Sustainable Investing in 2024: Bridging the Gap Between Climate Commitments and Corporate Action

Introduction

The urgency of climate change necessitates a transformation in how investments are approached, particularly through the lens of sustainable investing. Sustainable investing strategies prioritize environmental, social, and governance (ESG) factors, ensuring that investments are not only financially viable but also contribute positively to society and the planet. J.P. Morgan exemplifies this approach by employing a research-driven methodology that integrates comprehensive ESG data analytics into their investment decisions, allowing for a nuanced understanding of sustainability risks and opportunities. This alignment of financial and sustainability goals is crucial for fostering long-term value creation. Recent data indicates that sustainable funds outperformed traditional funds in 2023, achieving median returns of 12.6%, nearly 50% higher than the 8.6% returns of traditional funds. This trend reflects a growing recognition among investors that competitive financial returns can align with sustainability goals, with assets under management for sustainable funds increasing significantly to $3.4 trillion, accounting for 7.2% of total global AUM. Additionally, the transition to a lower-carbon economy has faced both progress and challenges, particularly in the renewable energy sector, which has encountered issues such as high initial valuations and supply chain disruptions. However, the commitment to green technologies and climate investment remains strong, supported by international and regional policy developments. 1, 5, 7

In the context of corporate emissions reduction, it is essential to recognize the disparity between ambitious targets and the credibility of these commitments. Many corporations, particularly in high-emission sectors, have set goals to reduce their carbon footprint; however, these targets often lack the necessary rigor and feasibility. Investors must engage in thorough assessments of corporate transition plans, focusing on the intent and credibility behind these commitments to mitigate exposure to transition risks. This systematic evaluation is vital, especially given that a significant proportion of global emissions is concentrated in a few high-emitting sectors that require substantial reductions to align with net-zero objectives. The increasing scrutiny of corporate ESG claims and the rise in litigation related to environmental commitments highlight the importance of accountability in these efforts, as investors demand more robust evidence of corporate commitments to sustainability. Notably, companies that actively engage in sustainable investing often implement joint reduction initiatives with their suppliers and customers, which is crucial for achieving emissions reduction targets. In fact, three-quarters of companies cutting emissions in line with their ambitions have collaborative programs with suppliers, while over half engage similarly with customers. 3, 8, 9

The role of technology in achieving emissions reduction cannot be overstated. Current estimates suggest that mature technologies, such as solar and wind, can deliver approximately 40-50% of the necessary emissions reductions. However, the remaining reductions depend on the deployment of innovative and less mature technologies. Addressing the financing gap is critical, particularly in emerging markets, where the need for investment in climate technologies is pronounced. Robust policy frameworks are essential to facilitate the growth of both mature and emerging technologies, ensuring that the transition to a low-carbon economy is both effective and equitable. Furthermore, as the demand for renewable energy and electric vehicles rises, there will be a significant increase in the need for metals and minerals, necessitating sustainable mining practices to mitigate environmental impacts. Companies motivated by market competitiveness and values are often willing to invest in higher-cost projects that provide substantial local co-benefits, while those focused on carbon management tend to prefer lower-cost options, particularly in renewable energy. 4, 6, 10

Moreover, specific technologies and pathways are pivotal for driving decarbonization efforts. Significant advancements in renewable energy have led to reduced costs, yet further investments and infrastructure improvements are necessary to support widespread adoption. Electrification of processes and enhancing efficiency are also crucial strategies for reducing emissions. Additionally, the scaling of carbon capture, utilization, and storage (CCUS) technologies is imperative for absorbing residual emissions post-reduction efforts. Innovative solutions, including green hydrogen and sustainable aviation fuels, present promising avenues for future investment, albeit with the requirement for substantial innovation and financial backing. The integration of climate risk assessments and biodiversity analysis into investment frameworks is becoming increasingly prevalent, reflecting the need for a comprehensive approach to sustainability. Companies employing automated digital solutions for emissions measurement are nearly 2.5 times more likely to measure their emissions comprehensively, suggesting that sustainable investing drives financial benefits and fosters a culture of accountability and innovation essential for effective emissions management. 4, 7, 9

To construct portfolios aligned with net-zero goals, investors must identify companies with credible decarbonization strategies. This involves a dual focus on low-emitting companies and those capable of effective transitions. Achieving net-zero targets is not a short-term endeavor; it demands a long-term commitment to planning, investment, and adaptability to evolving technologies and market conditions. The diversification of sustainable investing strategies is also on the rise, with a growing emphasis on thematic investments and alternative asset classes, reflecting a robust evolution in sustainable investing driven by regulatory changes and a commitment to integrating sustainability into investment strategies. The reinvestment of matured securities is particularly crucial, as it can significantly influence a portfolio's decarbonization rate, thereby supporting real-economy emissions reductions. Only through a concerted effort can investors play a pivotal role in driving the necessary changes for a sustainable future. 1, 7, 8

Sustainable Investing Strategies

Sustainable investing strategies are increasingly recognized as essential for addressing the urgent challenges posed by climate change. At the forefront of this movement, J.P. Morgan exemplifies a research-driven approach that integrates comprehensive ESG data analytics into investment decisions. This methodology enables investors to identify opportunities that not only provide financial returns but also contribute positively to environmental and social outcomes. By aligning investment strategies with sustainability goals, firms can foster long-term value creation, which is crucial in a rapidly changing economic landscape. Recent data indicates that sustainable funds outperformed traditional funds in 2023, achieving median returns of 12.6%, nearly 50% higher than the 8.6% returns of traditional funds, underscoring the growing recognition among investors that financial performance can coexist with sustainability objectives. Furthermore, the total assets under management for sustainable funds have surged to $3.4 trillion, accounting for 7.2% of global AUM, reflecting a robust shift towards sustainability in investment practices. Additionally, sustainable equity and fixed-income funds reached a record 7.9% of global total AUM in the first half of 2023, highlighting the increasing investor interest in sustainable strategies, particularly among Millennials, who show a strong intent to engage in sustainable investing. Moreover, a notable trend in 2023 has been the emphasis on climate technology investments, with firms increasingly focusing on the implementation of their climate targets using advanced analytical tools to assess transition risks and decarbonization strategies. This growing commitment to green technologies is evident despite challenges in the renewable energy sector, such as high initial valuations and supply chain disruptions. 1, 5, 6, 7

The effectiveness of sustainable investing is further enhanced by active ownership and continuous engagement with companies. J.P. Morgan emphasizes the importance of maintaining deep insights into the companies in which they invest, ensuring that their practices align with sustainability objectives. This active engagement is essential for driving corporate behavior towards more sustainable practices, particularly in high-emission sectors where accountability is critical. As investors increasingly scrutinize corporate ESG claims, the need for credible transition plans becomes paramount. Companies that demonstrate genuine commitment to sustainability, often through collaborative programs with suppliers and customers, are more likely to achieve their emissions reduction targets. Notably, three-quarters of companies that have successfully reduced emissions have implemented joint initiatives with their suppliers, while over half have engaged similarly with customers, highlighting the importance of collaboration in achieving sustainability goals. Furthermore, with the evolving regulatory landscape, including directives such as the EU’s Corporate Sustainability Reporting Directive, companies are now required to disclose various ESG factors, which will further shape corporate strategies and enhance the availability of standardized ESG data for investors. PIMCO's focus on corporate engagement initiatives underscores the necessity of active dialogue with clients to implement thoughtful solutions that align with sustainability objectives, reflecting a broader trend among asset owners who are shifting from merely setting climate targets to actively implementing them. 3, 7

Technological innovation plays a critical role in the success of sustainable investing strategies. Current estimates suggest that mature technologies, such as solar and wind, can deliver approximately 40-50% of the necessary emissions reductions. However, the remaining reductions hinge on the deployment of innovative and less mature technologies. Addressing the significant financing gap, particularly in emerging markets, is essential for scaling up these climate technologies. Robust policy frameworks are necessary to support both mature and emerging technologies, ensuring that the transition to a low-carbon economy is effective and equitable. Furthermore, as the demand for renewable energy and electric vehicles rises, sustainable mining practices will be crucial to mitigate environmental impacts associated with the extraction of necessary metals and minerals, which could see demand rise between two to six-fold by 2040. PIMCO highlights the importance of enhancing analytical capabilities, including climate risk and biodiversity analysis, to better inform investment decisions and facilitate the growth of climate technologies amidst these challenges. 4, 6, 7

Specific technologies and pathways are pivotal for driving decarbonization efforts within sustainable investing. Significant advancements in renewable energy have led to reduced costs, yet further investments and infrastructure improvements are necessary to facilitate widespread adoption. Electrification of processes and enhancing efficiency are also critical strategies for reducing emissions. Additionally, scaling carbon capture, utilization, and storage (CCUS) technologies is imperative for absorbing residual emissions post-reduction efforts. Innovative solutions, including green hydrogen and sustainable aviation fuels, present promising avenues for future investment, albeit with the requirement for substantial innovation and financial backing. The integration of climate risk assessments and biodiversity analysis into investment frameworks is becoming increasingly prevalent, reflecting the need for a comprehensive approach to sustainability. This evolving landscape suggests a more nuanced and integrated approach to sustainable investing as the market adapts to changing regulatory and environmental conditions, as emphasized by PIMCO's report on the importance of developing tools for carbon analytics in supporting these efforts. 4, 7

To construct portfolios aligned with net-zero goals, investors must identify companies with credible decarbonization strategies. This involves a dual focus on low-emitting companies and those capable of effective transitions. Achieving net-zero targets is not a short-term endeavor; it demands a long-term commitment to planning, investment, and adaptability to evolving technologies and market conditions. The diversification of sustainable investing strategies is also on the rise, with a growing emphasis on thematic investments and alternative asset classes, reflecting a robust evolution in sustainable investing driven by regulatory changes and a commitment to integrating sustainability into investment strategies. The reinvestment of matured securities is particularly crucial, as it can significantly influence a portfolio's decarbonization rate, thereby supporting real-economy emissions reductions. Only through a concerted effort can investors play a pivotal role in driving the necessary changes for a sustainable future. This year has also seen a sustained interest in ESG-labeled bonds, as their proportion within corporate fixed income indices continues to grow, indicating a strong market commitment to sustainable investment opportunities. 1, 8, 7

Growth of Global ESG ETF Assets

The growth of global ESG ETF assets has been remarkable over the past decade, reflecting the increasing investor interest in sustainable investment strategies. According to data from ETFGI, global ESG ETF assets have grown from $5 billion in 2006 to $480 billion in 2023. This significant increase underscores the expanding market for ESG-focused investment products and the growing recognition of the importance of sustainability in investment decisions.

Global ESG ETF Assets 2006-2023

Source: ETFGI, Global ESG ETF assets from 2006 to November 2023

Assets Under Management of Sustainable Funds Worldwide

The assets under management (AUM) of sustainable funds have shown significant growth over the years, reflecting the increasing commitment to sustainable investing. According to data from Statista, the AUM of sustainable funds worldwide grew from $1.437 trillion in FY 2018 to $3.360 trillion by December 2023. This growth trajectory underscores the expanding influence of sustainable investment practices in the global financial markets.

Assets Under Management of Sustainable Funds Worldwide 2018-2023

Source: Assets under management of sustainable funds worldwide from 2018 to December 2023 (in billion U.S. dollars)

AUM of Sustainable Funds by SDG Sectors Worldwide

The allocation of assets under management (AUM) by sustainable funds to different Sustainable Development Goals (SDG) sectors worldwide in 2022 highlights the diverse focus areas within sustainable investing. According to Statista, the largest share of assets was allocated to the Health sector (15.0%), followed by Climate change mitigation (9.0%), and Agrifood systems (4.0%). Other sectors such as WASH (Water, Sanitation, and Hygiene), ecosystems and biodiversity, telecommunication infrastructure, transport infrastructure, and education received smaller shares of the assets, reflecting a broad but varied commitment to different sustainability goals.

Share of Assets Allocated to Different SDG Sectors by Sustainable Funds Worldwide in 2022

Source: World Investment Report 2023, Page 104

Top ESG Impacts Investors Aim to Make Worldwide

In 2022, investors aimed to make significant impacts across various environmental, social, and governance (ESG) areas. According to Statista, the top ESG impact areas included quality education (21.0%), no poverty (15.0%), and zero hunger (14.0%). Other notable areas were clean water and sanitation (14.0%), good health and wellbeing (12.0%), and reduced inequalities (9.0%). These priorities reflect the broad scope of investor interests in driving positive change through sustainable investing.

Top ESG Impacts Investors Aim to Make Worldwide in 2022

Source: Top environmental, social, and governance (ESG) impacts investors aim to make worldwide in 2022

Corporate Emissions Reduction: Assessing Credibility

The landscape of corporate emissions reduction is marked by a significant gap between ambitious targets and the credibility of commitments made by many companies, particularly in high-emission sectors. While numerous corporations have pledged to reduce their carbon footprints, these targets often lack the rigor and feasibility necessary to ensure real impact. Investors must engage in thorough assessments of corporate transition plans, focusing on the intent and credibility behind these commitments to mitigate exposure to transition risks. A systematic evaluation is vital, especially as a significant portion of global emissions is concentrated in a few high-emitting sectors that require substantial reductions to align with net-zero objectives. The increasing scrutiny of corporate ESG claims and the rise in litigation related to environmental commitments further emphasize the importance of accountability in these efforts, as investors demand more robust evidence of corporate commitments to sustainability. Notably, the United States aims for a 65% reduction in greenhouse gas emissions by 2035, which underscores the urgency of credible assessments in high-emission sectors. However, the Corporate Climate Responsibility Monitor 2024 indicates that the median absolute emission reduction commitment for 51 major companies is only 30% of their full value chain emissions from 2019 to 2030, highlighting the gap between commitments and necessary actions. This situation calls for a shift from voluntary initiatives to formal accountability mechanisms to enhance the integrity of corporate climate pledges. 3, 11, 12

To effectively assess corporate emissions reduction strategies, it is essential to understand the role of collaboration in achieving sustainability goals. Companies that actively engage in sustainable investing often implement joint reduction initiatives with their suppliers and customers, which are crucial for meeting emissions reduction targets. Notably, three-quarters of companies cutting emissions in line with their ambitions have collaborative programs with their suppliers, while over half engage similarly with customers. This collaborative approach not only enhances the credibility of corporate commitments but also fosters a culture of shared responsibility in the transition towards a low-carbon economy. Furthermore, as regulatory pressures increase, companies are compelled to disclose various ESG factors, which will shape corporate strategies and enhance the availability of standardized ESG data for investors. However, a recent survey revealed that only 14% of companies have successfully reduced their carbon emissions in line with their stated ambitions, indicating ongoing challenges in high-emission sectors. The Corporate Climate Responsibility Monitor 2024 emphasizes the need for stronger regulatory frameworks to hold companies accountable and ensure that their climate actions are credible and substantial. 3, 9, 13, 12

The effectiveness of corporate emissions reduction efforts is closely linked to the adoption of innovative technologies. Current estimates suggest that mature technologies, such as solar and wind, can deliver approximately 40-50% of the necessary emissions reductions. However, achieving the remaining reductions hinges on the deployment of innovative and less mature technologies. Addressing the significant financing gap, particularly in emerging markets, is essential for scaling up these climate technologies. Robust policy frameworks are necessary to support both mature and emerging technologies, ensuring that the transition to a low-carbon economy is effective and equitable. As demand for renewable energy increases, sustainable mining practices will also be crucial to mitigate environmental impacts associated with the extraction of necessary metals and minerals. The urgency for deeper reductions is underscored by the call for a 43% reduction in global greenhouse gas emissions by 2030, highlighting the need for credible assessments and accountability in emissions reduction commitments across high-emission sectors. The Corporate Climate Responsibility Monitor 2024 indicates that while the collective ambition of companies' climate targets has improved, most companies still do not meet the necessary economy-wide emission reductions needed to limit global warming to below 1.5°C. 4, 14, 12

Specific technologies and pathways are vital for driving decarbonization efforts within corporate strategies. Significant advancements in renewable energy have led to reduced costs, yet further investments and infrastructure improvements are necessary to facilitate widespread adoption. Electrification of processes and enhancing efficiency are also critical strategies for reducing emissions. Additionally, scaling carbon capture, utilization, and storage (CCUS) technologies is imperative for absorbing residual emissions post-reduction efforts. Innovative solutions, including green hydrogen and sustainable aviation fuels, present promising avenues for future investment, albeit with the requirement for substantial innovation and financial backing. Companies that integrate climate risk assessments and biodiversity analysis into their investment frameworks are better positioned to navigate the complexities of sustainable investing and enhance their long-term viability. The Corporate Climate Responsibility Monitor 2024 emphasizes the need for formal accountability in corporate climate pledges to enhance credibility, particularly in high-emission sectors, as only about 19% of large public corporations have emissions pathways aligned with global climate targets. 4, 12

To construct portfolios aligned with net-zero goals, investors must identify companies with credible decarbonization strategies. This involves a dual focus on low-emitting companies and those capable of effective transitions. Achieving net-zero targets is not a short-term endeavor; it demands a long-term commitment to planning, investment, and adaptability to evolving technologies and market conditions. The diversification of sustainable investing strategies is also on the rise, with a growing emphasis on thematic investments and alternative asset classes. This evolution reflects a robust commitment to integrating sustainability into investment strategies, underscoring the importance of a concerted effort in driving necessary changes for a sustainable future. This year has also seen a sustained interest in ESG-labeled bonds, as their proportion within corporate fixed income indices continues to grow, indicating a strong market commitment to sustainable investment opportunities. 1, 8

Growth Rate of Sustainable Investment Assets Worldwide

Source: Global Sustainable Investments Review 2020, page 10

Assets under management of sustainable funds worldwide from 2018 to December 2023 (in billion U.S. dollars)

)Source: Assets under management of sustainable funds worldwide from 2018 to December 2023

The Role of Technology in Achieving Emission Reduction

The role of technology in achieving emissions reduction is critical in the context of sustainable investing. Current estimates suggest that mature technologies, such as solar and wind energy, can deliver approximately 40-50% of the necessary emissions reductions. However, the remaining reductions depend on the deployment of innovative and less mature technologies, which are essential for achieving ambitious climate goals. As of 2023, solar photovoltaic (PV) capacity has seen significant growth, with around 180 GW added in Europe and 120 GW in the United States since 2015. However, concerns remain that the current solar project pipelines may not meet 2030 targets due to less than 20% of expected capacity having reached the final investment decision (FID). In addition, while the CCUS market has experienced a notable increase in activity, with CO2 capture capacity expected to increase at least threefold between 2020 and 2030, many projects have yet to reach FID, posing risks to their timely deployment. Addressing the significant financing gap, particularly in emerging markets, is vital for scaling up these climate technologies. Robust policy frameworks are necessary to support both mature and emerging technologies, ensuring that the transition to a low-carbon economy is effective and equitable. As the demand for renewable energy and electric vehicles rises, sustainable mining practices will be crucial to mitigate environmental impacts associated with the extraction of necessary metals and minerals, which could see demand rise between two to six-fold by 2040. This underscores the need for a concerted effort in advancing technological solutions that align with sustainability goals. 4, 17

Specific technologies and pathways are pivotal for driving decarbonization efforts within sustainable investing. Significant advancements in renewable energy have led to reduced costs, yet further investments and infrastructure improvements are necessary to facilitate widespread adoption. Wind energy technologies, both onshore and offshore, are crucial, with Europe on track to meet its 2030 targets, although the US faces challenges, evidenced by only 16% of planned onshore wind capacity having reached FID. Moreover, while CCUS technologies are gaining traction as they can alleviate some of the pressures on renewable energy expansion, scaling these technologies remains imperative for absorbing residual emissions post-reduction efforts. Innovative solutions, including green hydrogen and sustainable aviation fuels (SAF), present promising avenues for future investment, albeit with the requirement for substantial innovation and financial backing. In particular, clean hydrogen, encompassing both green and blue hydrogen, has gained attention, with ambitious production targets set for significant increases by 2030, yet only a small fraction of projects have achieved FID. The integration of climate risk assessments and biodiversity analysis into investment frameworks is becoming increasingly prevalent, reflecting the need for a comprehensive approach to sustainability. This evolving landscape suggests a more nuanced and integrated approach to sustainable investing as the market adapts to changing regulatory and environmental conditions. 4, 18

To construct portfolios aligned with net-zero goals, investors must identify companies with credible decarbonization strategies. This involves a dual focus on low-emitting companies and those capable of effective transitions. Achieving net-zero targets is not a short-term endeavor; it demands a long-term commitment to planning, investment, and adaptability to evolving technologies and market conditions. The diversification of sustainable investing strategies is also on the rise, with a growing emphasis on thematic investments and alternative asset classes, reflecting a robust evolution in sustainable investing driven by regulatory changes and a commitment to integrating sustainability into investment strategies. The reinvestment of matured securities is particularly crucial, as it can significantly influence a portfolio's decarbonization rate, thereby supporting real-economy emissions reductions. This year has also seen a sustained interest in ESG-labeled bonds, as their proportion within corporate fixed income indices continues to grow, indicating a strong market commitment to sustainable investment opportunities. Only through a concerted effort can investors play a pivotal role in driving the necessary changes for a sustainable future. 1, 8

Key Technologies and Pathways for Decarbonization

The urgency of climate change necessitates a multifaceted approach to decarbonization, where technology plays a pivotal role. Current estimates indicate that mature technologies, such as solar and wind energy, can deliver approximately 40-50% of the necessary emissions reductions. However, achieving the remaining reductions hinges on the deployment of innovative and less mature technologies. For instance, while solar photovoltaic (PV) capacity has seen significant growth, with utility-scale solar capacity additions reaching nearly 9 gigawatts (GW) in 2023—a 36% increase compared to the previous year—concerns persist regarding the ability of current project pipelines to meet 2030 targets due to insufficient final investment decisions (FID) made thus far. This highlights the critical need for not only technological advancement but also substantial investment and policy support to facilitate the widespread adoption of these solutions. Moreover, the transition to sustainable fuels, including green hydrogen and sustainable aviation fuels (SAFs), is projected to play a significant role in meeting decarbonization targets, with an estimated investment requirement of between $0.6 trillion and $1.9 trillion by 2050 to expand production capacity and overcome challenges related to feedstock availability. 4, 24

In the context of renewable energy, the production of green hydrogen is anticipated to dominate the global supply mix by 2050, accounting for 50 to 65 percent of total hydrogen production. This growth is driven by the need for decarbonization across various sectors, including transportation and industrial applications. However, challenges remain in scaling up infrastructure and technology to support this transition, particularly the need for extensive refueling stations and hydrogen pipelines, as well as advancements in fuel cell technology for heavy-duty vehicles and marine vessels. The decarbonization of existing hydrogen applications will likely require government support, active mandates, and infrastructure development to facilitate the switch from fossil fuel-based hydrogen to clean alternatives. Overall, while the advancements in renewable energy technologies, particularly in hydrogen production and utilization, are promising, significant investments and coordinated efforts between the government and private sectors are essential to overcome the existing challenges and realize a sustainable hydrogen economy. 27, 28

The financial landscape for sustainable investments is also evolving, with significant regional disparities in the asset size of sustainable funds. As of the second quarter of 2023, Europe leads with an asset size of $2,368 billion, followed by the United States at $313 billion. Other regions, such as Asia (excluding Japan), Australia & New Zealand, Canada, and Japan, have considerably smaller asset sizes, highlighting the need for increased investment in these areas to support global decarbonization efforts.

Asset size of sustainable funds worldwide as of the second quarter of 2023, by region (in billion U.S. dollars)

Source: ESG Clarity

Despite the growing interest in sustainable investments, several barriers hinder retail investors from increasing their sustainable investments. The top barriers include a lack of transparency and reported data about the impact of investments (51%), a lack of a clear, agreed definition of what constitutes a sustainable investment (45%), and performance concerns (37%).

Top barriers to retail investors increasing their sustainable investments globally in 2022

Source: 2022 Global Investor Survey, Schroders

Investment Strategies for Achieving Net Zero

Investment strategies aimed at achieving net-zero emissions are increasingly critical in the context of sustainable investing. To construct portfolios aligned with net-zero goals, investors must identify companies with credible decarbonization strategies. This involves a dual focus on both low-emitting companies and those capable of effective transitions. Recent data indicates that sustainable funds significantly outperformed traditional funds in 2023, achieving median returns of 12.6%, nearly 50% higher than the 8.6% returns of traditional funds. This trend was particularly pronounced in the first half of the year, where sustainable funds achieved a median return of nearly 7%, compared to 3.6% for traditional funds. Furthermore, sustainable funds now account for 7.2% of total global assets under management, totaling $3.4 trillion, reflecting a 15% increase from 2022. This trend underscores the growing recognition among investors that financial performance can coexist with sustainability objectives, reinforcing the importance of integrating sustainability into investment strategies. Additionally, investment strategies for achieving net-zero emissions in 2023 must focus on accelerating the deployment of low-emission technologies, such as renewable energy sources, electrification technologies, and carbon capture, as many announced projects have yet to reach the final investment decision (FID) stage, posing risks to achieving 2030 targets. 5, 1, 30

Achieving net-zero targets is not a short-term endeavor; it demands a long-term commitment to planning, investment, and adaptability to evolving technologies and market conditions. Investors must engage in rigorous assessments of corporate transition plans, focusing on the intent and credibility behind these commitments to mitigate exposure to transition risks. As a significant portion of global emissions is concentrated in a few high-emission sectors, it is essential to evaluate the feasibility and ambition of corporate emissions reduction targets. This systematic evaluation is vital to ensure that companies are genuinely committed to sustainability and capable of meeting their stated goals. The urgency for deeper reductions is underscored by the call for a 43% reduction in global greenhouse gas emissions by 2030, highlighting the need for credible assessments and accountability in emissions reduction commitments across high-emission sectors. Moreover, companies aiming for net zero emissions should focus on several key investment strategies, such as targeting green premiums to finance the initial phase of industrial decarbonization and scaling low-carbon power and hydrogen production quickly to ensure an affordable and secure energy supply. 3, 14, 31

Furthermore, the diversification of sustainable investing strategies is on the rise, with a growing emphasis on thematic investments and alternative asset classes. This evolution reflects a robust commitment to integrating sustainability into investment strategies, driven by regulatory changes and an increasing demand for accountability in corporate climate pledges. The integration of climate risk assessments and biodiversity analysis into investment frameworks is becoming increasingly prevalent, highlighting the need for a comprehensive approach to sustainability. Companies that actively engage in sustainable investing often implement joint reduction initiatives with their suppliers and customers, which are crucial for meeting emissions reduction targets. Notably, three-quarters of companies cutting emissions in line with their ambitions have collaborative programs with their suppliers, while over half engage similarly with customers. Additionally, investment performance data indicates that 40% of companies reported an annual financial benefit of at least $100 million from emissions reduction efforts, showcasing the tangible benefits of sustainability initiatives. 4, 9

Leading reasons for ESG investing worldwide in 2019 and 2021

Source: The ESG Global Survey 2021, page 7

Investors must also focus on identifying 'improvers'—companies with credible decarbonization plans that can transition effectively. The reinvestment of matured securities is particularly crucial, as it can significantly influence a portfolio's decarbonization rate, thereby supporting real-economy emissions reductions. This year has also seen a sustained interest in ESG-labeled bonds, as their proportion within corporate fixed income indices continues to grow, indicating a strong market commitment to sustainable investment opportunities. The latest trends indicate that the diversity of sustainable investing strategies is expanding, influenced by Millennial investors and new government regulations. Furthermore, addressing supply chain challenges and streamlining permitting processes are essential strategies to enhance the execution of decarbonization plans. Only through a concerted effort can investors play a pivotal role in driving the necessary changes for a sustainable future. 1, 6, 32

Conclusion

In conclusion, the urgency of addressing climate change necessitates a comprehensive and strategic approach to sustainable investing, corporate emissions reduction, and the deployment of innovative technologies. As highlighted throughout this white paper, sustainable investing not only offers a pathway for financial returns but also aligns with broader societal and environmental goals. The significant outperformance of sustainable funds in 2023 illustrates the growing recognition among investors that sustainability and profitability can coexist harmoniously. In 2023, sustainable funds returned a median of 12.6%, significantly outperforming traditional funds, which had median returns of 8.6%. This trend was particularly pronounced in the first half of the year, where sustainable funds achieved nearly 7% returns compared to 3.6% for traditional funds. With assets under management for sustainable funds reaching $3.4 trillion, it is evident that the investment landscape is evolving toward a more sustainable future. This transition is further supported by robust policy frameworks and the increasing demand for transparency in corporate climate commitments, which are critical for fostering accountability and driving meaningful change in high-emission sectors. 5, 1

Furthermore, global investments in clean technologies reached a record high of $1.8 trillion in 2023, marking a 17% increase from the previous year, underscoring the heightened awareness of climate change and energy security concerns. Notably, spending on clean energy technology and infrastructure is projected to be nearly double that of fossil fuels in 2024, indicating a robust shift towards sustainable investment practices. This growth in clean tech investment reflects a focus on technologies with higher potential for emissions reduction, such as green hydrogen and carbon capture, which saw increases of 64% and 39%, respectively. The industrial sector's share of climate tech venture funding has also nearly doubled from 8% to 14%, highlighting the increasing emphasis on technologies that can significantly cut emissions even amidst challenging market conditions. 35, 34, 36

Call to Action

As we stand at a critical juncture in the fight against climate change, it is imperative for investors, corporations, and policymakers to take decisive action towards sustainable investing and corporate emissions reduction. The evidence is clear: sustainable investing not only provides a pathway for financial returns but also aligns with broader societal and environmental goals. In 2023, sustainable funds outperformed traditional funds, achieving median returns of 12.6%, nearly 50% higher than the 8.6% returns of conventional funds. This trend underscores the growing recognition that competitive financial returns can coexist with sustainability objectives, reflecting a robust shift towards sustainable investment practices. Investors must prioritize sustainable strategies that not only focus on profitability but also contribute positively to the planet. This includes actively engaging with companies to ensure their practices align with sustainability objectives, thereby fostering a culture of accountability and innovation essential for effective emissions management. By doing so, we can collectively drive the necessary changes for a sustainable future. 1, 5

Corporations must also commit to credible emissions reduction targets that go beyond mere rhetoric. The disparity between ambitious commitments and actual performance in high-emission sectors highlights the urgent need for accountability. Companies should establish robust transition plans that are transparent and measurable, ensuring that their goals are not only ambitious but also achievable. Collaboration with suppliers and customers is crucial in this regard, as joint initiatives can significantly enhance the credibility of corporate commitments. As investors increasingly scrutinize corporate ESG claims, it is vital for companies to demonstrate genuine commitment to sustainability through actionable strategies and credible reporting. A recent report indicates that while many companies have set ambitious targets, only 14% have successfully reduced their carbon emissions in line with their stated ambitions, emphasizing the need for more rigorous assessment of corporate sustainability efforts. Furthermore, the Corporate Climate Responsibility Monitor 2024 reveals that the median absolute emission reduction commitment among major companies is only 30% of their full value chain emissions from 2019 to 2030, underscoring the gap between commitments and necessary actions. 3, 12, 13

Policymakers play a pivotal role in shaping the landscape for sustainable investing and emissions reduction. Strong regulatory frameworks are essential for supporting the growth of both mature and emerging technologies. This includes facilitating investments in renewable energy, electrification, and carbon capture technologies, which are critical for achieving net-zero targets. Furthermore, addressing the financing gap, particularly in emerging markets, is vital for scaling up climate technologies. Policymakers must also prioritize sustainable mining practices to mitigate environmental impacts associated with the extraction of necessary metals and minerals, ensuring that the transition to a low-carbon economy is both effective and equitable. Recent insights suggest that global investments in clean technologies reached a record high of $1.8 trillion in 2023, indicating a robust commitment to sustainable investment opportunities. This trend reflects an increasing focus on technologies with higher potential for emissions reduction, such as green hydrogen and carbon capture, which saw significant increases in investment in recent years. 4, 1, 35

In conclusion, the path to a sustainable future requires a concerted effort from all stakeholders. Investors must identify and support companies with credible decarbonization strategies, while corporations must hold themselves accountable to their commitments. Policymakers must create an enabling environment that fosters innovation and investment in sustainable technologies. Only through collaboration and commitment can we drive the necessary changes to combat climate change and achieve a sustainable future for generations to come. The time for action is now, and the responsibility lies with each of us to contribute to this vital cause. Recent data shows that over 70% of individual investors believe strong ESG practices can lead to higher financial returns, reinforcing the need for a unified approach to sustainable investing. 1, 37

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• ESG and Sustainability: 2023 Year in Review & 2024 Predictions
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• Sustainable Funds Outperform: Year-End 2023
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• Climate tech investment falls 40% amid economic uncertainty: PwC 2023 State of Climate Tech
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• Do We Have the Technologies Necessary to Reduce Global Emissions?
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• Bridging the $18 Trillion Gap in Net Zero Capital

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