that reflects limitations in policy scope, implementation capacity and transition enabling-conditions.

FIG 1. Climate Action Tracker classification by government¹

Read more: Net-zero investing shows resilience in a year of shocks and shifts

Accelerating EM progress

Despite challenges, many EM economies are well positioned to enjoy an accelerated transition and are already demonstrating clear and undeniable momentum. Aside from supplying the world with renewable technology, China dominates the buildout of renewables (domestic Chinese solar accounting for about 60% of newly installed capacity globally in 2024) and is on track to become the world’s first ‘electro-state’. Meanwhile, 83% of power sector investment in India went to clean energy in 2024, and Thailand, Taiwan and Hong Kong are among the top 20 fastest growing markets globally for the adoption of science-based targets by companies.

These trends indicate that rather than lagging developed markets, emerging markets are accelerating along their own transition pathways, often overtaking legacy infrastructure with scalable, low-carbon solutions.

Capturing the opportunity

Solutions such as renewables, electrification, energy efficiency and low-carbon industrial processes are increasingly scalable and cost-effective. The main challenges are rapid deployment, aligning policy frameworks and mobilising capital at scale.

Investors should be mindful that climate objectives in emerging markets are currently less ambitious and less rigorously pursued than in developed economies. Only 22% of the MSCI Emerging Markets Index has a decarbonisation target set through the Science Based Targets initiative (SBTi), compared to 56% of the MSCI World Index. It is therefore unsurprising that when aggregated at index level, our proprietary implied temperature rise (ITR) metric indicates a pathway of 3.0°C for the MSCI Emerging Markets Index, significantly higher than the 2.4°C pathway for the constituents of the MSCI World Index.

Investors pursuing climate transition strategies in emerging markets must explicitly account for this structural gap, with expectations and portfolio objectives calibrated to the specific starting points, constraints and timelines of individual economies. However, we are still able to find credible and ambitious transition leaders across sectors in emerging markets, allowing us to build a well-diversified portfolio of companies driving the shift to sustainability.

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

Prioritising transition over exclusion

The launch of our TargetNetZero Emerging Markets Equities strategy extends our approach across all MSCI All Country World Index (ACWI) regions, supporting a global, inclusive approach to net-zero investing. The expansion reflects our belief that the transition to a low-carbon economy must be inclusive and economy-wide, engaging all geographies and sectors in a credible and forward-looking framework. 

TargetNetZero EM targets an implied temperature rise of 2.5°C or below, acknowledging the structural constraints and development needs of these regions while maintaining a credible and ambitious pathway towards a low-carbon economy. This is consistent with our philosophy of enabling transition rather than enforcing exclusion. By investing in companies with credible and ambitious decarbonisation targets, we aim to catalyse real-world decarbonisation across all geographies and sectors. 

Our systematic approach is designed to capture broad market exposure while aligning portfolios with credible decarbonisation pathways. By integrating EM equities, we extend our coverage to regions that are increasingly relevant to the global transition, both in terms of emissions and opportunity. 

As climate mitigation remains a priority, our TargetNetZero strategies continue to offer clients a distinctive proposition: core, low-tracking-error² solutions that are aligned with the future of the global economy.