Paris-aligned benchmarks are indices whose constituent companies are aligned with the Paris Agreement, which sees to limit the rise in global temperatures to well below 2°C above pre-industrial levels, and to pursue efforts to keep the rise to 1.5°C.
According to the EU this implies the creation of a benchmark “where the underlying assets are selected in such a manner that the resulting benchmark portfolio's [greenhouse gas] emissions are aligned with the long-term global warming target of the Paris Agreement and is also constructed in accordance with the minimum standards laid down in the delegated acts”.
Until 2020, no such benchmark existed for measuring the performance of investment strategies against the goals of the Paris Agreement. The EU Benchmarks Regulation responds to this need by defining the Paris-aligned Benchmark. Robeco innovated in this area by working with Solactive to create Paris-aligned Benchmarks for fixed income investing – for corporate credits and aggregate bonds. These are the indices against which the performance of the Robeco Climate Global Fixed Income strategies is measured.
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The indices are structured along the following principles:
For corporate bonds:
A process of year-on-year decarbonization is reflected, equaling at least 7% on average per annum, based on the Scope 1, 2 and 3 emissions.
All industries except fossil fuels are included, and sector weights are kept close to the broader market index.
Emissions are normalized by the total capital of issuers, measured in terms of book values.
For sovereign bonds:
A process of year-on-year decarbonization is reflected, equaling at least 7% on average per annum.
Decarbonization of the index will be achieved through decarbonization at country level, as well as by adjusting the weights of individual sovereigns to establish a -7% annual trajectory at index level.
Country emissions will be normalized by the population size, measured in terms of CO2 emissions per capita.
Despite these carbon-related constraints, Robeco finds that the index characteristics mimic those of the general market over time. The behavior and yield characteristics of the Paris-aligned indices are very similar to those of their equivalent generic indices, with the important difference being that the Paris-aligned indices have a much lower carbon footprint.