Transition investing: Exploring alpha potential

In our white paper we explain how transition investing requires a comprehensive approach, balancing impact with financial health, operational track record and the sector’s competitive dynamics. Climate change demands broad solutions beyond just clean technologies, addressing equity for different stakeholders dependent on fossil fuels, and improving efficiency in sectors like food, transport, and buildings. While renewables and clean-tech sectors face challenges from higher interest rates, they still present growth opportunities. High-performing categories include energy efficiency solutions for buildings and waste management, which have both shown consistent returns, outperforming the MSCI All Country World Index over three- and ten-year periods.

Using Robeco’s in-house Climate Analytics toolbox, a useful framework to identify so-called transition leaders and laggards, we’ve found that transition leaders, particularly in high-impact sectors like energy and utilities, are likely to outperform laggards due to improved resource efficiency and better access to capital. This investment approach also highlights the difference between developed and emerging markets, with DM laggards outperforming EM counterparts due to sector biases. A diversified strategy focusing on practical climate solutions and transition leaders can capture the potential upside from improved efficiency and reduced environmental impact, making transition investing a viable path to achieving net zero with the potential for strong alpha generation.