Snapshot to trajectory: how the evaluation of green investments must change

Today we still do not know with precision what truly makes an investment “green.” Sustainable portfolios are almost always built on ESG ratings that are inconsistent with one another and heavily backward-looking. Different agencies assign very different scores to the same company because they measure different parameters using opaque methodologies, often based on questionnaires administered to firms. For this reason as well, the return differential between green and non-green investments is not always significant.

Yet, by using forward-looking indicators based on decarbonization potential, research by Giacomo Bezzi, Mariano Massimiliano Croce, Ruben Fernandez-Fuertes, and Gimede Gigante shows that it is possible to build a portfolio that consistently delivers higher returns. In other words, value lies not in how green a company is today, but in how green it can become tomorrow. This is what the researchers call, in an effective expression, a “decarbonization growth option”: the potential to transform into a sustainable firm and therefore become more highly valued by the market.

Lost in transition

The literature has already shown that ESG ratings are weakly correlated with one another and often based on questionnaires and self-reported data, but some questions remain open, which the research seeks to address:

• Is there a more effective way to assess corporate sustainability, especially in a context of transition?
• And can these new criteria generate value for investors?

In a context where companies are changing, evaluating only current emissions means losing relevant information. A highly polluting company today may have enormous room for improvement; a company that is already “green” may instead have little growth potential. If markets do not distinguish between these situations, capital is allocated inefficiently.

The question then becomes more precise: how can an evaluation system be built that captures the transition path, not just the starting point?

Information asymmetry and returns

The research analyzes data from a fintech firm that uses artificial intelligence to construct indicators of “decarbonization potential.” Unlike traditional ratings, these do not measure the current level of emissions but the distance from a future target and the speed at which the company is moving to reach it.

The dataset used is broad but selective: about 1,300 companies in 30 countries, across the United States and Europe, observed over the period 2019–2023. Information is extracted automatically from corporate documents and transformed into quantitative indicators of “progress-to-target,” that is, progress toward climate goals.

The researchers test these metrics independently using established econometric models and construct long-short portfolios: they invest in companies with the highest scores and short those with the lowest scores.

Portfolios built on the basis of these indicators generate returns that are 9 percent higher annually, net of the main risk factors. By contrast, strategies based on traditional ratings or on improvements in standard ESG scores do not produce statistically significant results.

The effect is particularly strong in Europe and the United Kingdom, where disclosure requirements are more stringent, and in sectors with high transformation intensity, such as chemicals, industry, and capital goods, where the potential for emissions reduction is greater.

To explain these results, the researchers also develop a theoretical model. The key point is information asymmetry: managers know better than investors the decarbonization potential of their firms. A forward-looking scoring system, based on declared and verifiable targets, allows better companies to signal their quality and enables investors to allocate capital more efficiently.

New capital allocation logics

The study suggests that the credibility of a transition strategy matters more than the current snapshot. It is not enough to be “green” today; what matters is demonstrating, with data and verifiable targets, where the company is heading.

For investors, this opens up a new logic of capital allocation, more dynamic and future-oriented. The competitive advantage does not lie in excluding the most polluting firms, but in identifying those that can change more rapidly before the market recognizes their value.

For regulators, the need emerges for standards that incorporate forward-looking dimensions: not only emissions reporting, but also credible disclosure of transition plans. International initiatives are already moving in this direction, but the research suggests that the real leap forward will lie in the ability to measure progress, not just current status.

Giacomo Bezzi, Mariano Massimiliano Croce, Ruben Fernandez-Fuertes e Gimede Gigante, Scoring in the Transition: A Signaling Model of Corporate Decarbonization (October 27, 2025). Available at SSRN. DOI: http://dx.doi.org/10.2139/ssrn.5668232.