Exchange-traded funds that track Paris-aligned and climate-transition benchmarks – PABs and CTBs – had accumulated a record €37.6 billion in assets under management by end-2023, according to Morningstar data provided to Responsible Investor.
This represents a more than 70 percent increase from the €21.5 billion reported by the provider at end-2022.
The AUM for climate benchmark ETFs stood at €4 billion when they debuted in 2018.
Andreas Hoepner, a member of the group of EU advisers that developed the methodology for PABs and CTBs, said the rise in AUM was indicative of investor interest in integrating climate change considerations into their portfolios.
“I find this a very healthy development,” he said. “It shows just how much demand there is [for] decarbonisation investment portfolios, and it is encouraging that there is now supply to meet that demand.”
Investors that have announced allocations to PABs or CTBs include Sweden’s AP2, French pension fund Ircantec, insurer Länsförsäkringar, asset manager Handelsbanken Fonder, the UK’s Brunel Pension Partnership, and the German state of Baden-Württemberg.
At the same time, announcements by major ETF providers including BNP Paribas, BlackRock and Amundi show that tens of billions of euros of ETF assets have been rebadged to track climate benchmarks since their introduction.
Climate benchmarks are required to decarbonise incrementally at a rate of 7 percent year-on-year. The only difference between the two product tiers are the initial portfolio emissions at launch, with the more ambitious PABs required to slash the carbon intensity of their parent universe by half and CTBs by 30 percent.
Both categories are described as being aligned with the Paris Agreement’s 1.5C target, and take into account Scope 1, 2 and 3 emissions.
Morningstar’s data also shows that ETF providers cut fees for the product class in 2023 for the first time in five years.
According to the data provider, the average asset-weighted average expense ratio of the ETFs dropped by just over two basis points in 2023 to 0.178 percent, after hovering around 0.2 every year since 2019.
PAB and CTB ETFs recorded an expense ratio of 0.24 percent in 2018, the year the EU introduced the “climate benchmarks” format under the bloc’s sustainable finance action plan.
Morningstar’s director of passive strategies Monika Calay said that while fees for PABs and CTBs had seen a decline, they were still higher than fees for conventional passive funds, which can be as low as three basis points.
“This difference represents a ‘greenium’ that investors in these environmentally-focused funds bear. This reflects both the specialised nature of these funds and ongoing investor willingness to pay slightly more for sustainable investment options,” said Calay.
The EU’s taxonomy advisory body recently mooted a new benchmark format to direct capital toward companies that are aligning their capex with the taxonomy.
The proposed product would require annual decarbonisation of 7 percent, but no initial decarbonisation. They can also be used to address other environmental categories beyond climate.
A consultation on the proposal closes in March.