The Institutional Investors Group on Climate Change (IIGCC) has issued a set of five principles to evaluate and enhance the quality of net zero benchmarks.
This follows a working group formed last June that engaged with prominent providers, including Bloomberg, FTSE Russell, MSCI, and S&P Global.
The group’s objective was to assess the impact of current European Union regulations and suggest ways to improve the next generation of net zero benchmarks.
The market share of investment vehicles that track a benchmark has grown steadily over the past three decades, according to IIGCC.
As of 31 March 2023, more than 30% of the estimated $15.5 trillion invested in global public market assets are directed to passive strategies tracking a pre-specified benchmark.
IIGCC said, “This, together with the EU’s emphasis on emissions reductions is encouraging. However, to comply with those regulations, net zero benchmarks tend to overweight less-material sectors to climate change: such as communications, technology, and health care to achieve emissions reductions.”
The working group concluded that progress has been made at different paces across asset classes, with equities being the most advanced.
However, it said more work is needed regarding fixed income net zero benchmarks, particularly for sovereign bonds, which have proven to be a challenge for benchmark innovation due to limited integration into net zero investment strategies.Â
While the EU climate benchmarks regulation is seen as a step in the right direction, the working group believes it falls short as benchmarks implementing the regulation tend to comply with emission reduction targets through capital reallocation, rather than promoting actual emissions reductions.
The five recommendations look to promote best practices and encourage benchmarks that drive real-world emissions reductions.Â
The key principles include prioritising real-world emissions reductions; ensuring transparency of benchmark rules and their consequences and incorporating a sectoral and regional based approach.
They also cover prioritising publicly available data and integrating alternative alignment metrics; and facilitating engagement to improve issuer behaviour.
“Many net-zero solutions risk hitting the emissions target whilst missing the impact mark. What matters is not to reduce, on paper, an index’s average carbon footprint, but to unlock capital for companies showing ambition and progress in decarbonisation,” said Iancu Daramus, director of climate-aligned Investing at Fulcrum Asset Management.
He added, “Achieving these real-world outcomes requires transparent data, backed by engagement and reflecting the nuances of sectors and regions.”
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