Nearly a third of debt capital is invested through passive products, thus the potential impact of transitioning these portfolios is huge. Introduced in 2019 by the European Union (EU), the Paris-Aligned (PAB) and Climate Transition Benchmarks (CTB) labels set clear parameters for aligning passive investments with global climate goals.
Equities have so far attracted the lion’s share of PAB/CTB product offerings with most fixed-income flows driven by euro corporate bonds. Growth beyond this narrow focus is needed if passive fixed income is to achieve climate alignment on a global scale. To support the development of climate-aligned products in the fixed income space, we examine four examples of PAB Exchange Traded Funds (ETFs).
In this piece, we consider the challenges and opportunities that they present to investors. We find that complex benchmark construction is needed to meet these requirements, leaving investors with significant sector biases and a lack of transparency around the security selection and weighting process.
While PABs boost indices’ comparability and standardisation, investors should also be aware of the substantial implementation differences we find across providers. It is the case that PAB investment products deliver substantial climate enhancement without compromising performance. However, we suggest that “best-in-class” climate strategies are simpler to implement and potentially deliver similar climate outcomes.