Climate Transition and Paris-Aligned Benchmarks: differences and similarities
The EU Action Plan put the wheels in motion to turn temperature modelling into legislation. These changes have far-reaching implications for investors and the future of transition to a low-carbon economy.
EU Climate Transition and Paris-Aligned Benchmarks
There are two types of benchmark index for investors to either start a decarbonisation transition or immediately align with the goals of Paris.
These benchmarks are the Climate-Transition Benchmark (CTB) and the Paris-Aligned Benchmark (PAB).
CTB benchmarks place a portfolio on a “decarbonisation trajectory” – an incremental pathway towards a reduced carbon impact.
PAB benchmarks go one step further in this ambition, putting portfolios immediately in line with where they need to be in 2030: a 50% reduction in the carbon intensity, and outright exclusion of fossil-related activities. This is the key intermediate step to carbon neutrality in 2050. It also creates an additional buffer to secure the attainment of the Paris Agreement goals.
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CTB and PAB have similar goals. However, there are some differences between the pace and scope of the implementation of the two benchmarks.
For the first time, policymakers are using the passive management industry as a tool for shifting capital.
Investment indices, with their transparent and standardised investing method, are well suited to rules-based climate objectives.
Source: Lyxor International Asset Management, EU Delegated Acts as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-Aligned Benchmarks, July 2020. *EU 6 Objectives (Taxonomy): 1) Climate change mitigation, 2) Climate change adaptation, 3) Sustainable use and protection of water and marine resources, 4) Transition to a circular economy, 5) Pollution prevention and control, 6) Protection and restoration of biodiversity and ecosystems **As defined under the European NACE sector classification system.
Minimum requirements
EU CTB
EU PAB
Carbon intensity reduction Scope 1 + 2 and (+ 3 for Oil &Gas and Mining) (+ Scope 3 for every sector within a 4Y phase-in period)
-30%
-50%
Baseline exclusions (by 31 December 2022 for CTB)
- Controversial weapons - Tobacco producers/cultivators - 6 Environmental Objectives (EU Taxonomy), "Do no significant harm" * - Societal norms violators: • UN Global Compact • OECD Guidelines for Multinational Enterprises
Fossil fuel-related activity exclusions
No
Coal (>1% revenues) Oil (>10%) Natural gas/gaseous hydro-carbons (>50%) Electricity production (>100gCO2/kWh)
Decarbonisation trajectory
Minimum 7% per annum
Exposure to carbon-intensive sectors**
At least collectively equal to parent index (no underweight)
Bonus for Science Based Targets
Index administrators shall consider increasing the weights of companies that set approved SBTs