A Paris-Aligned Benchmark (PAB) is a financial index designed to align an investment portfolio with the Paris Agreement's most ambitious goal of limiting global warming to 1.5°C. These benchmarks help investors build portfolios that support the transition to a low-carbon economy by overweighting companies on a clear decarbonization path.
A Paris-Aligned Benchmark (PAB) is a category of climate-focused investment indices formally defined by the European Union. Its primary purpose is to provide a tool for asset managers and investors to construct portfolios of stocks or bonds that are compatible with the long-term goals of the Paris Agreement, specifically targeting a 1.5°C warming scenario. This is crucial for investors who want to mitigate climate-related transition risks and actively contribute capital to the decarbonization of the global economy.
These benchmarks are not just about picking "green" companies; they are built on a strict, science-based methodology. To qualify as a PAB, an index must meet several minimum requirements.
Key Requirements of a Paris-Aligned Benchmark:
- Initial Carbon Intensity Reduction: The benchmark's overall greenhouse gas (GHG) intensity must be at least 50% lower than that of its parent investable universe (e.g., the S&P 500 or MSCI World).
- Annual Decarbonization Trajectory: The index must follow a self-decarbonization pathway, reducing its own carbon intensity by an average of at least 7% per year, regardless of what the broader market does. This ensures the portfolio remains aligned with the 1.5°C goal over time.
- Activity-Based Exclusions: PABs apply strict exclusion criteria. They explicitly exclude companies involved in controversial weapons, tobacco, and those that significantly derive revenue from coal, oil, or natural gas exploration and production.
- Increased Exposure to Sustainable Solutions: The methodology aims to increase the portfolio's exposure to companies that are part of the climate solution, such as those in the renewable energy or energy efficiency sectors.
This rigorous framework distinguishes PABs from their less stringent counterparts, the Climate Transition Benchmarks (CTBs), which are aligned with a "well below 2°C" scenario and have less demanding reduction targets.
Concrete Use Cases
- Case 1: An ETF Provider. A large asset manager like BlackRock or Amundi can create an Exchange-Traded Fund (ETF) that physically tracks a PAB index, such as the "MSCI World Climate Paris Aligned Benchmark Index". This allows retail investors to easily buy a diversified, low-cost portfolio that is automatically managed to meet the 1.5°C climate objective.
- Case 2: A Pension Fund's Strategy. A national pension fund can adopt a PAB as the official benchmark for its global equity allocation. By doing this, it publicly commits to decarbonizing its portfolio, aligns its long-term investments with global climate targets, and systematically reduces its exposure to companies at high risk of being stranded assets in a low-carbon future.
The underlying principle of a PAB is to make climate alignment a core part of investment strategy, complementing other climate finance tools like investing directly in carbon markets [see our guide on the EU Emissions Trading System (EU ETS)]. For more detailed technical specifications, the official documentation from the EU is the primary source [see the EU Technical Expert Group Final Report on Climate Benchmarks].