This is the so-called “exclusion” strategy, according to the usual taxonomy of sustainable investment.4 The second (the so-called “best-inclass” strategy) would entail overweighting firms that, despite being carbon intensive, have committed to an ambitious and credible decarbonization plan over the coming decades.
The first approach, if applied on a vast scale, would suffer from a fallacy of composition: it would be feasible for the individual intermediary, but not at the aggregate level, short of a “miracle” in the form of a technological breakthrough allowing carbon intensive firms to transition without financial support, or a quick and radical change in households consumption patterns that causes a fall in demand for high carbon products and services.