Nearly half of all 'climate-focused' funds not measured against climate benchmark

Almost half (49 per cent) of funds marked as 'climate-focused' do not use a climate index benchmark, according to analysis from Pensions for Purpose, with 73 per cent of active climate-focused funds instead benchmarked against the market capitalisation index.

The research found that almost all (92 per cent) active managers were not using climate indices to benchmark their carbon metrics, despite funds being labelled as ‘climate-focused’, with 19 per cent of active climate-focused funds not using any benchmark at all.

Just 5 per cent of active climate-focused funds were aligned against a climate transition benchmark, and 3 per cent against a Paris-aligned benchmark.

It also showed that 142 different climate carbon benchmarks are being used across just 212 funds, with no commonality in the choice of benchmark used, making it harder for investors to compare on fund against another when making fund selection decisions.

Asset managers were found to be divided as to whether there will be a move towards consensus benchmarks or a shift towards more tailored benchmarks designed to meet pension funds’ specific climate goals.

In addition to this, the research revealed the "unexpected impact" on carbon metrics when shifting from low carbon to Paris-aligned benchmarks, suggesting that a pension fund investor could experience an increase in carbon footprint if relying on the same metric to evaluate performance against carbon objectives.

Meanwhile, 23 per cent of passive climate-focused funds were aligned against a climate transition benchmark, 23 per cent were aligned against a Paris-aligned benchmark, 17 per cent against a low-carbon or positive-impact benchmark.

Almost a fifth (19 per cent) of passive climate-focused funds were aligned against the market capitalisation index.

In light of the findings, Pensions for Purpose raised concerns that active asset managers could be opting for an ‘easy life’, with chair and founder, Karen Shackleton, stating that the group was surprised by the number of climate-focused active funds which do not 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,” she continued.

“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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