Three key net zero investment opportunities

Investors aiming to allocate capital to help support net zero objectives, can consider two broad ways to do this within equities and fixed income.

One is around decarbonisation, which focuses on seeking opportunities associated with the transition to a low-carbon economy and reducing exposure to carbon emissions. In essence this means investing in companies committed to delivering robust transition plans. The other is actively looking to channel capital towards climate and biodiversity solutions investments that are helping to drive positive impact on the environment.

The range of assets on which there is robust data continues to increase, making it even easier for fund managers to assess companies in detail and expand the universe for environmentally focused investors. However, it’s not just data availability that matters, it’s about having the expertise inhouse to understand nuances, limitations that is critical to investment decision making.

Below, we explore the specific opportunities investors are favouring as COP29 gets underway.

Biodiversity

Biodiversity is an emerging (i.e. newer) but fast-growing investment opportunity. Around half of world GDP relies on a medium to high functioning biodiversity, according to a world economic forum report published in 2022¹ . In addition, we are becoming increasingly aware of the Biodiversity Climate change nexus – two topics which are in fact deeply interconnected. Loss of biodiversity impacts climate change – for example deforestation means that we lose the benefits of forests acting a natural carbon sink and climate change is the second largest driver of biodiversity loss. This is why we’re seeing so many investors, especially those with net zero targets, upping the ante on biodiversity as part of their broader commitments.

Whilst biodiversity is arguably more complex than say climate change, the good news is there are ways to incorporate it into investing today across listed and private markets. In particular, we are seeing increased appetite for concrete investment solutions such as AXA IM’s dedicated biodiversity equity strategies which invest in the leaders of the biodiversity transition we have identified and where we now manage over €600 million in assets under management² .

Increasingly, however, investors also want to see their managers considering biodiversity across their portfolio by actively engaging on this topic as part of their stewardship activities and excluding where necessary companies in contravention of their policies as well as being able to assess how exposed portfolios are to biodiversity related risks. This is why it is so important to AXA IM that we deliver a portfolio-level biodiversity footprint metric as part of our ESG reporting.

Carbon transition strategies

Carbon transition strategies are becoming an increasingly popular way to support a decarbonisation pathway and drive a concrete shift in investor portfolios. They allow investors to move from commitment and high-level target setting to concrete action within an investment portfolio to support the transition to a lower carbon economy. This is a trend we’re seeing across both fixed income and equities.

Earlier this year we launched a global bond strategy centring on the carbon transition, investing in the companies on the path to net zero³ . In line with many of our sustainable strategies, it has a dual objective: it aims to both finance decarbonisation and provide a financial return. Interestingly this particular strategy was seeded with £100m from Aon – an indication that ultimately, investors want help to achieve their sustainability and net zero commitments and are increasingly looking to partner to achieve this in a way that ensures they do not sacrifice performance.

In addition, we are seeing increased appetite for our range of Paris Aligned Benchmark ETFs, which offer building blocks to investors seeking access to key markets in a simple and efficient way, including a decarbonisation objective.

Green bonds

Green bonds have existed for many years as an instrument as well as an investment strategy, and issuance continues to grow⁴ . Investors are truly waking up to the diversity of sectors that issue green bonds today compared to a few years ago.

What is really interesting is that we’re seeing more and more clients investing in green bonds as part of their global aggregate allocation, rather than just for sustainability-focused portfolios. This trend has been enabled by the expansion of the green bond market and is something AXA IM expects to continue in the years ahead.

Investors, however, need to be selective. That is why we have developed a rigorous framework for assessing Green, Social and Sustainable Bonds (GSSBs), based on the issuer’s sustainability strategy, management of proceeds, project types and impact reporting. We also evaluate these bonds’ contribution to and alignment with the UN SDGs. As a result, we filter out approx. 25% of the green bond universe. Our process means not every green bond issued is one we would consider investing in this way, investors can have confidence they are helping to finance only the most relevant and impactful projects we have selected.

One aspect that is critical across all three is stewardship. As an asset manager focused on sustainability, we do not believe divestment and exclusion policies, while they have a role, necessarily represent the best way to achieve decarbonisation goals. In our view, engagement is a dynamic process for driving change and investors recognise it is an effective way to hold companies to account, whether through ongoing dialogue or voting.

Important information

No assurance can be given that our investment strategies will be successful. Investors can lose some or all of their capital invested. Our strategies are subject to specific risks including, but not limited to: equity; emerging markets; global investments; investments in small and micro capitalisation universe; investments in specific sectors or asset classes, volatility risk, liquidity risk, credit risk, counterparty risk, derivatives risk, legal risk, valuation risk, operational risk and risks related to the underlying assets. Some strategies may also involve leverage, which may increase the effect of market movements on the portfolio and may result in significant risk of losses.