EU Climate Benchmarks are less under the spotlight than the EU Taxonomy but play a significant role as it can be a key lever in aligning the investments with long-term sustainability considerations and the transition towards a low-carbon economy.

Many asset managers and investors rely on them as investment monitoring solutions to track their return (passive and smart beta investment strategies) or to define the investment universe and to measure the performance of an investment fund/portfolio (active investment strategy).

Through this article, WeeFin enlightens you on the main EU requirements on Climate Benchmarks.

EU Climate Benchmarks aim to provide more harmonization and clarity on objectives and methodologies

A climate benchmark is an investment benchmark that incorporates specific objectives related to greenhouse gas (GHG) emission reductions and the transition to a low-carbon economy.

The main objectives of the new climate benchmarks are to: 

• Allow a significant level of comparability of climate benchmarks methodologies,
• Provide investors with an appropriate tool that is aligned with their investment strategy,
• Increase transparency on investors’ impact, specifically with regard to climate change and the energy transition,
• Mitigate risk of greenwashing by defining common language amongst benchmark administrators and investors.

These objectives serve a common mission: reorienting capital flows towards sustainable investment.

EU CTB & EU PAB are pursuing similar objectives…

The new EU Regulation defines which criteria have to be implemented by a benchmark that aim at (1) less carbon emissions, or (2) a reduction as required by the Paris agreement, as follows:

• A benchmark is labelled as “EU CTB” where the underlying assets are selected, weighted or excluded in such a manner that the resulting benchmark portfolio is on a decarbonisation trajectory.

• A benchmark is labelled as “EU PAB” where the underlying assets are selected in such a manner that the resulting benchmark portfolio’s GHG emissions are aligned with the long-term global warming target of the Paris Climate Agreement (1.5°C scenario alignment).

Theses climate benchmarks are seeking to address the following objectives:

• Demonstrate a significant decrease in GHG emissions intensity compared to their underlying investment universes or parent indices.
• Be sufficiently exposed to sectors relevant to the fight against climate change.
• Prove their ability to reduce their own GHG emissions intensity on a year-on-year basis.

…but differentiate themselves in terms of restrictiveness and ambition levels

The two benchmarks have slightly different target audiences, with the PAB designed for highly ambitious climate-based investment strategies (as it is aligned with the Paris Agreement’s 1.5°C goal), and the CTB focused more on institutional investors and allowing those investors greater opportunity for diversification.

Moreover, under the recommendations promulgated in the TEG report, six minimum standards have to be met for an investment portfolio to qualify as a CTB or a PAB.

These criteria are as follows:

In conjunction with the proposed EU Taxonomy for sustainable activities, this initiative is further evidence that the European Commission is committed to improving the transparency and comparability of information across benchmarks and to mobilizing capital flows towards a low-carbon transition, although it is currently too early to ascertain whether this commitment will achieve the intended outcome.

EU Climate Benchmarks are less under the spotlight than the EU Taxonomy but play a significant role as it can be a key lever in aligning the investments with long-term sustainability considerations and the transition towards a low-carbon economy.

Many asset managers and investors rely on them as investment monitoring solutions to track their return (passive and smart beta investment strategies) or to define the investment universe and to measure the performance of an investment fund/portfolio (active investment strategy).

Through this article, WeeFin enlightens you on the main EU requirements on Climate Benchmarks.

EU Climate Benchmarks aim to provide more harmonization and clarity on objectives and methodologies

A climate benchmark is an investment benchmark that incorporates specific objectives related to greenhouse gas (GHG) emission reductions and the transition to a low-carbon economy.

The main objectives of the new climate benchmarks are to: 

• Allow a significant level of comparability of climate benchmarks methodologies,
• Provide investors with an appropriate tool that is aligned with their investment strategy,
• Increase transparency on investors’ impact, specifically with regard to climate change and the energy transition,
• Mitigate risk of greenwashing by defining common language amongst benchmark administrators and investors.

These objectives serve a common mission: reorienting capital flows towards sustainable investment.

EU CTB & EU PAB are pursuing similar objectives…

The new EU Regulation defines which criteria have to be implemented by a benchmark that aim at (1) less carbon emissions, or (2) a reduction as required by the Paris agreement, as follows:

• A benchmark is labelled as “EU CTB” where the underlying assets are selected, weighted or excluded in such a manner that the resulting benchmark portfolio is on a decarbonisation trajectory.

• A benchmark is labelled as “EU PAB” where the underlying assets are selected in such a manner that the resulting benchmark portfolio’s GHG emissions are aligned with the long-term global warming target of the Paris Climate Agreement (1.5°C scenario alignment).

Theses climate benchmarks are seeking to address the following objectives:

• Demonstrate a significant decrease in GHG emissions intensity compared to their underlying investment universes or parent indices.
• Be sufficiently exposed to sectors relevant to the fight against climate change.
• Prove their ability to reduce their own GHG emissions intensity on a year-on-year basis.

…but differentiate themselves in terms of restrictiveness and ambition levels

The two benchmarks have slightly different target audiences, with the PAB designed for highly ambitious climate-based investment strategies (as it is aligned with the Paris Agreement’s 1.5°C goal), and the CTB focused more on institutional investors and allowing those investors greater opportunity for diversification.

Moreover, under the recommendations promulgated in the TEG report, six minimum standards have to be met for an investment portfolio to qualify as a CTB or a PAB.

These criteria are as follows:

In conjunction with the proposed EU Taxonomy for sustainable activities, this initiative is further evidence that the European Commission is committed to improving the transparency and comparability of information across benchmarks and to mobilizing capital flows towards a low-carbon transition, although it is currently too early to ascertain whether this commitment will achieve the intended outcome.