How can the new Paris-Aligned benchmarks contribute to the fight against climate change?
Adopted in 2015, the landmark Paris Agreement’s objective was to limit global warming to well below 2°C and pursue efforts to limit to 1.5°C above pre-industrial levels. The objective sets out a 50% reduction in greenhouse gas emissions by 2030, in order to reach ‘net zero’ by 2050.
In 2019, the European Commission set out proposals for two crucial benchmarks to help investors support the goals of the Paris Agreement. The EU Climate Transition Benchmarks (CTB) are designed to help investors decarbonise their portfolios and transition to a low-carbon economy. The EU Paris-Aligned Benchmarks (PAB), meanwhile, aim for higher reductions in emissions intensity in line with the long-term objectives of the Paris Agreement. While both benchmarks target an equal carbon footprint level by 2050, they differ in their carbon intensity reduction. CTB indices must have immediately a 30% carbon intensity reduction, while PAB must have a 50% reduction. Furthermore, the latter exclude companies heavily involved in certain activities such as oil, coal and natural gas exploration, while CTB benchmarks can still include the energy sector.
What are the specific benefits of harnessing this innovation in a passive investment approach?
The climate issue represents an emergency for which we must act quickly by rapidly shifting trillions in favour of investments countering climate change. Thanks to significant work in ESG data development, indices and ETFs allow all kinds of investor to immediately implement this change, and today they are among the most advanced players in this field. To shift capital faster, it is necessary to share scalable solutions with the largest possible number of investors. We believe index-tracking ETFs represent the ideal vehicle to reach this goal.
Paris-Aligned and Climate Transition indices can reflect all sorts of climate policies and make them accessible to investors at a low cost through ETFs. Thanks to the improvement in data quality and increasingly robust carbon disclosure frameworks adopted by thousands of companies around the world, indices today can be built to reflect specific decarbonisation and temperature pathways, and facilitate investment in a transparent, low-cost and rules-based way – which are vital considerations for investors looking to generate sustainable performance through time.
Passive vehicles are extremely transparent. We share our proprietary methodology for ESG and carbon footprint analysis publicly, allowing investors to monitor and measure their portfolios’ carbon footprint. ETFs and index funds also invest in publicly-listed assets rather than private ones, which means higher liquidity, giving investors the means to mobilise larger amounts of capital.
How does Lyxor’s “ecosystem” of ETFs help in the fight against climate change?
Lyxor has been pioneering socially responsible investing for more than a decade, and in 2020, it became the world’s first ETF provider to launch an ecosystem of ETFs specifically designed to counter climate change, with a range of equity ETFs meeting the requirements of both the Paris-Aligned and the Climate Transition Benchmarks.
This ecosystem launched in March 2020 with a suite of ETFs that track MSCI’s Climate Change indices, which take into consideration the main objectives of the European Union's regulations on CTB investment benchmarks as part of the EU “Action Plan on Financing Sustainable Growth”.
This was expanded in July with the S&P Paris-Aligned Climate ETF range, that focuses on large and mid-cap stocks within global, US, European, and Eurozone equity markets. These ETFs are designed to meet and exceed the EU PAB minimum requirements and will be adjusted according to the final characteristics set out in the EU delegated acts later this year if appropriate.
Alongside the world’s first Green Bond ETF launched in 2017, which recently crossed the USD 400 million milestone, Lyxor now offers an unparalleled range of low cost climate solutions designed to help investors transition to a greener, low carbon future.
