EU Paris-Aligned and Climate Transition-Benchmarks: A Case Study

Abstract

This article presents the results of a study examining the construction of Paris-aligned Benchmarks (PAB) and Climate Transition Benchmarks (CTB). Such portfolios are intended to satisfy the requirements for EU Paris-aligned and Climate Transition Benchmarks as laid out by the EU Commission Delegated Regulation of July 12, 2020, adopting the findings from <i>EU Technical Expert Group Report on Climate Transition and Paris Aligned Benchmarks</i> (TEG Report). We construct these portfolios using the tilt-based exposure targeting framework over the 10-year period between 2009 and 2019. The simulated results show that the proposed method is able to construct portfolios that satisfy all the requirements set out in the delegated regulation, including the requirements on emissions, exclusions, and sector constraints, in addition to incorporating forward-looking Transition Pathway Initiative (TPI) metrics. The requirements are also exceeded through increasing exposure to green economy sectors using green revenues data. <b>TOPICS:</b>ESG investing, information providers/credit ratings, portfolio construction, performance measurement <b>Key Findings</b> ▪ EU minimum requirements on Paris-aligned and Climate Transition Benchmarks are achievable and can be specified as feasible benchmark and portfolio construction objectives. ▪ A tilt based exposure targeting framework is a suitable option for constructing a portfolio that meets the PAB or CTB requirements. ▪ Forward-looking climate objectives using TPI metrics complement reported historic emission-based measures, prioritize allocations to companies that align their business models with international climate goals, and can reinforce investor-corporate engagement.