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AB: Homing In on Quality in Climate Investing Strategies

AB: Homing In on Quality in Climate Investing Strategies

Published 05-19-23

Submitted by AllianceBernstein

A small boat in a barren desert landscape.

Kent Hargis, PhD| Co-Chief Investment Officer—Strategic Core Equities

David Wheeler, CFA| Portfolio Manager—Sustainable Climate Solutions; Senior Research Analyst—Sustainable Thematic Equities

Teresa Keane| Managing Director—Equities

Stock selection in a climate investing strategy takes more than just avoiding companies exposed to global warming risks. The process should intersect with an active search for diverse opportunities among companies helping to fight climate change, but with high-quality business models, too.

Concerns and action to stem global warming are decades in the making, although efforts have increased in recent years. The German city of Freiburg, for instance, pioneered the move to solar power in the 1980s and is quickly approaching its goal to nearly halve its greenhouse gas emissions by 2030. Freiburg’s early awareness is uncommon, however, and many economies and industries today are just waking up to climate-related risks.

Info graphic Energy Transition Investing Has Grown

Climate Risks Are High but There’s Still Time to Act

Europe experienced its second-hottest year on record in 2022; globally it was the fifth warmest. Against this backdrop, the UN’s environmental experts intensified demands to fast-track climate-fighting efforts by “every country and every sector on every timeframe.”

On a positive note, the same UN report underscored that it’s not too late. First, the widely adopted goal to limit annual rising temperatures to 1.5 degrees Celsius by 2030 is still within reach. And by mobilizing funds and sharing best practices, technology and effective policy measures, any entity can better manage, even prevent, carbon output.

More top-down support via government initiatives is helping, too, and the incentive is clear; research shows that climate change can strain or benefit economic output to the tune of –8% to 15% annually, depending on how governments and industries respond.

At last year’s UN COP27 conference, for example, delegates agreed to establish a multinational financial backstop for loss and damage, ideally to help poorer countries recover from climate-related impact. The US Inflation Reduction Act and the pending European Green Deal include well-funded incentives to shepherd economies toward low-carbon mode. China, arguably a top greenhouse gas producer, is also on board. Its 2060 carbon-neutral framework, while addressing climate change, also reveals its vision for the country’s economic future in light of it.

Info graphic Climate-Related Industries a Vital Source of Long-term Returns

Many Industries Benefit From Climate-Related Economic Drivers

Combatting climate change goes deeper than macroeconomic policies. A growing number of industries, from electric vehicles to wind farms, are also on the front lines of a decarbonizing economy—and all are growing at a faster rate than the US economy (Display).

These are the innovative companies that will lead the way with climate-transition-specific business models, as well as products and services that enable the achievement of global decarbonization. And we expect they’ll enjoy multi-decade growth potential as a result.

Understandably, investors remain wary of today’s uncertain macro environment, mainly rising interest rates and high inflation. Clearly, these disruptors are factors in the investment selection process, too, but should be integrated right alongside climate risks—not in sequence—to find businesses likely to do well in the new economy.

Climate Solutions Are an Appealing Investment Factor

The growth potential among companies providing climate solutions is making a strong impression with investors. In 2022, for example, global investment in energy-transition products and services, such as renewable energy, electric vehicles, energy efficiency and hydrogen, reached a record $1.1 trillion, a 31% increase from the prior year (Display). China is by far the largest contributor to the growth, accounting for about half of all investment. More important, the recent groundswell put energy-transition investment levels on an even keel with fossil fuels for the first time. By the end of this decade, we anticipate investment in decarbonization products will dwarf spending on fossil fuels by at least four-fold.

The growing commitment to global carbon-reduction goals extends well beyond climate-friendly industries. More companies than ever are signaling support for science-based greenhouse gas reduction targets, particularly in the consumer discretionary, information technology and industrials sectors (Display).

This momentum is fostering a healthy competitiveness among innovative climate-resilient and climate-focused businesses, offering attractive growth opportunities. Companies such as AECOM, based in Dallas, Texas, offer consulting for carbon-intensive industries like transportation and construction that can help deliver aggressive emissions-reduction goals, up to 50% for most projects. Hexcel, based in Stamford, Connecticut, makes lightweight carbon fiber used in airplane construction that saves fuel and cuts airline annual greenhouse gas emissions by the tonnes. Norway-based recycling firm TOMRA continues to benefit from an expanding global commitment to reusable plastic in manufacturing, retail and food packaging.

Info graphic More Companies Committed to Low-Carbon Economy SBTi Targets for MSCI World Companies

Climate Resilience Also Needs Strong Fundamentals

A company’s climate resiliency also stems from the quality of its business model, so investors should focus on both. Besides navigating the near-term impact of climate change, companies need to plan their long-term contribution, and profitability, in a low-carbon economy. In our view, strong balance sheets and effective governance are as important to active climate investing as other equity strategies. It’s not enough to mitigate the financial impact of climate change; companies must demonstrate solid bottom-up fundamentals and top-down vision to benefit from current and future opportunities in the transition to a decarbonized world.

The global population will swell to 10 billion by 2050, so our worldwide Freiburg moment is now. Innovation is more important than ever to improve the environment, ensure clean water and produce enough safe food. That’s why holistically integrating the risks and opportunities in today’s economy is the linchpin of an effective climate strategy. Companies that can find their niche in this massive effort will prosper, providing they can mitigate today’s risks while setting the groundwork for future profitability. Climate investment solutions should focus on both sides of that equation.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams and are subject to revision over time.

References to specific securities are presented to illustrate the application of our investment philosophy only and are not to be considered recommendations by AB. The specific securities identified and described do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable.

Learn more about AB’s approach to responsibility here

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AllianceBernstein (AB) is a leading global investment management firm that offers high-quality research and diversified investment services to institutional investors, individuals, and private wealth clients in major world markets. We believe corporate responsibility, responsible investing and stewardship are intertwined. To be effective stewards of our clients’ assets, we strive to invest responsibly—assessing, engaging on and integrating material issues, including environmental, social and governance (ESG), and climate change considerations in most of our actively managed strategies. We also believe that strive to hold ourselves as a firm to similar practices that we ask of issues. Our stewardship practices, investment strategy and decision-making are guided by our purpose, mission and values.

Our purpose—pursue insight that unlocks opportunity—inspires our firm to act responsibly. While opportunity means something different to each of our stakeholders; it always means considering the unique goals of each stakeholder. AB’s mission is to help our clients define and achieve their investment goals, explicitly stating what we do to unlock opportunity for our clients. We became a signatory to the Principles for Responsible Investment (PRI) in 2011. This began our journey to formalize our commitment to identify responsible ways to unlock opportunities for our clients through integrating material ESG factors throughout most of our actively managed equity and fixed-income client accounts, funds and strategies. AB also engages issuers where it believes the engagement is in the best financial interest of its clients.

Because we are an active manager, our differentiated insights drive our ability to deliver alpha and design innovative investment solutions. ESG and climate issues are important elements in forming insights and in presenting potential risks and opportunities that can have an effect on the performance of the companies and issuers that we invest in and the portfolios that we build.

Our values provide a framework for the behaviors and actions that deliver on our purpose and mission. Values align our actions. Each value emerges from the firm’s collective character—yet is also aspirational.

  • Invest in One Another means that we have a strong organizational culture where diversity is celebrated and mentorship is critical to our success. When we invest in one another, we empower our employees to reach their potential, so that they can help our clients realize theirs. This enables us to partner with clients to design and deliver improved investment outcomes.
  • Strive for Distinctive Knowledge means that we collaboratively identify creative solutions to clients’ economic, ESG and climate- related investment challenges through our expertise in a wide range of investment disciplines, close collaboration among our investment experts and creative solutions.
  • Speak with Courage and Conviction informs how we engage our AB colleagues and issuers. We seek to learn from other parts of our business to strengthen our own views. And we engage issuers for insight and action by sharing ideas and best practices.
  • Act with Integrity—Always is the bedrock of our relationships and has specific meaning for our business. Unlike many other asset managers, we’re singularly focused on providing asset management and research to our clients. We don’t engage in activities that could be distracting, or create conflicts—such as investment banking, insurance writing, commercial banking or proprietary trading for our own account. We are unconflicted and fully accountable.

As of September 30, 2023, AB had $669B in assets under management, $458B of which were ESG-integrated. Additional information about AB may be found on our website,

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