Introduction

The report examines how investors can integrate net-zero objectives into portfolio construction alongside traditional risk and return. It frames net-zero alignment as a multi-objective optimisation problem, reflecting the Paris Agreement goal of limiting warming to 1.5–2°C and achieving global net-zero emissions by 2050. The authors position 3D investing as an extension of conventional frameworks to address these challenges.

Multi-objective optimization framework

The study builds on mean–variance optimisation, which balances expected return and risk, and extends it to include sustainability objectives. This extension allows portfolios to be optimised across three or more dimensions, accommodating metrics such as carbon footprint, ESG scores, and climate transition indicators within a single framework.

Standard mean–variance optimization

Traditional optimisation maximises expected returns for a given level of risk using asset weights, expected returns, and a variance–covariance matrix. While widely used, this approach does not account for non-financial objectives. The report highlights how this limitation motivates broader frameworks that incorporate additional constraints or objective terms.

A multi-objective optimization framework

The 3D framework introduces a sustainability metric directly into the objective function, allowing investors to trade off return, risk, and sustainability through preference parameters. The approach is flexible and can incorporate various ordinal sustainability measures, including carbon intensity, ESG ratings, and climate transition scores. This generality enables adaptation to different investor objectives and constraints.

Targeting a climate traffic light

Using Robeco’s Climate Traffic Light (CTL) scores and MSCI World constituents from 1989–2022, the authors simulate portfolios with a 0.5% tracking error target. Results show that integrating sustainability through an objective function, rather than hard constraints, can reduce turnover and improve expected net performance for ambitious climate targets. The 3D approach allows time-varying trade-offs, sometimes exceeding minimum CTL improvements when beneficial from a risk–return perspective.

Implications and applications of 3D investing for net-zero portfolios

Net-zero investing requires balancing short-term decarbonisation with long-term transition financing while maintaining portfolio performance. The report shows that 3D investing provides a systematic way to manage these trade-offs by combining current emissions metrics with forward-looking indicators. It emphasises that investor preferences and data quality materially influence outcomes.

Implications of net zero for portfolio construction

The framework supports simultaneous consideration of near-term emissions reduction and long-term alignment with transition pathways. By including both current carbon footprint and forward-looking measures, investors can identify firms positioned to benefit from the low-carbon transition while managing tracking error and risk budgets. Challenges include subjective weighting of objectives and inconsistent corporate disclosure.

Incorporating forward-looking net-zero metrics

The report discusses metrics such as Implied Temperature Rise, Science-Based Targets initiative coverage, and transition readiness scores. These indicators capture expected future alignment with net-zero goals rather than current emissions alone. The 3D framework can integrate multiple such metrics simultaneously, with weights reflecting investor priorities and perceived financial materiality.

Implementing net-zero pathways

The authors outline how emission glidepaths can be embedded through constraints on cumulative portfolio emissions. Drawing on a global carbon budget of 268.5 Gt CO₂ to 2050, the framework allows temporary deviations from annual targets provided cumulative limits are respected. This approach enables optimisation of alpha and risk while remaining aligned with long-term net-zero pathways, though it introduces path dependency and requires robust data.

Conclusion

The report concludes that 3D investing offers a practical toolkit for aligning portfolios with net-zero objectives while preserving risk and return discipline. By integrating sustainability directly into optimisation, investors can manage complex trade-offs dynamically. Ongoing improvements in climate data and disclosure are critical to effective implementation.