For investors to realize their climate ambitions, a structural shift in investment funds and benchmarks is needed. This process is well under way and includes important initiatives such as the EU benchmarks regulation, which defines the characteristics of a Paris-aligned benchmark. Importantly, though, the regulation covers only corporates, and has no guidelines and requirements for sovereigns. Consequently, in cooperation with Solactive, Robeco in 2020 created a Paris-aware benchmark2 for use in global fixed income investing. The performance and carbon intensity of the Robeco Climate Global Bond strategy, which was launched in December 2020, is measured against this index.
This innovative benchmark has moved climate-aware global bond investing from being a frontier activity towards the institutional mainstream. The Paris-aware Solactive Climate Global Aggregate Bond index reflects CO2 emissions for the government (treasury) and corporate sectors of the traditional global aggregate universe. It therefore covers the majority – about 72% – of the traditional global aggregate universe.
The focus now falls on finding ways to cover the remaining 28% of the global aggregate universe, equivalent to USD 18 trillion in securities – from a climate perspective.
There are two data sources for the Paris-aware benchmark. For corporates, ISS data for Scope 1, 2 and 3 emissions are used. For countries, CO2 emissions data (metric ton per capita) is taken from the European Commission’s EDGAR database.
We recognize some of the data shortcomings. For instance, climate data generally is backward looking, with most data being around two years old. Other considerations are the limited data availability in certain sectors, differences in modeling and methodology by different providers, and lack of visibility of carbon risk due to financial structures. However, these pitfalls should not deter us from continuing to improve our climate solutions. Besides, we believe that many of these issues can be resolved through good research.
With accelerating interest in climate investing, we expect that the asset management industry will support efforts to improve the availability of emissions data, scores and measurement techniques.
We have four recommendations for furthering the evolution of global fixed income Paris-aware benchmarking.
1This article is a shortened version of a paper entitled “Enhancing the Paris-aware global bond index”.
2The EU benchmark regulation defines Paris-aligned indices with reference only to assets issued by companies – and not by sovereigns. Strictly speaking, then, a benchmark which includes government bonds should not be described as being Paris aligned, hence the term ‘Paris-aware benchmark’.