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  • World Climate Foundation

Evolving transition in portfolios: A better definition and tangible actions

Helga Birgden, Global Chair, Mercer Sustainable Investment, Mercer

How can investors address the causes and impacts of climate change?

Investment decision-making, both today and longer term, includes addressing whether running “green portfolios” to respond to the transition to a net zero economy can help1 manage investment risk and opportunity and mitigates the effects of global warming.

At the same time, the physical damages wrought by climate change – with extreme floods, droughts and wildfires now the norm in many regions – are already influencing investment and insurance decision-making, triggering a growing recognition of the importance of adaptation action to increase climate resilience.

This points to the need for a broader definition of the climate transition. This should be one that expands beyond carbon reduction to address the issues of nature loss, physical risks and adaptation. Any definition should also encompass engagement in the circular economy and support for the principles of equality for sustainable development.

Recalibrating approaches to investment risk management and return maximization

While the countries signed to the Paris Agreement aim to address climate change through policy and government spending, it is investors that have to tackle the problem of where and how to deploy capital in line with climate goals.

However, asset owners and managers who invest significant volumes of global capital are not yet managing transformative portfolios, which incorporate assets supporting the transition from an extractive fossil fuel-based economy to a green economy, at scale.

According to Climate Policy Initiative research (2021), about 55% of the transition financing required to meet globally agreed targets for 2050 will need to come from the private sector – equivalent to an almost sixfold increase from current levels.

Private investment in climate adaptation continues to lag far behind current levels of investment in climate mitigation strategies or projects. Climate adaptation supports adjustment in response to actual and expected climate change effects. Climate mitigation targets reductions in carbon emissions and seeks to offset subsequent climate impacts.

Institutional investors2 recognize the need for resilient investment portfolios that defend against irreversible physical damages, disruption to communities and economies, and harm to the biosphere, and represent the largest pool of capital within the private sector. However, institutional investors’ combined contribution to average annual investment flows into climate finance (including mitigation and adaptation financing) is 0.01% of their asset base3.

Global warming exacerbates the impacts of nature loss4, through the degradation of biodiversity. Research into ‘biodiversity finance’5 private capital invested into biodiversity projects must meet a certain threshold in terms of both financial return and biodiversity impact to be effective. The authors conclude that private capital is unlikely to substitute for the implementation of effective public policies in addressing the biodiversity crisis.

For sustainable development to succeed, climate finance has to account for a “fair share carbon budget”, recognizing differences between the Global North and Global South. Inequality is structural: 52% of carbon emissions were produced by 10% of the world’s richest population over the last 25 years, while over 50% of the world’s poorest produced an estimated 7%. For transition to be meaningful, blended finance needs to be a primary mechanism for providing capital flows to support the net-zero economy in the Global South6.

The scope and complexity of the investment implications of climate change are massive. They include:

  • The investment impacts of changes in energy use/production.

  • Evolving attitudes to resource use.

  • The increasing attention that is being given to workers’ rights and the rights of indigenous people.

The scale of these challenges means that transition-focused approaches are yet to be addressed by all market participants. Encompassing the above interrelated issues requires investors to recalibrate what investment risk management and return maximization means today. We believe that this recalibration impacts:

1. Fiduciary responsibility

At the fiduciary level, investors may be constrained by mandate or risk-adjusted return maximization in their approach to integrating climate considerations into investment decision-making. But evolving policy and regulatory frameworks also play a factor, particularly for investors operating and reporting across multiple jurisdictions. Climate and, more recently, nature-related regulations are evolving rapidly worldwide; over 2,000 climate related laws exist across 200 countries7 .

2. The climate financing gap to 2030

While global climate finance almost doubled in the decade to 2020, with a cumulative US$4.8 trillion in climate finance committed between 2011-2020, a cumulative average annual growth rate (CAGR) of 7%, the current rate of increase is not on track to meet a 1.5 degrees Celsius global warming scenario. The Climate Policy Initiative estimates that at least USD 4.3 trillion in annual finance flows by 2030 (CAGR 21%) is required to avoid the worst impacts of climate change8; about 55% of the transition financing required will need to come from the private sector to meet globally agreed targets to 2050. This would be a 590% increase on current annual funding.

3. Investment approaches

At present, transition investing tends to involve focused investment approaches to portfolio decarbonization. This is done at the asset-class, sector and company levels.

At each level, decarbonization can potentially be achieved through portfolio tilting, active ownership and stewardship, ESG integration, blended finance and/or impact investing under a transition plan that aligns portfolios to a net zero outcome by 2050.

BOXOUT: At Mercer, our clients’ transition plans are supported by scenario analysis9 and our proprietary Analytics for Climate Transition – ACT10. The ACT framework is a forward-looking assessment of climate-transition risk, capacity and opportunity within an investment portfolio. The tool enables clients to assess possibilities for portfolio changes and transitioning to a low-carbon portfolio. Critical to the capital allocation to transition is stewardship through managers, active participation in collaborative initiatives and, in some cases, direct engagement.

Mercer undertakes the following activities:

Integration: Incorporate climate scenario and transition analysis into strategy and portfolio construction, and decisions and monitors market pricing Stewardship: Engages with companies, including via collaborative initiatives and utilizes voting rights Investment: Seeks to locate investment to low-carbon / sustainability solutions and monitors developments and prices Screening: Monitors high-carbon exposures where low transition capacity exists

An evolved definition of transition

Interrelated climate risks are recalibrating risk management and return maximization across portfolios, requiring a broader approach to climate transition.

An evolved definition of transition would seek to broaden investment approaches beyond carbon reduction objectives, to consider and incorporate both mitigation and adaptation solutions to the physical risks of climate change.

Investors typically establish interim and 2050 science-based targets; increasingly, such targets recognize that natural capital is critical to mitigation efforts and to combatting climate change.

We observe that an increasing number of investors are seeking to integrate considerations of natural capital into investment research and analysis to help prevent nature loss and build out solutions. A circular economy supports these aims by encouraging investor allocations to companies that enable maintenance of finite resources. A “fair share carbon budget”, which allocates the global carbon budget in a manner perceived to be equitable and fair across different countries, is also a key component of transition.

Expanding the definition

The below infographic seeks to show an expanded view of climate transition, showing it to be made up of five key interrelated issues. Its process is iterative to allow for a better assessment of transition.

Physical risks and adaptation

Broadly, the physical risks of climate change are material to portfolio and asset values. These risks encompass:

  • The availability of natural resources (e.g., water, food, materials and biodiversity)

  • Chronic damage (longer-term shifts in climate patterns causing sea-level rises or heat waves and desertification)

  • Acute damage (major catastrophes from storms, wildfires, droughts and floods)

Adapting portfolios to acknowledge and respond to these climate risks is core to the transition of assets in a decarbonizing economy.

However, annual investment for adaptation of between US$160-340 billion by 2030 is five to ten times below the levels required, according to the UN Adaptation Gap Report 202211. Adaptative investment is focused on supporting changes in processes, practices, and physical infrastructure to moderate potential damages, with a focus on agriculture, water and ecosystems and sectors vulnerable to drought, flood and variable rainfall12.

Investors currently allocate to assets that address the physical damages of climate change and adaptation through areas like infrastructure, water utilities and flood control in ‘real asset’ strategies in portfolios.

Natural capital risk

Fiduciaries increasingly acknowledge that nature loss13 such as deforestation results in subsequent damage to ecosystems, with knock-on impacts for agriculture, water, food security and beyond.

Nature loss can therefore create investment risk and impact value creation and maximization14. Critically, natural capital – the assets that nature provides – is estimated to be able to contribute up to 30% of climate mitigation to achieve the Paris Agreement scenario of limiting global warming to 1.5 degrees Celsius, an important example of the interrelated nature of investment risk and opportunity arising through transition of the global economy.

Overall, addressing nature loss as an investment theme remains relatively nascent, but fiduciaries globally are in support of initiatives such as TNFD and Nature Action 100. However, levels of capital being channeled into nature-based solutions to mitigate such loss remain insufficient. Bloomberg estimates that US$1trillion needs to be spent on natural capital annually out to 2030, from current levels which remain in the low billions15.

Fiduciaries are beginning to consider frameworks such as the UN’s 2030 Agenda for Sustainable Development (UN SDGs), and the 2050 Vision for Biodiversity, alongside the more recent Kunming-Montreal Global Biodiversity Framework (GBF), agreed at the 15th meeting of the Conference of Parties (COP-15), and the Convention on Biological Diversity (CBD).

BOXOUT: Incorporating a natural capital investment theme: Water

Lack of or excess water is a critical factor in the Global South and, increasingly, the Global North, where floods and wildfires have become embedded risks in certain regions. Managers of public equity water strategies look for investment opportunities across the entire water value chain and all stages of the water cycle. As a result, strategies include both broad and niche themes. Broader overarching themes include water infrastructure, water utilities, water treatment, and water technology. A focus on these themes results in high sector concentration. The industrials sector has the highest exposure in water strategies, while infrastructure and utilities provide exposure to more obvious solution providers.

Investing in support of a circular economy

Investing in support of a circular economy supports the aim of protecting natural capital, by encouraging investor allocations to companies that enable maintenance of finite resources.

The global economy uses 75% more of the biological resources than the planet’s ecosystems can regenerate on an annual basis16, while 90% of extracted resources are underutilised or wasted. In response, recent research supports the thesis that a circular economy17 is something fiduciaries can incorporate into their thinking to move away from an economy based on “take, make and waste”.

However, defining and investing to support the growth of a circular economy requires a massive effort by all market participants18.

Fair share carbon budgets

The broader policy implications of a “fair share carbon budget” are integral to global decarbonization and are often discussed in terms of three equity principles: responsibility, capability, and equality.

Allocating the global carbon budget in a way that is equitable and just across different countries19 is an important component of transitioning to a net zero economy. It is widely acknowledged that developed countries have contributed more to global carbon emissions due to their longer history of industrialization and economic growth, while many developing countries have a smaller carbon footprint but face increasing emissions as they undergo industrialization and economic development. This issue is highlighted by fair share carbon budget allocation20.

Considerations of the investment risks and future impacts of fair share carbon budget allocations may encompass historic contributions; the equity of decarbonization in relation to nations’ capacity for transition; and the principle of “common but differentiated responsibility”, which recognizes that developed countries should take the lead in addressing climate change and support developing economies.

Tracking progress in transition

Are transition assets an indicator of progress in combatting climate change?

In broadening the definition of climate transition in portfolios – and acknowledging the complexities of interrelated climate risks and impacts – we questioned the extent to which it is possible to quantify aggregate allocations to “transition assets”.

In 2022, the Net-Zero Asset Owners Alliance reported that the number of members to have set intermediate targets increased to 44 with US$7.1 trillion in AUM (from 29 and US$4.6 trillion AUM in 2021) and 41 had sub-portfolio targets applying to US$3.3 trillion AUM (up from 28 and US$1.5 trillion AUM) out of a total US$6.2 trillion in AUM21.

However, beyond metrics on target setting, data capturing the extent of transition assets in portfolio holdings of institutional investors can be hard to find. Despite policy commitments to net zero, only a small number of investors report the proportion of their transitioning assets in the public domain. Disclosing against agreed standard definitions over their total holdings also remains a challenge for all investors.

The Net Zero Asset Owners Alliance and Net Zero Asset Managers Alliance and for companies, the independently assessed Science Based Targets initiative22 allow investors and their clients to disclose on the asset classes, sectors and percentage of companies that have Science Based Targets in place and we observe increasing demand for guidance at the sector level23. Investors report on how they are increasing their transitioning assets, and the ways in which this is achieved – whether through portfolio construction, organically or through allocations to low- or net-zero indices.

Based on data from the Climate Policy Initiative (2021), author and academic researcher Dr Danyelle Guyatt reviewed the current proportion of climate financing for each type of private sector agent, compared to available capital. Institutional investors represent the largest pool of capital within the private sector, yet their combined contribution to average annual investment flows into climate finance (including mitigation and adaptation financing) is miniscule relative to their asset base (at 0.01%)24.

Transition Mercer has witnessed Mercer’s global client data base captures client investment allocations through investment strategies and solutions. It could therefore be considered a proxy for evidence of transition in these particular institutional portfolios.

Quantifying the extent to which institutional investors are allocating capital to make a meaningful contribution to reaching a net zero economy is challenging, and unlikely to achieve a useful result. However, we have seen strategies emerging that address transition through nature-positive investing, physical risks & adaptation, circular economy and fair share considerations that include the human impact.

As such, we believe that a new definition of climate transition, which goes beyond the linear measurement of carbon reduction in a portfolio, could provide investors with a greater understanding of the ways in which risk and return may evolve.

Key takeaways and look ahead to COP28 Interrelated climate risks are recalibrating risk management and return maximization across portfolios, requiring a broader approach to climate transition. A more holistic approach expands the focus from carbon reduction, and mitigation, to encompass physical risk & adaptation, natural capital, supporting a circular economy and principles of equality in for sustainable development in capital allocation. This paper has assessed what’s happening now, and considered how asset owners and managers can invest for climate transition in a broader, more holistic way:

  • Climate transition approaches can broaden in focus from net-zero, to incorporate adaptation with nature and just/fairness as core components.

  • We have seen institutional investors allocate to strategies that address nature-positive investing, physical risks and adaptation, circular economy and fair share considerations, demonstrating that capital can meet fiduciary requirements and allocate to support transitioning assets.

  • We observe a number of transition-focused strategies undertaking analysis and screening overlays to identify “transition” and “solutions” companies in global public equity portfolios; these strategies seek “transition” companies leading their sector in reducing their impact on natural capital.

  • ‘Solutions companies’ are those that have a meaningful percentage of revenue exposure to products/services that are crucial to creating more climate resilient infrastructure through adaptation – decarbonizing energy infrastructure, building renewable and transitioning energy assets, and/or measuring and monitoring climate risks – both physical and financial.

  • Fiduciaries can incorporate the circular economy within their allocations, supporting the move away from an economy based on “take, make and waste”, through investment strategies based on principles of circularity to “use less, recover, use longer and/or share”.

  • The investment risks and future impacts of fair share carbon budget allocations are important considerations in modelling climate change impacts across regions and more broadly across portfolios.

The key take away: Investors can use portfolio tools such as Mercer’s Analytics for Climate Transition (ACT); focus on manager and strategy selection that prioritizes addressing a wider set of transition risks and opportunities; and report progress against the Task Force on Climate-related Financial Disclosures (TCFD) and Task Force on Nature-related Financial Disclosures (TNFD). As case studies show, key steps include taking investment decisions to support investment into assets in transition. Investors and policymakers alike can adopt a broader, holistic approach to transition, and apply an expanded definition of transition to be effective in the face of increasingly interrelated risks and opportunities.

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About Marsh Mclennan

Marsh Mclennan (NYSE: MMC) is the world’s leading professional services firm in the areas of risk, strategy and people. The Company’s more than 85,000 colleagues advise clients in 130 countries. With annual revenue of over $20 billion, Marsh McLennan helps clients navigate an increasingly dynamic and complex environment through four market-leading businesses. Marsh provides data driven risk advisory services and insurance solutions to commercial and consumer clients. Guy Carpenter develops advanced risk, reinsurance and capital strategies that help clients grow profitably and pursue emerging opportunities. Mercer delivers advice and technology-driven solutions that help organizations redefine the world of work, reshape retirement and investment outcomes, and unlock health and wellbeing for a changing workforce. Oliver Wyman serves as a critical strategic, economic and brand advisor to private sector and governmental clients.

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About the Author

Helga Birgden is a Partner, Mercer's Global Business Leader, Responsible Investment. She has more than 20 years advising Trustees, Directors and Investment Boards from global pension funds, Sovereign Wealth Funds, endowments and insurers on responsible investment systemic risk issues - environmental, including climate change, governance and social. She leads Mercer's global RI business and has prepared investment advice on climate change and ESGissues for major institutional investors representing trillions of dollars of assets and advisedmulti-lateral institutions such as the International Finance Corporation, World Bank Group, G20, Development Banks and insurance regulators.Over the last decade Helga has been a leader on Mercer's global climate change studies over a decade including Climate change and strategic asset allocation 2011, Investing in a Time of Climate Change 2015 and The Sequel 2019 advising institutions on the impact of climate change and ESG. She facilitates the Future Makers Working Group, representing climate investor clients representing over $2+ trillion in AUM. Helga is Deputy Chair of the Investor Group on Climate Change, representing Trillions AUM of regional and global signatories and Advisory Committee, Asian Investor Group on Climate Change.


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Foot notes

3 – sourced analysis Danyelle Guyatt.

4 World Economic Forum (2020) ‘Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy’.

5 Biodiversity Finance Caroline Flammer, Thomas Giroux and Geoffrey M. Heal Working Paper N° 901/2023 March 2023.

6 Can investors save the planet? 2023, accessed at:

13 (UNFCCC, 2015) 13 Rockström et al., 2017, Rogelj et al., 2019, Rogelj et al., 2018, Xu and Ramanathan, 2017

14 (UNFCCC, 2015) 14 Rockström et al., 2017, Rogelj et al., 2019, Rogelj et al., 2018, Xu and Ramanathan, 2017

15 BloombergNEF. (2023). The Biodiversity Finance Factbook. A report published by BloomberNEF

16 Global Footprint Network, 2023, Overshoot Day

17 Circular Economy, 2021, The Circularity Gap Report, and

18 Figge, Frank and Thorpe, Andrea Stevenson and Gutberlet, Melissa, Definitions of the Circular Economy - Circularity Matters (March 14, 2023). Ecological Economics, Vol. 208, 2023, Available at SSRN:

19 K. Dooley, C. Holz, S. Kartha, S. Klinsky, J.T. Roberts, H. Shue, H. Winkler, T. Athanasiou, S. Caney, E. Cripps, N.K. Dubash, G. Hall, P.G. Harris, B. Lahn, D. Moellendorf, B. Müller, A. Sagar, P. Singer, Ethical choices behind quantifications of fair contributions under the Paris Agreement. Nat. Clim. Change, 11 (4) (2021), pp. 300-305, 10.1038/s41558-021-01015-8

21 United Nations Environment Programme, Principles for Responsible Investment, & Net-Zero Asset Owner Alliance (2022). Advancing Delivery on Decarbonisation Targets: The Second Progress report of the Net-zero Asset Owner Alliance.

24 Climate Policy Initiative 2021 – estimate by Danyelle Guyatt; Danyelle Guyatt, Cultivating a Sustainable Mindset in Finance (2023).


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