Broadening horizons: Uncovering the role of climate solutions in non-thematic portfolios
Understanding the role climate solutions can play in generalist portfolio allocations can help investors to better align sustainability with broader return-oriented portfolio goals.
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In financial industry reporting, flows into climate-labelled thematic funds are often used as a proxy for climate-related investing and market interest. By this measure the market has been growing significantly in recent years, although it still remains a comparatively niche investment segment, including in the specific context of private markets.
However, in reality this underestimates a much wider universe of climate-aligned investments that would be held within broader ‘generalist’ portfolios. Understanding this – and the opportunities it represents – could be key to aligning sustainability and climate goals with broader portfolio construction and return objectives.
The data
MSCI data shows that, in private markets alone, climate-labelled funds had a cumulative capitalisation of approximately $90.5 billion as of Q3 2023, accounting for a small share of what was then estimated at a $12 trillion private market investment asset base.
Within this, renewable electricity accounted for more than 40% of assets on a net-asset-value basis, while infrastructure as a whole accounted for just under 50% of total capitalisation. Among the 173 private climate funds identified, more than 10% of capital was allocated to each of buyout, venture capital and other private equity strategies.
A broader view
Beyond these climate-labelled funds, there is a substantial share of climate-related investments that are now held within broader “generalist” portfolios. This reflects the reality that many climate-aligned sectors are now supported by greater technological maturity and improved economics, making them competitively positioned on their own merits.
For example, BCG estimates that about 55% of low-carbon technologies are cost-competitive, with a further 10% at only a minor cost disadvantage and benefitting from long-term structural and regulatory tailwinds. As a result, these exposures are incorporated into portfolios not because they carry a climate label, but because they offer strategic relevance and compelling investment characteristics.
We find many transaction examples across the private markets landscape that similarly may not be obviously labelled as ‘climate solutions’, but that have a clear link to climate mitigation or adaptation.
Take investments in insurance-linked securities, which (as we argued in our paper earlier this year) inherently contribute to addressing the protection gap related to natural catastrophes, in turn linking to climate adaptation and resilience. However, in practice it is highly unlikely that these would be labelled as such.
Meanwhile, within private equity we see targeted opportunities in areas such as circular economy and companies that support the energy transition by providing essential value chain enablement services. In some cases, the classification of climate solutions exposure is more nuanced and requires clear definitions, robust measurement for assessing contribution and thoughtful management of uncertainty.
Internal frameworks, combined with external guidance, help to establish a consistent language for evaluating climate-solutions exposure to bridge these gaps. As a member of the GIIN’s Climate Solutions Advisory Committee, we collaborated on their Climate Solutions Investing Framework and recently discussed how this work reinforces Schroders Capital’s own Climate Solutions Identification Framework and broader approach.
Exploring climate exposure with our clients
In recent years, leading institutional investor groups on climate, such as the Net-Zero Asset Owner Alliance (NZAOA) and Paris Aligned Asset Owners (PAAO), have introduced allocation commitments to climate to direct financial flows into areas of investing that can drive real world decarbonisation. In a 2023 survey, PAAO found that 71% of signatories had set quantitative targets to increase their allocation to climate solutions, and 33% identified climate solutions as being the most impactful action and driver of decarbonisation.
Earlier this year, we published our introduction to climate solutions, which provides a starting definition of climate solutions and our internal considerations on how to categorise underlying investment opportunities. To a large extent this comes down to the measurement of climate solutions contribution, assuming a sophisticated level of information on the underlying investments.
Among other things, the article explored why asset owners may want to understand their climate solution exposure and the potential for this exposure to sit within ‘mainstream’ or non-thematic investments.
Picking up on the points above, and even without formal allocation targets, climate change is widely recognised as a mature investment theme and a multi-trillion-dollar addressable market. Strategically, asset owners may wish to assess where climate exposure exists within their portfolios and the extent to which it aligns with specific sub-themes and can sit across portfolio allocations.
This understanding can then inform which opportunity areas or themes to prioritise going forward. These exposures can be addressed either through dedicated thematic allocations or by working with existing managers to integrate climate opportunities within mainstream investment strategies.
Private equity
In our private equity practice, we focus on asset-light business models in healthcare, technology, business services, industrials and consumer sectors. We invest in lower and mid-market buyouts, as well as venture and growth opportunities across Europe, the US, India and China.
In our venture portfolios, we back new technologies that support climate solutions, while in the buyout segment we target service providers and enablers of climate solutions. Examples include companies that service power grids with renewable energy capacity, produce and install footings for roof-based solar panels, operate waste management or recycling models, run second-hand marketplaces and other circular-economy businesses.
Our private equity clients have shown much interest in how we can help them with their climate goals through our investment strategies. We always have an open conversation with our clients about how we can fulfill those needs for them.
Case study: our work with Nest
In 2022, Nest, the pension scheme representing a third of the UK workforce, appointed Schroders Capital to manage a private equity portfolio focusing on established and young businesses at the forefront of innovation, including across the healthcare, technology, financials and consumer sectors, as well as growth sectors such as artificial intelligence. These businesses span across North America, Asia and Europe, including the UK. To date, it has committed £1.5bn to this strategy.
Nest set out its net zero ambition in 2020, and in 2021 published its first climate solutions target to invest at least £1.3bn in renewable energy infrastructure by 2030. In 2024, the scheme reviewed and updated its climate policy and identified investment opportunities in climate solutions across as a key priority, with a particular focus on its growing allocation to private markets. Following this, Nest started a review of its broader portfolio to establish a baseline of its current exposure to climate solutions, to guide future capital allocations and to suggest a method for assessing climate exposure within a non-thematic portfolio.
When Nest approached us, we had just launched our climate solutions identification tool. Looking at Nest as a sophisticated and collaborative client, Schroders Capital proposed to apply the new tool to Nest’s private equity portfolio.
Schroders Capital proposed screening process
The portfolio was screened against three criteria for shortlisting:
- the top ten largest portfolio holdings, quickly cross-checked against industry classifications;
- whether these are held within other Schroders portfolios that have a climate thematic requirement; and
- testing an industry classification’s likelihood of climate and/or nature and circular economy exposure. Schroders’ proprietary public markets tool, ThemEx was used to infer this likelihood.
The result ended with five companies in Nest’s portfolio to analyse in further detail. These companies were assessed, based on a breakdown of revenue, using our proprietary Climate Solutions Identification Tool which compares industry classifications and taxonomies for climate solutions classifications. The result is an estimated percentage of portfolio net asset value (NAV) exposure to climate solutions, weighted by the revenue contribution to climate solution of each company.
We provided a percentage range of climate solution exposure based on a lower percentage, for clear climate solutions exposure within the Identification Tool, and a higher percentage that included cross themes such as circular economy and waste management. We expressed this range as a percentage of NAV for direct climate exposure and indirect climate exposure.
Below are examples of two portfolio companies, which help demonstrate these differences. They also demonstrate that within certain asset classes and asset allocations, investors ought to think beyond direct climate solutions and into those that enable climate change mitigation.
The clear alignment case with a mature sustainability strategy | The enabler with strong sustainability ambitions | |
|---|---|---|
Company name | ||
General Partner | ||
Year of investment | 2024 (client); 2017 (Schroders Capital) | 2024 (client); 2017 (Schroders Capital) |
Assessment Stage | ||
Screening: Initial Likelihood of Climate Solutions Exposure | Activity for likelihood of climate exposure: Environmental and Facilities Services
| Activity for likelihood of climate exposure: Metals, Glass and Plastic Containers
|
Shortlisted Company: Check within Climate Solutions Identification Tool Classification: Both Direct and Indirect End-Solution | NG Nordic provides a broad range of circular and environmental services. Through waste treatment, recycling, depollution of hazardous materials, construction reuse, and sustainable demolition, NG Nordic expands access to circular raw materials and helps decarbonise society by transforming waste into valuable resources and removing hazardous substances from circulation. External Classifications/Agreement: Activities that focus on waste management, notably hazardous waste, landfill and waste collection/treatment are generally not included in classifications for climate mitigation and generally considered solely within the circular economy theme. Compared with material and energy recovery (waste-to-energy) that are classified more strongly across both climate mitigation and circular economy. A breakdown of NG Nordic’s activities is required. End Result: Given its range of activities, NG Nordic features a range of climate solutions contribution and exposure. It’s activities around material recycling and energy recovery are considered strongly linked to climate solutions, likely due to the emissions savings potential. Other activities, such as hazardous waste to energy, and the collection, transportation and treatment of waste, are more generally considered within circular economy and pollution management. We recognise these as still carrying an element of climate mitigation potential, but distinguish within our climate solutions exposure by classifying part of NG Nordic’s revenue under the ‘direct climate solutions exposure’ and other revenues within the indirect climate mitigation end-solution category. Classification: Indirect Enabler | Contenur designs, manufactures and maintains containers for urban waste. Strongly playing into the theme of waste management. The company has a presence in developed and emerging markets. External Classification/Agreement: Activities that focus on waste management are more directly classified within circular economy compared with climate mitigation, particularly such an upstream product vs service activity. The company evidences use of recycled material and product lifetime extension. External classifications are limited on their applicability or degree of impact on geographic location but needs to be considered here. End Result: Contenur sits more directly within a circular economy theme vs climate mitigation. The activity is considered to contribute only a small amount of emissions savings to the overall value chain given its activity is pre-collection waste sorting. An exposure to climate solution (with widened definition) was still considered for assisting within waste management (segregation of waste) and collection route optimisation. Further consideration was the company’s presence in emerging markets, where their products were enabling formal waste management for the first time, limiting issues such as water contamination and methane emissions.
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We completed this climate solutions analysis on the portfolio with our net zero alignment framework to provide Nest with both a percentage climate solution exposure, along with a degree of alignment figure across individual alignment categories.
Katharina Lindmeier, Head of Sustainability Strategy at Nest said: “Schroders’ climate solutions demonstrate a disciplined and forward-looking approach to supporting the global transition to a low-carbon economy. Their focus on delivering long-term value aligns closely with Nest’s commitment to secure sustainable retirement outcomes for our members.”
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