As the push for rapid decarbonization intensifies, investors are increasingly turning to the European Union Climate-Transition (CTB) and Paris-aligned benchmarks (PAB) to guide portfolio decarbonization. Due to varying carbon footprints across sectors, decarbonization rates differ significantly. This article examines how decarbonization trajectories and climate benchmark alignment affects portfolio diversification and risk.
Executive summary
- The EU Climate-Transition (CTB) and Paris-Aligned Benchmarks (PAB) provide measurable pathways for investors to achieve net-zero targets within their equity portfolio.
- Implementation guidance: the benchmark guidance allows flexibility in rebalancing and reweighting but requires maintaining exposure to high-impact sectors.
- Simulation results: Maintaining high-impact sector exposure leads to overallocation of firms with the lowest footprints, making sector classification crucial.
- Long-term: CTB and PAB-aligned portfolios tend to concentrate on sector (see figure 1 below), country and issuer-level, with a clear tilt towards growth stocks.
- Emission pathways: Demand growth in certain high-impact sectors outpaces per-unit footprint reduction, increasing absolute emissions under various scenarios (see figure 2 below).
Figure 1: Sector distribution in 2035 of CTB & PAB
Source: Aegon Asset Management, MSCI (as of 2024). Simulations consider the period 2018-2035, from 2024 onwards weights are simulated.
Figure 2: Carbon reduction pathways for aviation sector based on TPI data
Source: Aegon Asset Management, Transition Pathway Initiative (2024). Simulations for the period 2024-2035.
Click here for our full paper on sector-based decarbonization and the simulation of EU climate benchmarks.
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