New net-zero benchmark principles
Source: Middle East Insurance Review | Jul 2023
The Institutional Investors Group on Climate Change (IIGCC) has released a new report outlining how index providers can enhance net-zero benchmarks.
The new 31-page report Enhancing the quality of net zero benchmarks released in May 2023 puts out five core benchmarking principles based on the findings of more than 30 investors. IIGCC is an alliance of over 400 asset owners and managers focused on climate change.
The five core benchmarking principles include:
- prioritise real-world emissions reductions
- ensure benchmark rules and their implications are transparent
- incorporate a sectoral and regional approach
- prioritise public data and integrate alternative alignment metrics and
- facilitate engagement to improve issuer behaviour.
The report said, “Investors are increasingly committed to aligning their portfolios with a net zero target. Meanwhile, a significant portion of capital traded in the public markets is increasingly being allocated to strategies that track or seek to outperform a given benchmark.
“To ensure that more capital is in alignment with net zero targets, passive and active investors will benefit from sound net zero benchmarks that balance the need to incentivise real world emission reductions, whilst also reflecting the investable universe of traditional benchmarks to allow for greater adoption.”
The working group that developed the guidance report said it is intended to be implemented across asset classes and should be viewed as best practice to improve real-world decarbonisation. However, investors and index providers should be cautious of different nuances between asset classes, specifically as they relate to exclusions and engagement.
The report said net-zero benchmarks vary in their maturity across asset classes. For example, those for equities are the most advanced, while those related to fixed income, particularly for sovereign bonds, need improvement. M