Report on investing for transition benchmarks

The Platform on Sustainable Finance has published a report on Investing for Transition Benchmarks (the “Report”) proposing two voluntary benchmark labels. The Report sheds light on the potential role of the EU Taxonomy when it comes to transition finance as well as to shaping climate and environmental benchmarks.

The proposed voluntary benchmark labels are:

• ITBex: Investing for transition benchmarks with exclusions, characterized by ambitious climate strategies and strict activity exclusion requirements, and
• ITB: Investing for transition benchmarks without exclusions, characterized by greater diversification to allow for, among others, business relations with fossil fuel issuers.

In general, an investing for transition benchmark is an investment benchmark incorporating specific objectives relating to greening of capital expenditures (CapEx), greenhouse gas (GHG) emission reductions and transition to low-carbon economy by selecting and weighting underlying constituents:

“the proposal is for a benchmark to be labelled as an Investing for Transition Benchmark where the underlying assets are selected, weighted or excluded in such a manner that the resulting benchmark portfolio is on an upwards environmentally sustainable capital expenditure trajectory, while the non-environmentally sustainable capital expenditure proportion is on a decarbonisation trajectory.”

The proposed benchmarks are inspired by the EU Paris-aligned benchmarks (PAB) and climate transition benchmarks (CTBs) which have been key players in pushing low-carbon transition in financial markets. They will primarily be relevant for institutional investors working towards protecting their assets against investment risks regarding transition to a low-carbon economy as well as climate changes. By using the proposed benchmarks, investors intend not only to mitigate climate transition risks but do also intend to direct investments towards solutions relating to energy transition.

The benchmarks are relevant as, among other things, an engagement tool and an investment performance benchmark for GHG emission-related strategies. The Platform on Sustainable Finance acknowledges, however, in their report that particularly data availability, especially on green CapEx outside Europe, will be a challenge some years ahead.

The main purpose with publishing the report is to support development of innovative tools for decarbonisation and green portfolios. More specifically the report shall

• provide investors with a tool to align the EU Taxonomy with their investment strategies,
• increase transparency on investors’ impact, especially when it comes to climate change and environmentally sustainable CapEx required for energy transition,
• show how a significant level of comparability of Investing for Transition benchmarks methodologies could be achieved while giving benchmarks’ administrators flexibility in designing their methodology, and
• prevent greenwashing.

Next step

The proposal reflects the view of the members of the Platform on Sustainable Finance which is an advisory body with a specific mandate to work with areas of sustainable finance and advise the EU Commission. However, the Report does not commit the EU Commission currently but will be analysed and viewed by the EU Commission.

Tags:  Sustainability