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The answer lies somewhere between yes and it depends. It depends because even if investors broadly agree on how to define value, there are multiple approaches to climate investing, each with their own merits. In systematic investing, tilts allow for the popular low-carbon approach to be combined with value if one is willing to overweight the financial sector. In active investing, low carbon alone is no longer seen as enough to define a meaningful climate strategy. Instead, many active investors focus on climate leaders and pure play solution providers. These companies are often referred to as ‘green darlings’ and while being popular investments, they rarely represent value.

Chart 1 shows the positive relationship between value and emission intensity. In aggregate, higher value exposure comes at the cost of higher emission intensity. This is hardly surprising, the most pollutive sectors are all deep value, partially driven by years of sell-off due to climate concerns.

Chart 1: Emission intensity vs Fundamental value

The efforts of climate solution providers, such as renewable energy companies, are critical to meet climate targets. But they are only one piece of the puzzle. To achieve net zero, highly pollutive legacy sectors must decarbonize, or transition. Today, transition investing is by no means mainstream, but it is quickly gaining momentum. Here the focus is on the rate of change in emissions rather than the current level. Given that transitions are only relevant for companies with material emissions, transition investing is by construct inherently value investing.

Another related approach is to look for ’hidden assets’ in legacy businesses. Many companies have significant businesses in areas critical to combating climate change but are not widely perceived as climate solution providers. These businesses with ‘hidden solutions’ can often be purchased at far lower implied prices than what one sees for the pure play solution and low carbon businesses that are the core of many sustainable investment strategies. These companies are often growing their climate solutions business and using their legacy business cash flows as a cash cow to fund this transition journey.

Transition investing is by construct inherently value investing. In addition, sustainable investors looking beyond the already green can gain exposure to hidden climate solution assets at a discount. As these businesses evolve, we believe they will be recategorized as green and earn higher valuations.

A credible transitions strategy must include effective engagement. That is what makes it not only a value strategy, but an investment approach tackling climate change in a meaningful way. We expect the net zero race to accelerate and become the key performance differentiator in emission-intense sectors. Engagement accelerating decarbonization is doing good for the climate but is also likely to drive investment returns. A winning double bottom line approach.