Climate transition benchmarks have become a focal point for investors looking to integrate climate risks into their portfolios and align them with the climate goals of the Paris Agreement (or "Paris-aligned" benchmarks). This has fueled an active interest among investor groups and regulators to identify criteria that can be used to define such benchmarks. Accordingly, the EU tasked the Technical Expert Group (TEG) to develop recommendations for minimum benchmark requirements that are aligned with the Paris Agreement objectives and address the risk of greenwashing. In this paper, we address the EU’s action plan on sustainable investment:
- We develop a FTSE All-World Paris-aligned Benchmark (PAB) Index that satisfies the TEG report requirements, using the Target Exposure framework, based on the FTSE All-World universe.
- We demonstrate that over the simulation period from 2009-2019, the resulting FTSE All-World PAB Index is able to achieve all the required TEG objectives and examine sources of outperformance over the period.
- We add additional constraints to ensure the resulting index is replicable and assess the effect of individual requirements on index outcomes.
- We show that the Target Exposure framework that underpins our construction approach ensures the FTSE All-World PAB Index achieves the PAB climate transition objectives.