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Aligning index-linked investing with the ‘Paris’ goals

Investment strategy

Isabelle BOURCIER
 

More and more, investors in index-linked strategies are looking for portfolios of companies reducing their carbon footprint and avoiding companies with fossil fuel revenues or production. In accordance with EU aims for sustainable finance, strategies are now being adjusted to two new indices that are aligned with the ‘Paris’ goals. Isabelle Bourcier explains.*

First, let’s look at the European Union’s role in promoting the fight against global warming

The EU’s has set a goal for carbon neutrality by 2050 and it is about to enshrine this into law. In addition, there are three medium-term objectives that the EU aims to ratchet up so that they reflect the new ambitions (in brackets the proposed new targets):

  • A 40% reduction in greenhouse gas emissions in Europe compared to their 1990 level (50%)
  • An increase in the share of renewable energy to at least 32% (40%)
  • An improvement in energy efficiency of 32.5%. (40%)

To achieve this would require between EUR 175 billion and EUR 290 billion per year. The public and private sectors must therefore be mobilised, including the financial sector.

The Technical Experts Group on Sustainable Finance[1] set up by the European Commission in 2018 presented new proposals in March 2020. They related in particular to the EU sustainable taxonomy and the creation of two new indices that are aligned with the objectives of the Paris agreement and EU´s carbon neutrality goal and help deal with the risk of greenwashing.

What are the characteristics of the new indices?

The Climate Transition Benchmark and the Paris Aligned Benchmark are pursuing a similar objective. However, the PAB is designed for more ambitious investment strategies and has stricter fossil fuel related exclusions. The CTB aims to reduce the carbon footprint by around 30% relative to its investment universe and the PAB by 50%.

Both provide for a mechanism to reduce the portfolio’s carbon footprint further, by at least 7% a year. This is in line with the IPCC’s[2] 1.5-degree trajectory, and in turn in line with the EU’s carbon neutrality goal.

To do this, the definition of the indices assumes keeping an exposure to sectors that are highly exposed to climate change at least equal to that of the reference universe.

How will BNP Paribas Asset Management’s index strategies comply?

The Low Carbon 100 Europe index is the benchmark of a BNPP AM index-tracking strategy and as Euronext works to bring the index into line with the requirements of the PAB, together with CDP[3] and Carbone 4, this will ensure our LC 100 strategy is compliant.

The carbon footprint of the LC 100 index was already at around 50% of that of its investment universe. Furthermore, it already included the three scopes[4] and exclusions related to fossil fuels[5] in its methodology.

This is now being modified to take into account the above-mentioned target of an annual reduction in the carbon footprint of 7%.

How do the efforts on the PAB fit with our overall stance on sustainable investing?

BNP Paribas Asset Management has a long-standing commitment to environmental themes and more generally to ESG[6] investing.

For several years, we have taken into account the wishes of clients to invest in index-linked strategies that reduce the carbon footprint of portfolios and/or are not exposed to companies whose revenues or production are derived primarily from fossil fuels.

Many investors have said they want to disinvest from fossil fuels and specifically coal.

As we work to integrate ESG criteria fully into our range, it will be aligned more and more with investor requirements.

*This article is based on an interview with Isabelle Bourcier, head of quantitative and index management, published on www.optionfinance.fr


 

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this article do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

[1] On the TEG, BNP Paribas Asset Management is represented by Helena Viñes Fiestas; for more, see https://ec.europa.eu/info/publications/sustainable-finance-technical-expert-group_en

[2] IPCC: Intergovernmental Panel on Climate Change

[3] CDP is a non-profit international organisation, formerly known as the Carbon Disclosure Project

[4] The GHG Protocol Corporate Standard classifies a company’s greenhouse gas emissions into three ‘scopes’. Scope 1 concerns are direct emissions from owned or controlled sources. Scope 2 involves indirect emissions from the generation of purchased energy. Scope 3 covers all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.

[5] The companies involved in the following activities are excluded from the index: Companies with fossil fuel reserves; Companies searching, collecting, treating, refining or transporting coal, oil or gas; Utilities that use fossil fuels to produce electricity. Source: Euronext

[6] ESG: investing on the basis of environment, social and governance criteria

On the same subject:

Investments in the aforementioned fund are subject to market fluctuation and risks inherent in investing in securities. The value of investments and the revenue they generate can increase or decrease and it is possible that investors will not recover their initial investment. Source: BNP Paribas Asset Management.

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