Climate-named funds have expanded rapidly in both publicly listed and private capital markets, reflecting growing investor interest in the energy transition and decarbonisation opportunities across asset classes, according to the latest MSCI Transition Finance Tracker.
Assets under management in publicly traded climate funds has grown nearly 20-fold over the past seven years, up to $560bn, while private capital climate funds launched between 2021 and 2023 represent 43% of the total in existence and account for nearly two-thirds (65%) of the $119bn cumulative capitalisation – evidence of the rapid growth of private climate investment, the report said.
Transition fund flows
Financing the energy transition requires investors to deploy capital in ways that help companies in hard-to-abate sectors reduce their emissions. Investors in privately held companies – whether through private equity, venture capital or hybrid funds – can often influence corporate behaviour more directly by virtue of their controlling ownership stakes, the report explained.
Public climate funds “tend to focus more on transition-enabling sectors”. As much as 22% of investments in publicly traded climate funds are in the information technology sector, and 8% are in materials, both essential to scaling low-carbon technologies. In contrast, private capital funds allocate just 7% and 3%, respectively, to these industries.
In contrast, 40% of investments in private capital climate funds are allocated to the utilities sector – an emissions-intensive industry that offers significant opportunities to support the energy transition – compared with just 8% of publicly traded climate funds.
MSCI Sustainability Institute also compared the carbon intensity of different climate funds. Transition funds – funds that invest in emissions-intensive sectors and encourage long-term decarbonisation – have a carbon intensity nearly three times higher than that of so-called Paris-aligned funds, which avoid investing in fossil fuels and require annual emissions reductions in line with the goals of the Paris Agreement.
Climate transition benchmarks, which mandate an initial 30% emissions cut and 7% annual reductions in emissions, fall somewhere in between. All three fund types, however, display a lower Scope 1 and 2 carbon intensity than the total funds universe.
Geopolitical risk and opportunity
Climate-focused funds, whether publicly traded or privately held, are primarily investing in the US. 71% of investments in publicly traded climate funds were in US-listed companies or other US-domiciled assets, as of 31 March. Privately held climate funds follow a similar pattern, with more than two-thirds (68%) of assets allocated to US-based investments.
Japanese companies and assets represent 5.1% of publicly traded climate fund holdings — the second-largest country exposure after the US – compared with less than 1% of assets held by private capital climate funds.
For investors, portfolio geography may be a current source of both risk and opportunity. Climate funds tilt heavily toward the US, Japan and China — countries exposed to tariff and trade tensions. At the same time, the dynamics of tariffs, though evolving, may prompt investors to diversify geographically with the aim of unlocking opportunities in regions such as Latin America and Southeast Asia.
Rumi Mahmood, research director at the MSCI Sustainability Institute, told PA Future: “Both public and private climate funds have expanded significantly, but face evolving challenges, particularly from trade policy uncertainty and sector-specific transition risks. Private climate funds are channelling capital into emissions-intensive sectors like utilities, indicating a willingness among investors to lean into hard-to-abate sectors rather than avoiding them.”
However, while private climate funds are playing an increasingly important role, especially in sectors requiring active ownership and longer-term capital, the Tracker suggests that public markets will continue to be critical.
“Publicly traded funds offer scale and exposure to transition-enabling technologies, making them well-suited for investors with broader diversification mandates. Rather than one replacing the other, we anticipate a complementary dynamic between public and private markets in financing the transition.”
