Introduction: turning ambition into action

The report underscores the urgency of transitioning investment strategies to address escalating climate and biodiversity tipping points. It highlights that global emissions must peak before 2025 and reduce by 43% by 2030 to align with the 1.5°C target. Emerging markets lag in financing adaptation and mitigation efforts, necessitating urgent mobilisation of private capital. Stakeholders are encouraged to prioritise equitable financial flows, supported by mechanisms such as the Climate Finance Action Fund and Loss and Damage Fund, to bridge funding gaps.

Part 1: The global backdrop to transition today

Progress towards global sustainability objectives, including the UN Sustainable Development Goals (SDGs), remains inadequate. Developing countries face a $4 trillion annual financing gap, with clean energy and infrastructure sectors significantly underfunded. Investments in renewable energy have tripled since the SDGs’ adoption but are disproportionately concentrated in developed economies. Africa and the Middle East require over $1.36 trillion by 2030 to meet renewable capacity targets. The report urges greater private-sector involvement in these regions.

The report also reveals a paradox: while investment portfolios report declining carbon intensity, global emissions continue to rise. This disconnect highlights the need for more meaningful real-world decarbonisation, emphasising systemic risks and comprehensive transition strategies.

Part 2: Mercer’s climate transition approach

Decarbonisation of investments

Decarbonisation efforts should move beyond simple emissions targets. Investors are advised to conduct emissions attribution analysis to identify drivers of emissions changes and incorporate scope 3 emissions into strategies. Scope 3 emissions, representing 70% of greenhouse gas impacts across sectors, are pivotal to achieving systemic decarbonisation. For example, in the MSCI ACWI index, only 13.4% of carbon footprint reductions between 2020 and 2024 stemmed from actual emissions cuts, with the remainder driven by valuation and portfolio changes.

Recommendations include adopting advanced metrics such as carbon footprint intensity and absolute emissions, alongside sector-specific strategies, to better align portfolios with real-world decarbonisation.

Climate transition alignment

Achieving transition alignment involves evaluating portfolios using forward-looking tools such as Mercer’s Analytics for Climate Transition (ACT). The report categorises assets into “green,” “grey,” and “in-between” to assess climate risks and opportunities. Case studies, such as in the utilities sector, demonstrate the importance of assessing alignment beyond emissions metrics by considering factors like science-based targets and renewable energy revenues.

Investors are encouraged to engage with partially aligned companies to ensure continuous progress and re-evaluate holdings in poorly aligned sectors. This approach helps balance financial returns with long-term transition goals.

Investing in climate solutions

The report identifies climate solutions as critical to closing sustainability funding gaps. Priority sectors include clean energy, sustainable agriculture, and circular economy initiatives. Investments in renewable energy, precision fermentation, and vertical farming offer high-impact opportunities. For instance, vertical farming reduces emissions by minimising transportation and enabling localised production.

Private finance plays a vital role in addressing financing shortfalls, particularly in emerging markets. Nearly 79% of institutional investors plan to increase allocations to ESG and sustainability strategies, according to Mercer’s 2024 Large Asset Owner Barometer.

Concluding remarks: Turning ambition into action

The report concludes by urging investors to integrate decarbonisation, alignment, and climate solutions into portfolios. It stresses the importance of addressing systemic risks, scaling investments in emerging markets, and adopting innovative approaches to maximise real-world impact. By expanding beyond traditional targets, investors can help mobilise capital towards equitable and sustainable global transitions.