The EURO iSTOXX® Ambition Climat PAB Index, which underlies the world’s first fund compliant with the European Union’s Paris-aligned Benchmark (EU PAB) regulation, has won the Index of the Year award from Structured Retail Products (SRP).
SRP, which announced the winners in a statement, recognized the solution’s innovative approach in adopting a wide and demanding set of rules, as well as product performance and customer satisfaction.
The EURO iSTOXX Ambition Climat PAB Index tracks a portfolio of companies that is aligned with the greenhouse gas emission reduction goals of the Paris Agreement. The index was designed in conjunction with Amundi and ISS ESG, and last year won a mandate from a group of 12 French institutional investors. For more information on this and Qontigo’s other Climate benchmark Indices that follow the EU PAB regulation, please click here.
We caught up with Armelle Loeb-Darcagne, head of sell-side sales for EMEA at Qontigo, to ask her what makes the EURO iSTOXX Ambition Climat PAB such a special index.
Armelle, this award is a recognition to the innovation of the Ambition Climat index. What are some of characteristics that make the index stand out?
“We are indeed very happy and grateful about SRP’s recognition, as this is truly an innovative index both from the inception process and the methodology perspective. The EURO iSTOXX Ambition Climat PAB is an example of how index-based solutions can be constructed in a multi-step process that considers rigorous regulatory requirements. More importantly, the index was the result of close collaboration with the asset-management client and with one of the world’s leading data providers. All three partners worked together to create a solution that met and exceeded the regulation’s criteria, relied on the best data available, and was efficient, replicable and useful to the end investors’ needs. We worked for and with a group of large French investors in what would become the very first EU PAB-compliant investment in the world. I think the sum of all the expertise is embodied in the final product and we are very proud of it.”
You mention that the index exceeds the requirements in the EU PAB regulation. Why did you base the stock selection on more stringent rules than asked for?
“When it comes to climate action, we felt that more will need to be done in order to meet the challenging goal of keeping global warming below 20C. We have the means and ability to do so, and that is why from day one we knew that we had to raise the bar in terms of climate response. We expect carbon emission rules to become more demanding as we move forward in time and the realization that we may fail on the Paris Agreement targets kicks in. In that sense, the STOXX PAB indices are ‘future-proof’: we are creating portfolios that are one step ahead in the in decarbonization path.”
Can you give us some examples of how the STOXX PAB indices exceed the requirements in the EU Climate Benchmarks regulation?
“There are several points. Firstly, Scope 3 carbon emissions data is used across all sectors from the first date of inception of all STOXX Climate Benchmarks, instead of incrementally up to four years as allowed in the new legislation. Secondly, STOXX PABs surpass the requirements in activity exclusions to remove companies that use coal for power generation. Thirdly, the indices will by 2030 feature only companies that have scientifically approved decarbonization targets.
“The indices also offer features not considered by the EU rule: they exclude companies that significantly hinder the United Nations’ Sustainable Development Goal No. 13 of mitigating climate change; they consider the ‘green-to-brown ratio’ at index level; they overweight climate leaders based on Carbon Risk Rating data; and finally, they are designed so that the resulting portfolio is aligned with the International Energy Agency’s 20C scenario until 2050.”
Can you develop on the criterion of selecting companies that have approved targets for emissions reduction?
“One of the defining features of the PAB indices is that they track securities that have approved targets derived from the Science Based Targets initiative (SBTi), which supports policies that are in line with the level of decarbonization required to keep global temperature increase below 20C. Securities with no commitments or no SBTi-approved targets will be subjected to incremental underweighting and will not be eligible for selection starting 2025 and 2030 respectively. This is a very clear message for corporate boards and one of the most efficient ways to push companies for change. We are trying to give an incentive to executives to do better in terms of climate transition policies and management.”
What role do you see for PAB indices in the market?
“Paris-aligned indices will increasingly become the benchmark for large asset pools from institutional investors, particularly in Europe. Moreover, the indices are already being used as engagement tools between investors and companies. As large asset owners adopt the indices, more and more companies have stepped up efforts to comply with the index requirements. We have designed the EURO iSTOXX Ambition Climat PAB Index specifically to participate in this engagement. The index uses very transparent and clear rules for selection, so it is easy for companies to see where they need to improve in order to be eligible. This is a very positive development and at Qontigo we are happy to work with our clients and with companies to help the latter align their operations with the right behaviour.”
Finally, is this index available for the retail market?
The index was designed for an institutional mandate, but there is also an exchange-traded fund (ETF) on it that is managed by Amundi. We are looking forward to the day when a similar strategy is available to structured-products investors. This will be the case eventually because the regulation will evolve and will allow this.”