A study by MSCI has cast new light on the burgeoning landscape of climate-related investment funds, revealing stark differences in the strategies of private versus public markets.
According to ESG Today, the report, titled “In the Name of Climate: Private vs. Public Funds,” by Vice Presidents Abdulla Zaid and Rumi Mahmood, dives into the nuances of the climate funds sector, highlighting the distinctive paths taken by private and public funds in the quest for net zero transition opportunities.
The MSCI study identifies a burgeoning “green rush” within the investment world, noting an unprecedented surge in climate funds across both private and public sectors. Since 2020, the influx of new private market climate funds has been particularly notable, accounting for over 70% of the $90.5m in cumulative capital dedicated to private markets climate initiatives. Public markets are not far behind, with over 1,300 funds, the majority of which were launched in the same timeframe, embodying nearly 80% of assets under management (AUM).
A critical finding of the MSCI research is the contrasting sectoral focus between private and public climate funds. Private funds are significantly inclined towards investing in high-emission sectors that are pivotal for the net zero transition, displaying a strategic focus on sub-industries within these sectors. Conversely, public funds tend to be more conservative, with a lean towards companies that already exhibit a reduced carbon footprint, resulting in a less than 6% asset weight in carbon-intensive sectors such as utilities, compared to private funds’ substantial 45% utilities exposure.
The study also sheds light on the asset class preferences of climate funds. Private markets exhibit a dominant interest in infrastructure, which constitutes nearly half of their cumulative capitalization, whereas public funds predominantly invest in equity, highlighting a clear divergence in investment strategies aimed at combating climate change.
Zaid and Mahmood commented on the diversity of climate strategies available to investors, underscoring the importance of transparency in fund holdings for those evaluating climate strategies. They emphasized the varying environmental impacts due to the different sector compositions of the underlying holdings, stating, “The universe of climate strategies available to investors is diverse, ranging in scope and focus from portfolio decarbonization to offering exposure to climate solutions and clean energy. The environmental impact of these strategies can vary because of the different sector composition of the underlying holdings. Providing transparency into climate funds’ holdings may be pertinent for investors evaluating climate strategies such as reducing a portfolio’s financed emissions and financing low-emissions solutions.”
This study not only highlights the dynamic nature of climate fund investments but also signals a pivotal moment in the financial sector’s approach to addressing climate change, with private funds leading the charge in sectors critical for the net zero transition.
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