Industry trends in climate indices – Pensions for Purpose

Research undertaken by Pensions for Purpose on the different types of climate indices used by asset managers and when pension funds may consider using different benchmarks.

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Karen Shackleton and Lewis Kilbride of Pensions for Purpose spoke with 24 leading asset managers offering climate-focused funds to UK pension schemes. Some of the key findings concluded:

  • These managers had a total of 108 different climate-themed funds on offer with a further 104 that had a broader ESG thematic approach. Within these 212 funds there were 142 different benchmarks or performance targets being used.
  • Climate indices can be broadly grouped into low carbon, climate transition, Paris-aligned or positive impact indices. We give suggestions as to when these types of indices might be most suitable for a pension fund.
  • There is a lack of commonality in the choice of climate benchmarks and mixed views on whether there will be a move towards consensus benchmarks or a shift towards more tailored benchmarks designed to meet pension funds’ specific climate goals.
  • Pension funds should be clear about their goals when shifting from one passive strategy to another. There may be some unexpected carbon metrics arising from this.
  • Active managers rarely reference climate indices in their funds. Only two active equity managers and one active bond manager benchmarked their funds with reference to a climate index. We set out the arguments given by active managers as to the limitations of climate indices but question whether they could raise the bar if they switched to these for the purpose of comparing carbon emissions and intensity, even if the universe of investment opportunities remained the parent index.

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