The rise of climate investing can offer distinctive allocation opportunities, but it has also complicated the task of decarbonisation. In the past, most investors tended to focus on mitigating climate risk, often by excluding the fossil fuel sector. While this practice, which we would now call “paper decarbonisation”, still results in impressive low carbon metrics by today’s standards, investors should be very aware that this is a side effect. It will not be news to investors that exclusions alone may not be the best way forward in an area that requires strong engagement and active ownership.

The need for a fundamentally different approach has given rise to a whole new field of climate benchmarks that aim to achieve multiple objectives, such as reducing the carbon intensity of an investment portfolio, allocating to climate investment solutions or aligning with a specific climate pathway. These innovations are timely, as heightened geopolitical risk and record temperatures on land and sea are driving investor ambition and regulatory action on climate change. Climate change has already become the largest dedicated investment theme within the ESG universe, but as investor confidence in this area has grown, allocation options have also branched out - resulting in a jungle of different benchmark approaches.

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