Climate benchmarks | Insight Investment

For investment strategies targeting climate outcomes alongside traditional investment objectives, selecting an appropriate benchmark is a key consideration. While a regulatory push towards standardisation is expected to have some effect over time, bespoke climate transition benchmarks may better reflect investors’ specific objectives.

1. Climate-focused investors are under growing pressure to measure emissions reductions relative to a climate (rather than broad market) benchmark

• European authorities have clarified that passive funds classified as Article 9 under the EU SFDR with a climate objective are not able to replicate a broad market benchmark, but must instead track a Paris-aligned or climate transition benchmark

2. Climate benchmarks present practical challenges and costs for investors – and do not necessarily reduce real-world emissions

• Climate benchmarks are complex, exhibit significant turnover, and can still fail to drive emissions reductions in the real economy
• Paris-aligned benchmarks may constrain opportunities to drive, and profit from the carbon transition
• Decarbonisation targets may be easier to deliver against broad market indices
• While climate benchmarks imply a linear decarbonisation trajectory, active management allows deviation from the benchmark in pursuit of long-term investment objectives

3. Bespoke climate transition benchmarks can support management of emerging climate risks in line with investor objectives, while capitalising on opportunities from the low-carbon transition

• In our view, for a benchmark to effectively support the low-carbon transition, it should be balanced between some exclusions of the worst performers, allocations to investments that can demonstrate positive forward momentum on climate performance (climate improvers), and allocations to specific climate solutions – either through green bonds or through investments in companies with a high share of low-carbon research and development investment.