Understanding Paris-Aligned Indexes: A Guide for Fixed Income Investors

EU Paris-Aligned Benchmarks (PABs) and Climate Transition Benchmarks (CTBs) are investment benchmarks that incorporate specific objectives aimed at the reduction of Greenhouse Gases (GHG) emissions and the transition to a lower-carbon economy. They were first introduced in 2019 as tools to accompany the transition to a low-carbon economy by the Technical Expert Group of the European Commission (TEG). The recommendations in the TEG Report for PABs and CTBs was then incorporated into the EU Low Carbon Benchmark Regulation in December 2020.

Both PABs and CTBs seek to facilitate investor integration of the objectives set out in the 2015 Paris Agreement into practical capital allocation plans and investment strategies that are environmentally sustainable and inclusive. Importantly, they strive to promote decarbonisation in the real world and facilitate the low-carbon transition to keep the temperature rise well below the 2°C above the pre-industrial levels, and pursue efforts to limit the temperature rise to below 1.5°C.

The benchmarks help investors who have decarbonisation goals by providing them with a standardized framework for assessing and comparing how well their portfolios align with the goals of the Paris Agreement and climate-related risks, and identify investment options that demonstrate a lower carbon footprint. By considering the carbon exposure of their investments, investors can identify companies or sectors that may be more vulnerable to physical risks, regulatory changes, or market shifts related to the transition to a low-carbon economy. This information allows investors to make more informed decisions and adjust their portfolios accordingly. Investors who have decarbonisation goals can use the benchmarks as a tool to engage with portfolio companies, encouraging them to improve their climate-related disclosures, reduce emissions, and transition to more sustainable business practices.

However, we believe it is also important that investors are mindful of the holistic sustainability approach of their portfolios and benchmarks, making it critical to understand the nuances of their structure as well as have the data and proxies to perform their own analysis and monitoring of their investments.