Andy Howard, Global Head of Sustainable Investment at Schroders, explores in a fragmented world.
The mood at London Climate Action Week (LCAW) 2026 was one of pragmatic urgency. As over 75,000 delegates descended on the UK capital to attend over 1,000 events, the narrative decisively shifted from “why” we must transition to “how” we finance it.
Against a backdrop of geopolitical fragmentation and energy security concerns, there is a growing acceptance of the gap opening between the political commitments made in Paris in 2015 and the tangible action policy makers, corporates and the real economy are making to deliver those ambitions.
Perhaps counterintuitively, as evidence of transition has waned and concerns over the effects of its physical consequences have grown, the case for investing selectively in the transition has strengthened. A thoughtful, active approach to climate finance can reward investors while delivering the real-world decarbonisation the planet urgently needs.
The valuation opportunity in the transition gap
The pace of real-economy decarbonisation has undeniably slowed. Policy progress toward net-zero alignment has stalled in recent years, and Climate Action Tracker estimates that the policies governments have put in place leave us on track for temperature rises of 2.6 degrees by the end of the century, well short of the two degree commitment in the Paris Agreement.
That shortfall in action is well recognised and reflected in financial market valuations.
We have examined the pace of decarbonisation implied by equity valuations using a Gordon Growth framework to estimate the pace of transition reflected in the valuations of listed companies better prepared for decarbonisation through either lower emissions, exposure to clean solutions, or through the strength of their transition plans.
That data shows that the market is currently pricing in a slower transition than either models suggest is necessary or pace which is likely given the policy changes we have seen.
Comparing expected decarbonisation rates to the pace reflected in valuations
Source: Schroders analysis. Implied-decarbonisation rates are model estimates using a Gordon Growth Model framework on carbon- vs less-carbon-exposed companies; results are sensitive to calibration assumptions. The rates of decarbonisation implied are calculated on a sector-relative basis, comparing better vs worse placed peer companies to mitigate the effects of performance differences across sectors.
This embedded pessimism is a strength. Lower market expectations mean there is less valuation risk in holding transitioning companies today.
When markets have discounted faster rates of decarbonisation, faltering expectations or delivery missteps put investment returns at risk. The transition toward a low carbon economy is inevitable – even if the timing is uncertain – and low expectations embedded in valuations presents opportunities to capture significant upside as action inevitably accelerates.
Investing in the climate transition is undoubtedly getting harder. Filtering investment universes for companies with already-low emissions has provided a relatively straightforward solution to portfolio decarbonisation on paper. Going forward, more selectivity will be needed and valuation discipline will be important.
Our emphasis has been on companies well placed to deliver transition. Over the past decade, companies actively cutting their emissions and transitioning their business models most quickly have outperformed peers by around 4% annually. Our Climate Transition Model is designed to help us identify future beneficiaries of that tailwind.
Conclusion
The macro case for transition investing has strengthened. Real-economy decarbonisation has slowed, leaving the transition under-priced by the market. However, capturing this value requires more than a simplistic model or a passive sector tilt.
The same principles hold beyond climate investing. The global geopolitical backdrop is becoming more complex, fast-changing and uncertain. The long-term direction is often much easier to discern than near-term prospects.
Focusing on companies well placed to benefit in the long term, at attractive valuations, is harder than applying simple screens or tilts, but provides compelling opportunities.
Main image: carbon, emissions, ESG, veeterzy-UwBrS-qRMHo-unsplash
