The MSCI Provisional Climate Change EU Climate Transition Indexes and the MSCI Provisional Climate Change EU Paris-Aligned Indexes allow investors to assess in practice how the EU’s climate benchmarks could be implemented.
The benchmarks are one of three legislative proposals that form the EU’s Sustainable Finance Action Plan and aim to increase sustainable finance flows.
The EU’s Technical Expert Group (TEG) on Sustainable Finance published the methodologies of the EU Climate Transition benchmark (EU CTB) and the EU Paris-aligned benchmark (EU PAB) in a report at the end of September.
“An EU CTB means a ‘benchmark that is labelled as an EU Climate Transition Benchmark where the underlying assets are selected, weighted or excluded in such a manner that the resulting benchmark portfolio is on a decarbonisation trajectory and is also constructed in accordance with the minimum standards laid down in the delegated acts’,” the report says.
“An EU PAB means a ‘benchmark that is labelled as an EU Paris-aligned Benchmark where the underlying assets are selected in such a manner that the resulting benchmark portfolio’s GHG emissions are aligned with the long-term global warming target of the Paris Climate Agreement and is also constructed in accordance with the minimum standards laid down in the delegated acts’”.
While the EU CTBs are tools to “accompany” the transition to a low-carbon economy, the EU PABs are tools that allow investors to be at the forefront of the transition, the report explains.
The final delegated acts, including the requirements for the EU CTB and EU PAB are yet to be published.
In line with the TEG’s final report, MSCI’s series of provisional indexes pursue, among others things, a reduction in carbon intensity and the exclusion of controversial weapons and companies that breach global norms, MSCI said.
They also incorporate a year-on-year self-decarbonisation reduction of at least 7% on average to align with the trajectory of the Intergovernmental Panel on Climate Change’s 1.5-degree scenario.
The indexes will also apply a screen to exclude carbon-intensive companies, it said.
MSCI intends to transition the methodology of its existing MSCI Climate Changes Indexes to the MSCI Provisional Climate Change EU Climate Transition indexes methodology by 30 April 2020, if the final EU CTB and EU PAB requirements do not vastly diverge from the TEG’s report recommendations.
The transition will be subject to a global public consultation as per MSCI’s policies, the company said.
Stephane Mattatia, head of index products Emea at MSCI, comments: “These two new index series will allow investors to better grasp the characteristics and associated implications of the new benchmark types defined by the EU TEG on Sustainable Finance.”