A rigorous and widely accepted definition of net-zero investing has yet to emerge. At present, the term is defined and understood differently by different people, so it must be used with caution to avoid miscommunication.

In practice, net-zero investing may include various elements, including but not limited to the following:

• Making commitments
• Setting targets and objectives
• Formulating strategies and action plans
• Assigning responsibilities
• Performing risk assessments
• Making capital allocation decisions
• Engaging with issuers
• Engaging with other market participants
• Policy advocacy
• Educating beneficiaries and clients
• Measuring and reporting progress

Risk, portfolio alignment, and impact are important aspects of net-zero investing. Different approaches to net-zero investing often emphasize one of these aspects over the others.

When the emphasis is on risk, there is a strong focus on the physical risks of climate change and the transition risks that may arise from efforts to mitigate or adapt to climate change. Examples of physical risks include damage to real assets, disruption of supply chains, and interruptions in operations. Examples of transition risks include changes in government policies, economic incentives, consumer preferences, and technology. The CFA Institute Research and Policy Center report “Climate Change Analysis in the Investment Process” explains physical and transition risks in greater detail and presents several ways these risks can be analyzed in an investment context. The CFA Institute Climate Risk, Valuation, and Investing Certificate delves even deeper into these topics.

Some approaches to net-zero investing focus on constructing a portfolio of assets that in aggregate aligns with a specified decarbonization pathway that is ultimately expected to lead to net zero. In practice, this means allocating capital to issuers that have significantly reduced net greenhouse gas (GHG) emissions or are in the process of doing so as evidenced by a commitment, a plan, and/or actions. While constructing portfolios in this way may seem straightforward at first, there are many factors to consider. Portfolio alignment is covered in the CFA Institute Climate Risk, Valuation, and Investing Certificate and in the Financial Analysts Journal article “Net-Zero Carbon Portfolio Alignment.”

Some forms of net-zero investing emphasize taking actions to achieve real economy decarbonization. The focus is on financing specific projects and initiatives and persuading issuers and policymakers to take steps that are conducive to achieving net zero . This approach has dual objectives, which can generally be stated as: (1) to attain the risk and return objectives (whatever those may be) and (2) to contribute to the attainment of net zero . More information about impact approaches to net-zero investing can be found in the CFA Institute Research and Policy Center report “Navigating Transition Finance: An Action List” and in the CFA Institute Climate Risk, Valuation, and Investing Certificate curriculum.

The approaches described above can be envisioned as a Venn diagram—each having similarities and differences with respect to the others, each having strengths and shortcomings, and each being more, or less, appropriate for certain investors and in certain circumstances.

Those involved in net-zero investing are sometimes referred to as net-zero investors. In the discussion and practice of net-zero investing, it is important to distinguish between “end investors” (i.e., principals) and “professional investors” (i.e., agents) because these groups have different roles, responsibilities, and motivations. End investors are asset owners (e.g., pension funds and foundations) and individual investors (e.g., individual retirement account holders and retail investors) that have the ultimate legal decision-making authority over how monetary assets are invested. It should not be assumed that every end investor is, or will be, a net-zero investor, nor that net-zero investors necessarily invest all their assets in net-zero strategies. Professional investors are asset managers and investment advisers that serve end investors who, in aggregate, have a wide range of needs and preferences. Professional investors cannot force end investors to be net-zero investors.