As attention turns to the COP26 Climate Change Conference, the urgency of the climate crisis has never been more palpable. Years of unsustainable practices have brought our planet to breaking point. For investors committed to a sustainable future, here we look at the progress of the Benchmarks Regulation in directing passive assets to address climate change.
In 2018 the European Commission published its “Action Plan on Sustainable Finance¹”. As part of this programme, two new categories of benchmark emerged under the Benchmarks Regulation² – Climate Transition Benchmarks (CTB) and Paris-aligned Benchmarks (PAB). The establishment of these categories of benchmark within the EU regulation acknowledged the importance of re-directing passively invested assets towards tackling the climate emergency. The CTB and PAB must comply with strict minimum requirements to achieve their climate objectives. Both types of index require the exclusion of companies that have a negative impact on key environmental aspects, such as climate change, pollution, marine protection and biodiversity, as well as companies that are involved in controversial weapons.
Beyond this, the primary difference is in the indices’ respective levels of climate intensity. The PAB integrates a more stringent carbon footprint reduction and a more restricted investment universe than the CTB. It has now been a year since the launch of CTB and PAB funds. The question is, how successful have they been in meeting their decarbonisation objectives compared to their parent index?
Amundi launched a range of CTB and PAB ETFs in 2020. In assessing their impact, we look at the two Amundi climate ETFs that have attracted the most investor interest; these ETFs offer global equity exposure, tracking the MSCI World Climate Change Paris Aligned Select index and the MSCI World Climate Change CTB Select index. The primary areas we look at based on the requirements of the benchmarks are the index carbon emissions and the index carbon intensity where we see a marked reduction versus the parent index.
Investors have many reasons to choose climate ETFs – and for this reason, we believe it is important to offer a range of solutions to meet different needs. For example, for some investors, their priority could be managing climate-related risks such as stranded assets. From that perspective, the data in the chart above demonstrates a clear reduction in exposure to companies that play a role in increasing fossil fuel and carbon emissions and may suffer premature write-downs or devaluations as we move from fossil-fuel led
power to climate-friendly solutions.
Another reason for investing in climate may be an investor’s belief in exposure to innovative sectors with long-term potential. The CTB and PAB indices have greater exposure to clean technology solutions. These indices provide a more comprehensive approach for index investors to introduce climate investing into their portfolios. Since Amundi became one of the first asset managers to launch a PABaligned ETF in 2020, we have seen strong demand from ETF investors who now have the choice of almost 50 different low carbon, fossil fuel free or climate change ETFs. Amundi now offers a range of PAB and CTB ETFs covering equity and fixed income and a range of geographical exposures.
To learn more visit:
https://www.amundietf.co.uk/professional/
Investing-in-ETF/Climate-Investing
1) Source: European Commission https://ec.europa.eu/info/
publications/sustainable-finance-renewed-strategy_en, March
2018
2) Source: ESMA https://www.esma.europa.eu/policy-rules/
benchmarks
