Conclusion

Net zero investing is a trending approach in climate investing. This approach involves two objectives: portfolio’s decarbonization and transition to green activities. We’ve seen that one of the most popular methodology in climate investing - the Paris-Aligned Benchmarks - falls short in addressing the second objective.

We’ve developed a firm-level measure of greeness with a Natural Language Processing approach in order to build a transition portfolio, following a mixed taxonomy.

As we increase the targeted portfolio’s greeness improvement, we shrink the investable universe towards green technologies pure-players, leading to large increase of tracking error.

Overall, we’ve seen that the transition dimension in net zero investing can be addressed with the use of text-mining, without relying on top-down level approach.

Therefore, the transition dimension can be integrated into the construction of net zero portfolio, targeting both the decarbonization and the transition dimensions.