Is 2025 the time to decarbonise your portfolio or the planet?

Please note: This article is designed to be thought leadership content, to offer big picture views and analysis of interesting issues and trends that matter to our clients and the world in which we live. It is not designed to be taken as expert advice, investment advice or a recommendation, and any reference to specific companies is therefore not an opinion as to their present or future value or broader ESG credentials.

Reliance upon any of the information in this article is at the sole discretion of the reader. Some of the views and issues discussed in this article may derive from third-party research or data which is relied upon by Barclays Private Bank and may not have been validated. Such research and data are made available as additional information for the reader where appropriate.

Key points

• The impacts of climate change are increasingly costly and material to the world and the markets.
• Reducing your portfolio’s exposure to climate risk could protect its long-term returns. 
• Alternatively, increasing allocations to lower-carbon companies, or to those that provide climate solutions, could grow its long-term returns.
• The next twelve months could be an ideal time to decide you and your family’s ambitions for financial and sustainability goals.

Climate change is reshaping the world and will be a critical factor that drives the performance of  investors’ portfolios. By August of 2024, the year was already the hottest on record globally¹, and many impacts of climate change have been earlier or larger than scientists have expected². 

The halfway point of the “Decisive Decade” for climate action is 2025³. As the International Energy Agency roadmap to net zero by 2050 indicates (see chart), politicians, businesses and society have to move from pledges to taking action, if global decarbonisation targets are to be met.  

As the global community seeks to accelerate the delivery of its transition to a low-carbon world, investors face a fundamental question – should you focus on decarbonising your investment portfolios, or should you invest in ways that help decarbonise the planet? 

Both approaches have unique goals, risks, and rewards. This article explains the differences, implications, and considerations to inform your choice and how to begin positioning your portfolio. 

The roadmap to net zero requires accelerating delivery 

Key decarbonisation milestones on route to the world being net zero by 2050, as set by the International Energy Agency

Decarbonising your portfolio 

Decarbonising your investment portfolio involves taking action to reduce your portfolio’s exposure to climate risks, and the effects it has on your returns. 

The goal is to manage these risks, from the physical impacts of changing climate, whether from the impact of extreme weather or long-term change, as explained in Making portfolios more weather resistant, or to manage risks from the impact of global efforts to reduce emissions, from shifts in policies, technologies and market demand, as pointed out in Is your portfolio at risk from the low-carbon transition?.

Here, the ambition is to have a ‘greener portfolio’ that’s aligned with economic policy and global energy shifts, whether now or in the future, to protect its value by managing potential risks better. 

To decarbonise your investments could involve a simple screening strategy, avoiding or divesting from high-emitting sectors, such as power generation or cement production, and actively overweighting lower-emission ones, perhaps technology or healthcare. Alternatively, if wanting to maintain broad market exposure, you could select ’best-in-class’ companies amongst a peer group in a particular industry. And you can draw on the increasing amount of corporate disclosures in the area to support investment decisions as we explained in Making better use of climate-risk data.

Additionally, there is the option to invest in the companies that have a credible, science-based target and transition pathway to meet their net-zero target. Within the widely used Net Zero Investment Framework, and depending on the firm’s progress, they would be considered ‘achieving net zero’, ‘aligned to a net zero pathway’, or ‘aligning to a net zero pathway’⁴. 

If investors cut back on exposure to industries such as oil and gas, such portfolios may lag a traditional benchmark’s performance in periods when related commodity prices increase. Or potentially, if transition risks arise more slowly or are less than expected. On the other hand, decarbonised portfolios should be able to retain their value with an accelerating transition or if carbon-intensive assets are suddenly, and sharply, repriced, which is generally known as a ‘Minsky moment’⁵.

As a result of this approach, your holdings should be more resilient against climate-related risks, but without directly funding the efforts to decarbonisation the planet.  

Protecting the planet 

Decarbonising the planet with your investments means selecting those that actively support reducing total global emissions. The goal is to make returns from investing in companies that provide solutions to deal with climate change or to accelerate action from companies that need to transition. 

Your motivation may be to use your investments in a way that should create a greener world, one that can benefit from the transition to a more environmentally-sustainable economy. Or, perhaps the motive is more financial than altruistic, and to recognise a market’s growth potential and improve your portfolio’s performance by investing in those sectors. 

In seeking to invest in this way, you may prioritise companies, or projects, that make a positive environmental impact through their goods or services, such as generating profit from renewable energy, battery or energy storage, and green infrastructure. Also, picking companies that aren’t necessarily ‘pure-play’ green companies, but are providing enabling solutions that help to reduce costs or improve decarbonisation outcomes, such as software businesses or data providers.  

Additionally, ‘transition investing’ provides a novel and pragmatic option to invest to support currently high-emitting and hard-to-abate sectors, to move onto credible transition pathways and accelerate the decarbonisation of their processes, business models, and products. (As explained further in Capitalising on the low-carbon energy transition).

If portfolios have a larger exposure to companies with climate-change solutions than in a benchmark index, it can add concentration risks. This might cause over- or under-performance, depending on ‘sector rotations’ and changes in the economic outlook. Additionally, higher interest rates can weigh down decarbonisation-solution businesses, which tend to newer and more capital-intensive than many other businesses.  Furthermore, a portfolio may end up being exposed to more transition risks, if the selected companies or projects do not achieve their decarbonisation targets or plans. 

As a result of taking this investment approach, your holdings may support decarbonisation, but can be more susceptible to market sell-offs in the sector or from market perceptions of progress towards net zero, and so impact share prices.  

Deciding for your portfolio

Determining between these approaches comes down multiple factors, such as your motivations, financial and sustainability goals, and beliefs. 

Decarbonising a portfolio could be done to align your holdings with your values, or to seek to safeguard your assets from climate-related risks. Or you may focus on investing for decarbonisation to create positive outcomes, influencing the world that your children and grandchildren will inherit, or to unite your family’s generations and create a positive reputation or legacy. 

As well, both can be pursued. It’s possible to combine elements of both approaches across your portfolio, or apply one approach in a particular asset class, for example in early-stage companies as highlighted in Four drivers making green ventures attractive.  

Finally, it’s critical to remember that these approaches are only one perspective on which to build your portfolio. This includes fundamental investment principles around asset allocation, diversification, selection of high-quality companies. As well, as ever it's valuable to try to manage the effects your innate behavioural biases in 2025, as discussed in Making sense of things.

Getting started 

To implement these approaches, you have a variety of possible starting points:

• Review your portfolio to identify holdings that could be exposed to climate risks, or to discover opportunities in environmental sectors that should have long-term growth potential.  
• Articulate your motivations and ambitions around climate change, then, to meet those aims, outline what an ideal portfolio would look like. It can be particularly valuable to connect with younger generations for this discussion and help them to understand and prepare them to take on the family portfolio.
• Carve out an allocation and build a set of climate-related investments, by either setting aside a specific amount or portfolio percentage, or by focusing on an asset class. This can be helpful to get started and experiment, while also learning and limiting overcommitment risks. 
• Focus on a particular theme or sector of interest, perhaps energy systems or food systems, to search for related opportunities that could span equities, bonds and other types of investments. 
• You can learn more and gain useful insights into these approaches via sustainable investing specialists, or from peers, who have already adopted these approaches. In all cases, financial advisors can counsel you on the practicalities and consequences of changes to consider any changes holistically.  

Taking the first step

The choice between aiming to decarbonise your portfolio or the planet doesn’t have to be an either/or.

Both can offer compelling financial and personal value – whether by aiming to improve returns with a more resilient investment mix, or by supporting the urgent work around limiting and reverse the increasingly costly effects of greenhouse gas emissions. 

As always, when investing, actively evaluating and making considered decisions is critical to achieving your aims. Discussing with your family and advisors puts you on a path that’s increasingly critical, both for the financial and sustainable future you want. Use 2025 to take the first step.