EU Climate Benchmarks Regulation: A performance analysis of Climate Transition and Paris-Aligned ETFs

Abstract

The publication of Regulation (EU) 2019/2089 and its delegated acts has revolutionised the world of sustainable finance by establishing the first mandatory set of environmental, social, and governance (ESG) disclosure standards for benchmarks and indices at the European level. The enactment of Commission Delegated Regulation (EU) 2020/1818 has further enriched the regulative framework by introducing two innovative benchmark labels: the Climate Transition Benchmark (CTB) and the Paris-Aligned Benchmark (PAB). Since then, many investment funds have started to adopt these benchmarks, including Exchange-Traded Funds (ETFs). Starting from an introduction on the general topic of ETFs, this thesis provides a comprehensive overview of the abovementioned regulative framework. A performance analysis of EU CTB and EU PAB ETFs is then conducted. While no significant performance difference is found between EU CTB ETFs and matched conventional ETFs, the opposite holds for EU PAB ETFs, which exhibit reduced risk-adjusted performance in the period following the introduction of the regulative framework, suggesting a negative impact of the strict requirements imposed on this type of ETFs. Furthermore, a significant negative relationship between the ETFs’ sustainability rating and their risk-adjusted performance is found. Lastly, sustainable ETFs appear to be characterised by higher total expense ratios.