Since 2019, Paris Aligned Benchmarks (PABs) have been present within financial markets with a primary goal to assist in the transition towards a low carbon economy. This is done by reallocating capital towards more sustainable solutions wherein constituent companies within the PAB indices are selected and weighted to ensure that they collectively keep a decarbonisation trajectory in line with the Paris Agreement (seeking to retain global temperature rise to 1.5°C above pre-industrial levels).
Up until 2019, no robust standard or benchmark existed to ensure the alignment of portfolios against the goals of the Paris Agreement. The European Union benchmarks’ regulation therefore responded to this need by defining the PABs, a ready-to-use alternative for asset allocation intended to investors who wish to adopt a climate-conscious investment strategy.
What are the benefits and objectives of the Paris Aligned Benchmarks?
The primary benefit of PABs is their unique ability in providing investors with a designated tool that allows for the measurement of the decarbonising efforts of an investment strategy. In effect, the PAB standards support investors to mitigate climate risk and to prevent greenwashing thanks to robust nature of their methodology.
The PABs are the more ambitious of the two climate benchmarks introduced by the European Commission (EU Climate Transition Benchmark and the EU PAB), aiming to reduce carbon intensity by 50% compared to the initial investment universe, as well as setting a minimum annual carbon intensity reduction of 7%, and also a minimum exposure to high climate impact sectors (to retain the companies showing the best decarbonisation efforts in these sectors).
How has BNP Paribas used the PABs and how do they behave?
The PAB standards are sufficiently flexible and can be integrated into previous non-PAB solutions. They can also be combined with other financial and sustainable requirements, especially those that integrate a quantitative approach. For example, an investor can elect to commit their portfolio to the PAB standards, ensuring that they are compliant with key sustainability labels on the market, such as the Febelfin “Towards Sustainability” label. An example of this being done was in December 2021, when BNP Paribas integrated the PAB standards into its flagship socially responsible investing fund, while keeping the control of various dimensions of risk, namely to ensure a limited tracking error (divergence of price behaviour) compared to a standard market benchmark.
Although PABs aim to relay a close representation of the market, when taken from a sectoral point of view for example, they can have marginal overweight into less polluting activities such as Information Technology, Healthcare and Financials. In the more carbon-heavy sectors such as the utility and energy sector, there is typically a lower allocation within the sectors that are more focused on “greener” technologies or energies. This may mean that PABs underperform standard market benchmarks during for instance, a period of high oil prices, as conventional energy companies may get record profits.
As the bank for a changing world, BNP Paribas fully supports its clients to embrace new business models and strategies in their pathways to a net-zero economy. BNP Paribas has defined financing the energy transition as its top environmental responsibility priority. Investing in transition technologies and supporting innovation is an important compass across the finance industry, and will be a key lever across the whole economy to enable the path to net-zero.