Proof and profit: the search for transition alpha is heating up
A pivot to transition investing is putting the spotlight on credible, profitable planning
Asset owners are pivoting towards transition investing in a bid to back real-world decarbonisation. While investors routinely assess transition plans on their credibility, investment decisions remain primarily motivated by risk-adjusted returns.
As transition investing becomes mainstream, capital allocation will likely reflect not only how credibly companies transition but also the profits they accrue along the way.
The search is on for transition alpha – superior returns linked with credible decarbonisation.
Private Markets and Portfolio Construction | 5 November 2026 | Central Court, London
Transition performance
Investors often tend to outline criteria for including companies in their transition portfolios.
Swedish pension investor AP7 is a case in point. The fund first introduced a transition portfolio in 2022. “A core criterion for inclusion in the transition portfolio is the company’s financial strength, both to meet our return requirements and to ensure that the company has the capacity to carry out the necessary transition”, reads AP7’s latest climate action plan.
New research from Morningstar Sustainalytics also highlights investor focus on financial performance. According to the data, the link between corporate transitions and profitability is conditional on organizational capacity.
“The same transition activity may strengthen profitability at one company while weakening it at another, depending on the firm’s underlying structural capacity”, the report reads.
These criteria have also found their way into manager expectations. Net Zero Investor’s Climate Capital Allocation Index (CCAI) shows that 77% of surveyed funds expect their managers to expand engagement with high emitters and assess corporate transition plans.
Credible evidence
Alongside financial performance, investors are examining transition plans for signs of credibility. Transition ambition after all, is now commonplace.
“There is no shortage of climate targets. What investors need to understand is whether companies are taking the steps needed to meet them”, says Alice Borgonovo, a senior product manager at Clarity AI responsible for climate solutions.
Clarity AI has launched a new transition credibility assessment service. The product, Clarity AI’s response to the rising tide of transition investing, tracks a range of performance indicators – green capital expenditure, reporting quality, technology deployment and governance of transition plans.
“A credible plan shows up in the evidence: in emissions, in investments and in the technologies a company deploys. We built the assessment to examine that evidence, sector by sector, and show investors exactly where it comes from”, explains Borgonovo.
Clarity AI’s conclusion, based on preliminary research, is that it is still early days. Documenting and communicating the credibility of transition plans is a work in progress for corporates and data providers alike.
As a new era of transition investing gets underway, investors are sharpening their assessment toolkits. To be deemed investible, a transition plan must bring proof and profits.
