Climate transition benchmarks
Climate transition benchmarks are indices of equities or corporate bonds which aim to assist in meeting the decarbonization objectives set by the European Union’s Sustainable Finance Action Plan. They aim to promote sustainable investment in companies that are helping to combat global warming, principally by cutting greenhouse gas emissions.
The EU defines a climate transition benchmark as one “where the underlying assets are selected, weighted or excluded in such a manner that the resulting benchmark portfolio is on a decarbonization trajectory and is also constructed in accordance with the minimum standards laid down in the delegated acts”.
Index providers who wish to offer one must meet the standards of the EU Benchmarks Regulation, which was updated in 2020 to provide a framework for climate-specific indices against which the performance of investment strategies could be judged. This led to the creation of the EU Climate Transition Benchmark and the EU Paris-Aligned Benchmark. These pursue similar objectives but vary in their level of ambition.
A Climate Transition Benchmark incorporates specific objectives related to emission reductions and the transition to a low-carbon economy (based on the scientific evidence of the Intergovernmental Panel on Climate Change) through the selection and weighting of underlying constituents. At least a 30% reduction in carbon versus the investable universe is required, followed by a 7% year-on-year decarbonization trajectory.
A Paris-Aligned Benchmark is specifically aligned to the Paris Agreement goals that seeks 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. This includes a more ambitious 50% reduction in carbon versus the investable universe, followed by 7% decarbonization annually. Constituents should therefore be on track to be able to do this through their decarbonization efforts.
As there was no global benchmark for climate bonds, Robeco created a Paris Aligned Benchmark in conjunction with Solactive, a German provider of financial indices. These are the indices against which the performance of the Robeco Climate Global Fixed Income strategy is measured, rather than the usual benchmarks used for credit strategies, such as the Bloomberg Barclays Global Aggregate (corporate) Index.