Climate funds failing to measure against climate indices

19% of active, climate-focused funds use no benchmark and 73% use market capitalisation index rather than a climate index

Half of climate funds are not using a climate index benchmark to measure performance, according to Pensions for Purpose, a group that helps pension funds invest for impact.

The group spoke to 24 asset managers and found 108 active and passive climate-themed funds – 49% of which were not using a climate benchmark. In its report Industry trends in climate indices, Pensions for Purpose found 19% of the active, climate-focused funds were using no benchmark at all and 73% used the market capitalisation index rather than a climate index.

The total sample of funds Pensions for Purpose looked at included a further 104 funds with a broader ESG focus. Within the 212 strong group of funds, 142 different benchmarks or performance targets were being used. Pensions for Purpose said the lack of standardisation makes it harder for investors to compare funds.

Fund benchmark% of active climate focused funds aligned against benchmark for climate impact% of passive climate focused funds aligned against benchmark for climate impact% of all climate focused funds aligned against benchmark for climate impact
Market capitalisation73%19%49%
No benchmark19%0%10%
Climate transition5%23%13%
Paris aligned3%23%20%
Low carbon0%17%8%
Positive impact0%17%8%
Source: Pensions for Purpose

Just two active equity managers and one active bond manager benchmarked their funds with reference to a climate index. Pensions for Purpose said more managers referencing a climate index would raise standards and allow better comparison of funds’ carbon emissions and intensity, even if the universe of investment opportunities remained the parent index.

Karen Shackleton, Pensions for Purpose chair and founder, said: “We were surprised by the number of climate-focused active funds that don’t benchmark themselves against a climate index.

“The question this raises is whether active managers could set a higher bar when considering their carbon footprint, by benchmarking against a climate index rather than comparing themselves with the market capitalisation index, which has much higher carbon metrics, even if they keep the market cap index as the performance benchmark.”

Switching indices

In discussion with BlackRock, Pensions for Purpose heard that a pension fund switching out of a low-carbon index fund into a Paris-aligned benchmark (PAB) index fund could experience an increase in carbon footprint if relying on the same metric to evaluate performance against carbon objectives.

Pensions for Purpose noted measuring performance against carbon objectives is a multi-dimensional exercise for investor portfolios and is sensitive to how carbon footprint is defined in the first place.

“Low-carbon strategies rely on carbon emissions across scope one and two, typically normalised by company sales.

“By contrast, PAB strategies additionally include scope three emissions (those produced from a company’s value chain, upstream and downstream) and are required to use EVIC (enterprise values including cash) instead of sales to normalise these in the case of equities.

Read more:- Amundi moves climate ETFs to track Paris-aligned index

“It is also important to highlight the different objectives of the two strategies: while low-carbon strategies have an objective to minimise portfolio carbon intensity, PAB objectives set specific carbon reduction targets versus the parent index and incorporate a year-on-year reduction which highlights the more forward-looking nature of PAB and its focus on transition,” the report stated.

Shackleton commented: “Overall, it’s important for pension funds to have clarity in their investment beliefs – what is the pension fund trying to achieve? – as well as how success in the fund’s climate action approach will be assessed over time. What comparators, for example, what benchmarks, will be used to make that assessment?”