Enhancing the Paris-aware global bond index

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.

1. Sectors that can already be included in climate-aware benchmarks given data availability
   Our analysis suggests that some quick wins can be made in extending the climate-aware benchmark. A careful review of available data for global issuers represented in the Institutional Shareholder Services (ISS) and the EU Emissions Database for Global Atmospheric Research (EDGAR) emissions databases shows that some government-related sectors already have emissions data, and could therefore be included in the Paris-aware index. We believe this expansion would add about USD 6 trillion of securities to the investable universe.
   
   
2. Further data disclosure and standardization needed on an industry level 
   After these proposed inclusions, about 18% of the traditional global aggregate bond universe, or about USD 12 trillion of securities, still has no industry-standard carbon footprint data. This segment consists of securitized issuers (13%) and those government-related issuers (5%) not addressed by the new coverage ideas outlined above. It seems there is more data work to be done at an industry level in order to fill these remaining gaps. 
   
   For example, in the local authorities sector, which represents about 2.9% of the aggregate index, there are a number of cities, regions and provincial issuers with emissions data, but which are provided by different country or agency databases. However, these databases have two notable shortcomings: most of the information dates from two to three years ago, while it is not clear whether the methodology used conforms with the UN’s IPCC classification system. Until there is more reliable data and emissions disclosures from these issuers, we would argue these segments of the market should not be included in a Paris-aware index.  
     
   Encouragingly, there is a growing emphasis on climate risks in the research provided by credit-rating agencies. This is visible in, among others, thematic studies such as the release of S&P climate risk models for asset classes like CMBS, to mitigate climate risk. 
   
   
3. Trade associations could encourage increased reporting disclosure
   Several trade and industry associations already provide methodologies and frameworks for data disclosures. The International Capital Market Association’s (ICMA) handbook, “Harmonized framework for impact reporting”, recommends reporting metrics for buildings. These currently do not include carbon intensity. While there are scores for many financial structurers that use the ISS data for banks and financial institutions, work is needed to create more transparency and reflect the carbon emission of the underlying assets in covered bonds. Unless there is disclosure of asset-level carbon footprint, it would be inaccurate to use the bank scores.
    
4. Financial institutions could incorporate more standardized carbon accounting and data constraints 
   As banks are increasingly measuring the carbon intensity of their loan books, we expect more detailed disclosure of such data going forward. Certain European asset managers use the methodology of the Platform for Carbon Accounting Financials (PCAF) to calculate the carbon emission of their mortgage portfolios, commercial real estate investments and auto loans. However, as there are data availability issues in certain countries, the methodology provides a framework for estimations and to encourage further measures to obtain data. 
   
   As more asset owners globally use similar methodologies and disclosure standards, such as PCAF, data accuracy will improve – but the process will take time. We believe there will be a growing need for further climate data analytics, particularly as investor scrutiny intensifies in the drive to bring the financial sector on board in mitigating climate change and moving towards net zero goals. 

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’.