Their conversation explores Europe’s “electrotech revolution,” highlighting both the region’s competitive strengths and one of its central challenges: persistently high electricity prices. They examine the drivers behind elevated power costs and discuss several of the investment themes raised during the event, including system efficiency, small modular technologies, and the resilience and independence of energy systems.

The discussion also turns to energy policy, where Antonella notes that the panel saw Europe as having made meaningful progress in establishing a strategic framework for electrification. Electrification was identified as a critical pathway for decarbonisation, energy security, and industrial competitiveness. At the same time, they consider potential solutions to high electricity prices, including shifting more of the tax burden away from electricity and onto gas.

Looking ahead, Simon and Antonella point to significant untapped potential across Europe’s existing grid infrastructure, as well as emerging innovations such as software modularity, which could lower costs, reduce risk, and improve the speed of deployment for technologies including electric vehicles and EV charging systems. While Europe continues to rely heavily on imports for solar panels and batteries, it retains important advantages in other parts of the electrification value chain, particularly grid infrastructure and consumer energy technologies such as heat pumps. They also note the longer-term potential of battery recycling to strengthen Europe’s internal energy ecosystem over time.

Watch the video below to hear Simon and Antonella’s insights on Europe’s energy transition and the investment implications of electrification.

Sustainable and impact investing at Cambridge Associates focuses on helping clients invest in ways that support positive social and environmental outcomes alongside financial returns. Sustainable Investing in Focus is designed to make these topics accessible to everyone by explaining key concepts in a clear and simple way. By sharing practical examples and expert insights, the series helps viewers understand how sustainable investing works, why it matters and how it’s changing.

The post Sustainable Investing in Focus: Green Horizons or Gridlocked appeared first on Cambridge Associates.

As a global investment firm managing $616 billion in assets for over 1,000 clients, we recognize that achieving net zero is a collective, long-term endeavor. Our approach is pragmatic and client-centered, focusing on education, actionable guidance, and continuous improvement. This report highlights meaningful progress, new developments, and the challenges that remain as we work with clients and the broader industry to advance real-world decarbonization.

Key Progress

Over the past year, Cambridge Associates has:

• Advanced our proprietary Manager Assessment Framework, deepening our evaluation of investment strategies for climate risk and net zero alignment.
• Published new guidance to help investors simplify net zero implementation and navigate practical pathways toward climate-positive portfolios.
• Enhanced client engagement, with a growing proportion of assets receiving tailored net zero education and reporting.
• Strengthened our operational commitment by relocating to a high-performance, energy-efficient headquarters and submitting targets to the Science Based Targets initiative (SBTi).
• Continued to support global industry initiatives and foster climate stewardship among investment managers.

For a comprehensive look at our progress, including key metrics and case studies, read our full report.

Looking Ahead

Our journey toward net zero is ongoing. We continue to prioritize real-world emissions reduction, increase allocation to climate solutions, and engage with managers and policymakers to drive industry-wide progress. Cambridge Associates’ net zero principles guide our approach, emphasizing pragmatism, impact, and collaboration. We remain committed to helping clients maximize their positive impact in a changing world.

To explore our methodology, progress, and practical steps for investors,  read our Net Zero Progress Report.

The post Net Zero Investment Consultants Initiative Progress Report 2025 appeared first on Cambridge Associates.

Their conversation explores how established business models are being repurposed to address sustainability challenges. David and Liqian highlight the growing trend of applying Software-as-a-Service (SaaS) frameworks to sustainability, enabling scalable solutions for environmental and social issues. The discussion delves into the transformative role of biotechnology in agri-food technology, emphasizing innovations that are reshaping food production to be more resilient in the face of climate change. The episode also addresses the broader societal implications of these shifts, particularly the intersection of climate risks with persistent issues such as inequality and how economic resilience depends on tackling these interconnected challenges.

They discuss practical solutions, including workforce development programs, affordable housing initiatives, and efforts to promote health equity. These strategies are presented as essential for building communities that can adapt to and withstand the risks posed by climate change. The conversation highlights the importance of integrating sustainability into core business and investment strategies, not only to mitigate risks but also to unlock new opportunities for growth and positive impact. Watch the second episode in our video series below.

Sustainable and impact investing at Cambridge Associates focuses on helping clients invest in ways that support positive social and environmental outcomes alongside financial returns. Sustainable Investing in Focus is designed to make these topics accessible to everyone by explaining key concepts in a clear and simple way. By sharing practical examples and expert insights, the series helps viewers understand how sustainable investing works, why it matters and how it’s changing.

The post Sustainable Investing in Focus: Innovating for Resilience appeared first on Cambridge Associates.

Their conversation covers the evolving regulatory landscape, the ongoing challenges and opportunities presented by climate change, and the contrasting approaches to sustainable investing in the United States and the United Kingdom. As they look ahead to 2026, Liqian and Annachiara identify key trends and areas of growth that are shaping the industry.

Together, they examine how new regulations increase data availability, enhance transparency, and enable more informed decision-making for investors and stakeholders. Liqian and Annachiara also cover the rapid advancements in renewable energy technologies and the critical need for continued investment in grid infrastructure to support this growth.

Sustainable and impact investing at Cambridge Associates focuses on helping clients invest in ways that support positive social and environmental outcomes alongside financial returns. Sustainable Investing in Focus is designed to make these topics accessible to everyone by explaining key concepts in a clear and simple way. By sharing practical examples and expert insights, the series helps viewers understand how sustainable investing works, why it matters and how it’s changing. Watch the first episode in our video series below.

The United States vs The United Kingdom

Regulation

Climate Change

Opportunities in SII

SII 2026 and Beyond

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by Kevin Rosenbaum

Many investors have seen the share of their portfolios invested in equities—both public and private—increase over the past decade. This shift was fueled partly by the maturation of private investment asset classes, the growth of passive investing, and low bond yields that accompanied extraordinary fiscal and monetary stimulus, all of which contributed to robust equity returns and reinforced higher allocations. However, the landscape has changed meaningfully in that time. Elevated valuations, increased market concentration, and mediocre macroeconomic conditions underpin our view that equity risks are heightened. For investors whose equity allocations are at elevated levels, 2026 presents a timely opportunity to reassess policy allocations and embrace greater diversification.

The upward shift in equity allocations is apparent across different investor types. For example, our analysis of a consistent group of 247 US endowments and foundations reveals that their average allocation to public and private equity increased from 51.7% in June 2015 to 64.8% in June 2025. This pattern is echoed among US households, who, according to the latest Fed data, held a record proportion of their financial assets in equities as of second quarter 2025. The magnitude of these changes suggests that many portfolios globally may now be less resilient to adverse market events.

This shift has occurred as the likelihood of such an event has increased. Valuation measures across equities signal caution in virtually any way you look at them, reflecting both years of strong performance and the recent surge of enthusiasm around AI. The excitement surrounding AI has also contributed to greater market concentration, with the ten largest US companies now representing 22.2% of total global equity exposure—one of the highest levels on record. At the same time, recent data trends suggest that labor markets may be more likely to weaken than strengthen in the coming months, a development that often serves as a key indicator of the global economy’s direction. Collectively, these factors point to elevated idiosyncratic and systemic risks compared to historical norms.

To be sure, the future is uncertain. That uncertainty is why we seek diversified exposure rather than allocating solely to the next best-performing investment. While we cannot predict the future, we can assess the factors likely to shape the range of potential outcomes. In today’s environment, these factors point to a distribution of expected equity returns with a lower median than typical and greater negative skewness. Still, the possibility of an equity rally remains within that distribution, despite heightened risks. For long-term investors able to withstand volatility, or those facing substantial tax implications from reducing equity exposure, maintaining current allocations may be appropriate. However, for investors sensitive to drawdowns—due to spending needs, risk tolerance, or other constraints—now may be an opportune time to reassess equity allocations if they are currently elevated.

Any shifts in policy allocations should reflect not only the outlook for equities, but also the relative attractiveness of other asset classes. Assessing these opportunities requires weighing how new exposures align with portfolio constraints, enhance diversification, and offer potential for manager value add—considerations that are often unique to each portfolio. One area that merits consideration in the current environment is hedge funds. They can provide differentiated sources of return and help reduce drawdown risks, particularly as many strategies are adept at navigating market inefficiencies and macroeconomic uncertainty. In addition to the potential for compelling returns, a thoughtfully constructed sleeve of hedge funds, or broader diversifying strategies, can also deliver substantial value add. We explore our hedge fund perspective, along with considerations across other asset classes, throughout the rest of this publication.

Once policy allocations are set, investors may also identify tactical opportunities that further diversify risks and support value add. By broadening diversification and thoughtfully adjusting policy allocations, investors can strengthen portfolio resilience and better navigate changing market environments. As risks shift, so should our thinking.

Investors should lean into AI thoughtfully in 2026

by Celia Dallas

Artificial intelligence is rapidly emerging as one of the most significant disruptive transformations to the technology ecosystem, with the potential to reshape business models, drive productivity, and address demographic headwinds. The sector’s promise is substantial, but the current investment environment is marked by exuberance, with capital flowing into AI infrastructure and applications at an unprecedented scale. Investors must balance optimism with caution, seeking exposure that is both strategic and disciplined.

The four largest hyperscalers (Alphabet, Amazon, Meta, and Microsoft) are projected to spend $350 billion in capital expenditures in 2025, with cumulative investment reaching trillions over the next five years. This capex boom echoes historical technology revolutions—railroads, telecom, dot-com—where transformative innovation led to overinvestment, excess capacity, and ultimately poor shareholder returns for the builders. Today’s AI leaders are shifting from asset-light, high-ROIC models to asset-heavy, capital-intensive businesses, a transition historically associated with deteriorating fundamentals and lower free cash flow.

Valuations for core AI infrastructure stocks are elevated, and the competitive arms race among Big Tech resembles a prisoner’s dilemma: firms feel compelled to overspend to avoid losing market leadership, even at the expense of collective profitability. The risk is that inflated multiples and massive capex may not be justified by future growth, echoing the dot-com bust. Asset lifecycles are shortening, with rapid depreciation of AI hardware requiring faster returns and exposing investors to higher risk if growth slows. Funding quality is shifting, with more reliance on private credit and securitized finance. Additionally, the ecosystem’s “circularity”—where companies are simultaneously customers, suppliers, and investors in one another—can mask underlying demand and profitability issues.

For now, most of the large public AI players have been living within their means, but operating cash flows are increasingly consumed by capex, share buybacks (in part to offset dilutive effects of share-based compensation), and acquisitions, all of which are strategic investments to remain competitive in this race to dominate the AI landscape. On average, capex accounts for 75% of cash flow from operations across these five companies, up from 45% in 2024.

Beyond the mega-cap tech firms, for companies broadly able to leverage the technology, AI is not just a source of top-line growth but also a powerful lever for cost reduction and margin expansion. Such opportunities are difficult to recognize at this stage of AI development, giving skilled managers with appropriate insights the potential to invest in such companies at relatively attractive valuations.

The buildout of AI physical infrastructure is creating new opportunities in power generation, grid modernization, and energy efficiency. As data centers and AI workloads drive up electricity demand, companies focused on improving access to power—whether through renewables, grid upgrades, or distributed energy solutions—stand to benefit. Even if AI promises are delivered more slowly than anticipated, such investments would still benefit from other electricity demand drivers like electrification of transportation and digitalization trends. These segments are essential to the sustainable scaling of AI and may provide more stable, diversified returns than the core technology providers.

Venture capital plays a critical role in the AI ecosystem, serving as the engine for innovation and disruption. Many of the most transformative companies of the internet era—such as Amazon and Uber—were venture-backed disruptors that redefined entire industries. Today, venture capital is fueling the next generation of AI innovators. These companies are often the source of breakthrough technologies and new business models that can reshape markets and create outsized value. However, the surge of interest in AI has led to a dramatic escalation in venture capital valuations requiring discipline to separate hype from legitimate opportunity.

AI’s investment frontier is rich with potential but fraught with complexity. The sector’s productivity and economic impact may take longer to materialize than current capex and valuations imply. Thoughtful AI exposure requires diversification beyond the largest AI-exposed names. Success will require partnering with skilled managers, maintaining price discipline, and staying adaptive as the landscape evolves. By eschewing hype, focusing on fundamentals, and diversifying exposure—especially toward asset-light early adopters, power and energy efficiency themes, and innovative venture-backed disruptors—investors can position themselves to outperform as the AI era unfolds.

Investors should invest across the electricity transmission food chain in 2026

by Simon Hallett

Much attention has been given to AI’s growing appetite for electricity and the resulting demands on grid capacity to support new, power-intensive data centers. However, AI is just the icing on the cake for an industry that, until now, was considered mature but is now poised for multi-year growth. Investors should prioritize cross-asset exposure to the expansion and modernization of electricity grids.

Grid operators need to build capacity and connect different locations at a pace not seen since the 1960s. This rapid expansion is straining supply chains for equipment and materials, leading to growing order backlogs and firm pricing for equipment manufacturers. At the same time, technological solutions are essential for operating smarter, more efficient grids that maximize existing capacity and seamlessly integrate multiple distributed and intermittent power sources.

Twin sustainability trends essential to a low-carbon transition are (1) the build out of renewables on global power grids, and (2) the expansion and redesign of grids to integrate this distributed power from new locations. This includes the addition of storage, load balancing, and “smart grid” technologies necessary to maintain stability with intermittent generation. These trends are deeply interconnected. As noted in a 2023 International Energy Agency (IEA) report, “Grids need to both operate in new ways and leverage the benefits of distributed resources, such as rooftop solar, and all sources of flexibility.”

The changing nature of electricity supply is a major driver of grid investment, but rising demand is reinforcing this need. After years of flat growth—when efficiency gains largely offset increased usage—global electricity demand is now accelerating as more activities, such as transportation (notably electric vehicles), heating, and industrial processes, become electrified. The most widely discussed theme is the AI-driven surge in data centers, which require not only more power but also new connections to the transmission system in previously unserved locations. While there is some risk that advances in technology and efficiency could eventually render certain data centers surplus to requirements, the growth in electricity demand extends well beyond AI alone.

Meanwhile, electricity grids worldwide have suffered from years of underinvestment. According to the IEA, while investment in renewables has doubled since 2010, capital expenditure on grids has remained largely flat. As a result, grid operators are now playing catch-up. Both the IEA and BloombergNEF estimate that grid capex must double by 2030, requiring an additional $300 billion in annual spending.

This is good news for a range of players. Utilities can expand their regulated asset bases at an unprecedented pace. Equipment makers and contractors are building order backlogs several years long, as are gas turbine makers. The situation for wind turbine makers is less clear, given political and regulatory changes have caused a swath of project cancellations, but growing demand outside the United States is underpinning recovery. For us, the clearest and most robust opportunity from electrification is in the grid itself rather than generation, considering the combination of historic underinvestment, new technologies and the need to “re-wire” many developed countries to cope with a completely different pattern of supply/demand.

Investors can access this opportunity through thematic strategies spanning a wide range of assets, from infrastructure to venture capital. Public equity managers focused on the energy transition may invest in large industrial companies supplying grid equipment, as well as the utility operators building out the grid. Similar opportunities exist in private markets, including private infrastructure funds and select buyout managers. Venture and growth equity managers with transition expertise are also active, targeting grid-enhancing technologies and unlocking the potential of demand response and energy storage through digitalization. One risk to note is the recent surge in public market valuations for some large industrial stocks tied to grid spending. Public market investors may benefit from waiting for a pullback or being highly selective.

The expansion and modernization of electricity grids is a broad theme with several distinct, independent drivers. It is not solely about AI or renewables; rather, it encompasses a range of factors shaping demand and investment. Additionally, the long timescales for infrastructure investments and equipment lead times suggest this will remain a multi-year opportunity.

Investors should underweight the US dollar in 2026

by Aaron Costello

After experiencing a decade-long bull run that started in 2011, the US dollar (USD) weakened sharply in 2025, falling by 10% at one point. We believe the US dollar has begun a multi-year bear market, but given recent oversold momentum, we expect the dollar will rally at some point in 2026. This is consistent with historical trends, whereby the US dollar tends to stage a rebound after experiencing declines of 10% or more. However, we do not think investors should try to market-time any USD rebound, due to the inherent uncertainty in the duration of any such rally and the fact that the US dollar remains overvalued, with ample scope to decline over the coming years. Instead, investors should underweight the US dollar relative to policy targets and use any rebound as an opportunity to initiate or add to USD underweights, with non-US equities and unhedged non-US sovereign bonds as two potential implementation options.

For 2026, the US dollar could strengthen if US economic growth remains resilient relative to elsewhere. Indeed, non-US economic growth faces headwinds in 2026 as the boost from tariff front-running fades. Relatively stronger economic momentum in the United States would also place less pressure on the Fed to cut rates, resulting in higher US rate differentials versus elsewhere and lending support to the US dollar, a dynamic that has already started to play out in late 2025. Conversely, the US dollar has historically rallied at some point during a US recession, albeit sometimes only briefly. While a recession is not our base case, the US dollar could still jump amid a growth scare in the United States triggered by further weakness in the US labor market spilling over into lower consumption and investment.

But investors should not chase any such rally. This is because we expect the dollar to remain in a downtrend over a multi-year horizon. The US dollar still faces headwinds from economic policy uncertainty, overvalued assets, and fiscal sustainability concerns, factors that dampen the attractiveness of US assets relative to elsewhere and therefore demand for the US dollar. The US dollar has benefited from equity-related portfolio inflows and given the growing froth in US equity markets, anything that shakes confidence in the AI theme could see reduced flows and a weakening US dollar. While the US dollar has benefited recently from a reduction in Fed rate cut expectations, this could change over the course of 2026 as a new Fed chair (and potentially two other Fed governors) will be appointed by the Trump administration. These upcoming appointments may bias the Fed toward more aggressive easing and narrowing of interest rate support for the US dollar. Regardless of who chairs the Fed, lower interest rates and a weaker US dollar are a stated goal of the Trump administration to help narrow the US trade deficit and spur a revival of US industry.

Overall, we expect the US dollar will weaken. Counter-trend rallies are common amid multi-year USD bear markets and despite the recent decline, the US dollar remains 32% overvalued in equity-weighted terms. Non-US equities and unhedged non-US sovereign bonds have typically outperformed during USD bear markets, especially when relative valuations are in their favor, making them effective potential options for implementing a dollar underweight. While we acknowledge the likelihood of a USD rally at some point in 2026, investors should remain underweight the US dollar because of the scope for continued USD weakness over a multi-year horizon.

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by Sean Duffin

Hedge funds remain a vital part of diversified portfolios, and building resilience requires a thoughtful mix of strategies. In today’s environment—marked by elevated dispersion, low correlations, and ongoing policy uncertainty—equity long/short (ELS) managers are especially well positioned. Advances in AI and persistent tariff-related disruptions have driven pronounced outperformance in select sectors, notably technology and communication services, resulting in significant gaps between winners and laggards. Skilled ELS managers can exploit these market inefficiencies and others through both long and short positions, offering the potential for attractive risk-adjusted returns. Given these considerations, investors should consider leaning more than typical into ELS—either through portfolio rebalancing or by adding a new position—as part of a well-diversified hedge fund strategy mix.

The investment landscape is being shaped by a complex interplay of macroeconomic and geopolitical forces, including tariff-related uncertainty, sticky inflation, and evolving labor market dynamics. These crosscurrents are creating opportunities for nimble hedge fund managers. Global macro and other absolute return strategies are well positioned to navigate these challenges, given their flexibility across asset classes and regions. Yet, what distinguishes the current environment is the pronounced sector dispersion and volatility driven by technological innovation and policy shifts—conditions that are particularly favorable for ELS managers, who can capitalize on both broad market trends and stock-specific inefficiencies.

Hedge fund strategies offer distinct trade-offs for investors navigating the uncertainties of 2026. While a recession is not our base case scenario, the potential for episodic volatility and policy-driven market disruptions remains elevated. ELS approaches provide a practical way to position for this environment, offering reasonable defensiveness without sacrificing significant growth potential. Over the last 20 years, ELS strategies have captured about 70% of the equity market’s total gain but have lost roughly half as much as broader equity markets during major drawdowns. In contrast, more defensive hedge fund strategies such as trend-following and global macro have excelled during sustained market stress, providing diversification and crisis alpha, though these strategies have significantly lagged equity markets over the long term. By combining ELS with these and other defensively oriented strategies in a diversified hedge fund allocation, investors can position portfolios to participate in market upside, while maintaining robust protection against extended periods of volatility or unexpected downturns.

Another supportive factor for hedge funds that short securities is the current level of interest rates, which has increased the short rebate—the interest earned on cash collateral from short sales. While this is a structural feature of the strategy rather than a source of manager alpha, it does provide a tailwind for funds employing short positions, boosting baseline returns compared to the low or negative rate environment of 2010–21. As long as rates remain elevated, this dynamic should continue to benefit hedge funds with meaningful short exposure.

While we recommend leaning into ELS strategies, given current market dynamics, it remains essential to prioritize manager quality and ensure each allocation fits within the broader portfolio. Investors should avoid over-concentration in any single strategy or style and align allocations with overall portfolio risk and objectives—whether adding risk or protecting capital. For taxable clients, selecting managers that actively consider tax implications and demonstrate a track record of tax-aware trading can further enhance after-tax outcomes.

Leaning into hedge fund strategies in 2026 is prudent for investors seeking both performance and protection. ELS strategies are especially well positioned, given current market dynamics, but a diversified approach that includes other defensive hedge fund strategies remains critical for portfolio resilience. By focusing on high-quality managers and strategic fit, investors can harness the diversification benefits that hedge funds provide—helping portfolios remain resilient and adaptable amid today’s market uncertainties.

Investors should lean into real asset secular themes in 2026

by Wade O’Brien

In 2026, investors should favor real assets that benefit from secular themes like digitalization, decarbonization, and demographics. However, as competition for these assets has driven up pricing, choosing skilled value-add managers who can develop projects and look beyond traditional plays is essential to unlocking high returns. Secondaries funds in both infrastructure and real estate are also attractive given access to high-quality assets at often favorable pricing.

Recent returns for infrastructure funds underline the dual role they can play both in generating absolute returns as well as protecting against inflation. Private infrastructure funds have generated annualized internal rates of return (IRRs) of around 11% over the last five and ten years. Returns have been even higher for skilled managers who capitalized on these secular themes, with value-add funds investing in areas like energy transition and data centers often outperforming generalist infrastructure funds and even some buyout strategies.

Infrastructure valuations have risen for many assets, reflecting demand that has exceeded forecasts. For example, last year Grid Strategies predicted that US power demand could increase by 8% over the next five years, given surging data center demand, almost 3x the pace it had modeled just two years prior. Even when strong demand growth is well telegraphed, supply can struggle to respond. An aging US population will require between 35,000 and 45,000 new senior living units per year, but supply has fallen well short in recent years, given rising labor and financing costs.

Rising price tags for certain infrastructure assets favor funds developing new projects over those acquiring existing assets, though in some markets—such as US renewables—distressed sales will present opportunity. As partners in developing new projects, investors should carefully search for managers that bring specialized toolkits to the table. Developing complex assets like data centers requires navigating challenges like permitting, power supply, cooling, and scaling traditional designs to meet today’s massive compute needs. Underwriting tenant risk is also important, as long-term contracts with deep-pocketed hyperscalers may prove more secure than short-term rentals with more speculative players. Diversified private infrastructure funds also can have an edge in identifying related plays, for example in the case of data centers identifying companies that generate and store power or help upgrade grids to connect these assets.

Global infrastructure funds are an attractive choice, given the diverse opportunities and varying valuations across markets. For example, publicly traded utilities in the United States fetch higher valuations than those in other markets, reducing their attractiveness as take-private candidates. Also, while data center capacity is expected to experience almost uniformly rapid growth across the United States, Europe, and Asia in future years, renewable growth in the United States may be slower due to recent policy shifts.

In real estate, as in infrastructure, we favor value-add managers focused on secular themes. Elevated valuations for core real estate assets limit the potential for price appreciation and reduce the appeal to lock-up capital. Instead, value-add strategies targeting themes such as demographics (e.g., senior housing) and digitalization (e.g., cell towers) are more compelling.

For investors seeking to accelerate portfolio deployment, secondary funds are worth considering, though the rationale for doing so varies across asset classes. Infrastructure secondaries can provide immediate access to cash-flowing assets, though at modest discounts. In contrast, real estate secondary stakes can offer substantial discounts, offering a margin of safety for assets with deteriorating fundamentals.

Looking ahead to 2026, real asset investors should stick with secular winners. While valuations have risen for some of these assets, partnering with private infrastructure and real estate funds that add value through design and operation can enhance return potential. Should economic growth disappoint or inflation surprise to the upside, these strategies should be supported by strong long-term fundamentals.

Investors should overweight California Carbon Allowances in 2026

by Celia Dallas and Justin Hopfer

California’s Carbon Allowances (CCAs)—permits issued under the state’s cap-and-invest program—present an attractive investment opportunity relative to global equities. CCAs offer an asymmetric return profile: the program’s price floor limits downside risk, while tightening supply, linkage with Washington state, and regulatory changes create significant upside potential. As the market transitions from annual supply surpluses to persistent deficits, we believe CCA prices are poised for accelerated appreciation. Current pricing offers an attractive entry point, with prices near the price floor, whereas global equities remain constrained by elevated valuations and index concentration.

California’s cap-and-invest program, run by the California Air Resources Board (CARB), requires entities to surrender allowances equal to their emissions in three-year compliance cycles. Allowances are distributed through free allocation and quarterly auctions, with auction prices supported by a price floor and the Allowance Price Containment Reserve (APCR). The cap, a state-set limit on emissions, declines each year to meet climate targets by reducing free and auctioned allowances. Once prices reach containment tiers, CARB releases additional allowances from the APCR at set prices. After APCR units are depleted, CCAs can rise to the price ceiling. Price tiers rise annually by inflation plus 5%. Entities may “bank” allowances for future use and use carbon offsets, credits earned from emission-reduction projects, to meet part of their compliance.

Since 2019, the cap has decreased by 4% annually, while emissions have declined by 2%–3%, tightening supply relative to demand. Prices remain subdued, given the large bank of allowances, but as the cap tightens and these are depleted—projected by the early 2030s—prices should rise sharply. CARB’s proposal to accelerate the annual cap decline would remove 118 million allowances from 2027 to 2030. This would likely drive the market into persistent annual deficits starting in 2027, ultimately exhausting banked supply by 2031 and supporting higher prices. Even without accelerated cap declines, deficits are projected to emerge by 2034.

Asset manager Aetos’ base case scenario, with 118 million allowances removed through 2030, indicates the program could hit the first containment tier in 2031 and the second in 2032. Current CCA prices are $30, with Tier 1 and Tier 2 prices estimated at $96 and $134 in those years, implying annualized returns of 24% over the next six to seven years. Across four managers, expectations range from banked allowances being depleted from 2031 and 2034, with projected IRRs of 24% to 14%, respectively. Furthermore, the anticipated linkage with Washington state’s program, expected by 2027, would likely drive price convergence and support higher prices. Even in bearish scenarios, returns remain positive, as the price floor rises annually. This underscores CCAs’ attractive, asymmetric risk/reward profile, especially compared to global equities, which face subdued return expectations as outlined earlier. For US taxable investors, CCAs also benefit from long-term capital gains treatment, enhancing after-tax return potential.

Despite compelling return potential, the thesis faces regulatory, political, and market volatility risks. An immediate concern is further implementation delay, especially after the program extension to 2045 took longer than expected. Next steps—Initial Statement of Reasons (ISOR) publication and rulemaking—must be completed before the October 2026 issuance of free allowances to enable accelerated allowance removals and deplete banks allowances. Recent federal executive orders have also prompted legal challenges, creating ongoing litigation and regulatory uncertainty as a tail risk. Nevertheless, the program has withstood past legal challenges and enjoys strong state support, reinforced by its fiscal contributions—$33.7 billion since inception.

The investment case for overweighting CCAs remains strong as the market shift from surplus to persistent deficit. Prudent position sizing is essential, given political and regulatory risks, lower liquidity, and event-driven volatility. Overall, CCAs offer differentiated return and diversification potential, with significant upside relative to global equities if anticipated catalysts are realized.

The post 2026 Outlook: Diversifier Views appeared first on Cambridge Associates.

The core investment thesis is that CCAs will transition from an annual supply surplus to persistent deficits within the next one to two years, even without further supply tightening. In more mature carbon markets, such a shift has historically led to sharp price increases. Total program cumulative supply, including inventories, is expected to go into deficit between 2030 and 2035, with 2030 depletion estimates dependent on timely implementation of CARB’s supply reduction plan.

CCAs now trade near the 2025 price floor set by CARB, limiting downside risk. The floor price increases annually by 5% plus inflation, providing a steadily rising base. With the CCA price roughly 3% above the floor, the minimum return from the current purchase price is 2% plus inflation over the next year, and inflation plus 5% over subsequent years. Should anticipated catalysts materialize, prices could retrace its losses to around $40, a gain of nearly 50%.

While timing is uncertain, annual deficits will eventually drive prices to the first price containment tier, designed to slow carbon price increases. If covered entities need to buy CCAs beyond what remains in inventory and the allowance price containment reserve, CARB executes a price ceiling sale. The potential upside from such an eventuality is eyepopping. There are multiple price ceilings with set allowances in reserve, with the first at $60.47, increased by 5% plus inflation annually. As of May 2, prices are 143% below the first containment tier value for 2026. Accounting for the mandated price increases, if it takes three years to reach the containment tier, CCAs could deliver a 41% annualized return, and if five years, a 26% annualized return.

While the price floor limits downside, program elimination would render CCAs worthless. President Trump’s EO elevated concerns, even though the risk to the program is likely minimal. The order directs the US Attorney General to review state and local climate regulations, including California’s Cap-and-Trade Program, to determine if they are unconstitutional and obstruct US energy use or production by June 7. Legal counsel for managers participating in this market has consistently concluded the EO has no legal basis. The program has also survived court scrutiny, including by the current Supreme Court.

Following the EO, Governor Newsom and bipartisan state legislators have reaffirmed strong support for the CCA program and expressed intent to pass legislation extending it through 2045 this year. CARB has announced plans to implement program tightening soon after. These actions, if realized, would be significant catalysts for CCA prices, providing greater certainty and potentially accelerating the shift to a market deficit.

The upside potential for CCAs relative to the downside risk justifies an allocation, particularly when funded from global equities. For example, if global equity valuations revert to their historical median over three years, the annualized price return would be -8.3%. With CCA prices near the floor, the probability of program termination would need to be at least 20% for the probability-weighted downside to match that of equities reverting to their median valuation. In contrast, if CCAs recover to their prior highs of around $40, the annualized returns would be 14.4% over three years—a scenario requiring global equities to reach record-high valuations. Political risk is inherent in the CCA market and may not suit all investors. Overall, for investors comfortable with the unique risks, CCAs offer a compelling risk-reward profile that can enhance portfolio diversification and return potential.

The post Are California Carbon Allowances an Attractive Investment? appeared first on Cambridge Associates.

• Of the 255 CA clients that responded to the 2024 survey, 157 reported engaging in Sustainable and Impact Investing (SII) (54%). A group of 49 institutions have consistently responded to three consecutive surveys in 2020, 2022, and 2024. From this group, we have seen a steady increase in SII integration from 45% in 2020 to 61% in 2022, and now 69% in 2024.
• The number of respondents to the survey increased by 111 institutions, representing a 77% increase from 2022.
• Religious institutions have the highest SII integration with 93% of respondents. Foundations, cultural/research institutions, and colleges & universities all have most respondents integrating SII with 64%, 61%, and 58%, respectively.
• Institutions that do not engage in sustainable and impact investing mainly cited they were not interested or that their mission is solely addressed via programmatic/philanthropic activities or perceived negative impact on financial performance. However, nearly one-quarter of these institutions anticipate engaging in sustainable and impact investing in the future.

Investment Structure

• The ways in which responding institutions incorporate sustainable and impact investing most often include: developing an Investment Policy Statement (IPS) that integrates SII priorities, principles, and decision criteria; engaging with advisors to implement; and informing their investment managers that SII/ESG is important.
• Approximately 63% of respondents engaged in sustainable and impact investing allocate more than 5% of their portfolio to sustainable and impact investments, with nearly one-third allocating more than 25%. Over the past five years, 78% of the respondents reported they increased their allocation to sustainable and impact investing. Approximately two-thirds of respondents reported plans to increase their allocation to sustainable and impact investing over the next five years.

Implementation Strategies

• Institutions continue to employ a range of strategies to achieve SII objectives, including ESG integration, impact investing, negative screening, and program-related investments. ESG integration remains the most commonly used tool.
• Respondents reported that anti-ESG/DEI sentiment and/or legislation had minimal impact on approach to SII with 93% reporting no effect.

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