Half of all funds labelled ‘climate-focused’ don’t measure against a climate benchmark
Melanie May | 11 April 2022 | News
Research by Pensions for Purpose has shown that half of all funds labelled ‘climate-focused’ still don’t measure against a climate benchmark. The new study was conducted with asset managers representing over $32 trillion (£26.7 trillion) in assets.
Instead, 73% of active climate focused funds are benchmarked against the market capitalisation index rather than a climate index, from both a financial and climate impact perspective. A further 19% of active climate focused funds don’t have any benchmark at all.
According to Pensions for Purpose’s research, 142 different climate carbon benchmarks are being used across just 212 funds, with no commonality in the choice of benchmark used. This lack of standardisation makes it harder for investors to compare one fund against the other when making a fund selection decision. The asset managers interviewed for the research had 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.
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| 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 capitalisation | 73% | 19% | 49% |
| No benchmark | 19% | 0% | 10% |
| Climate transition | 5% | 23% | 13% |
| Paris aligned | 3% | 23% | 20% |
| Low carbon | 0% | 17% | 8% |
| Positive impact | 0% | 17% | 8% |
The research also showed the impact on carbon metrics when shifting from Low Carbon to Paris Aligned benchmarks. A pension fund investor could experience an increase in carbon footprint if relying on the same metric to evaluate performance against carbon objectives. For pension funds tracking their carbon footprint year-on-year, the researchers say, this is an important insight as the switch could result in a temporary increase in their portfolio carbon measure.
Karen Shackleton, Chair and Founder, commented:
“We were surprised by the number of climate focused active funds which 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.”
“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?”
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About Melanie May
Melanie May is a journalist and copywriter specialising in writing both for and about the charity and marketing services sectors since 2001. She can be reached via thepurplepim.com.