Introduction

The May 21st deadline is rapidly approaching for UCITS and Alternative Investment Funds (AIF) to comply with new labelling guidelines from the European Securities and Markets Authority (ESMA). Under the rules, every strategy bearing an environmentally-oriented name such as ESG, sustainable, climate or impact (though not ‘transition’) is expected to implement screening based on the Paris Aligned Benchmark (PAB) regulation.

Key takeaways:

• How much exposure do ESG-labelled equity mutual funds and ETFs have to non-PAB stocks?
• Do some funds manage the trade-off between PAB-type exclusions and risk (tracking error) more efficiently than others?
• Are the funds with the lowest exposure to non-PAB stocks also delivering a substantial reduction in carbon intensity?
• Should significant skews in sector exposure and Factor Profile be expected when investing in strategies with a PAB-focused investment universe?

For this analysis, we focus on a set of public equity strategies that are intended to be comparable, primarily driven by market beta and with low idiosyncratic risk. As a result of the parameters used, the strategies in our group are somewhat benchmark-constrained by nature, but investors can ask the same questions of more active strategies.

Moreover, while we focus here chiefly on PAB-based screening (with ESMA in mind), investors should take care to avoid ‘tunnel vision’ based on one screen or metric. PAB has its recognised limitations: the carbon calculations used are inherently backward-looking in nature; information on ‘Scope 3’ emissions remains limited; forward-looking assessments, such as those supported by the Science Based Targets Initiative, are not considered. Philosophically, investors seeking to promote real-world transition should also consider the extent to which they wish to remain engaged with the broader market: the Paris Aligned version of the MSCI World index contains just 39% of the companies in the MSCI World and 68% of its market capitalisation; these figures may decline over time depending on the progress of decarbonisation.

Readers are welcome to use the Scientific Portfolio user platform to analyse their own equity portfolios for non-PAB stocks, carbon intensity and a variety of other ESG, risk and performance metrics.

Authors

Matteo Bagnara, PhD
Quant Researcher,
Scientific Portfolio ……………………………………….
…
….

Shahyar Safaee
Deputy CEO and Business Development Director,
Scientific Portfolio

Read the full Market Review

"*" indicates required fields

Name*

First Name Last Name

Company Email*

Phone Number

Company Name*

Organization Type*

Select your organization typeAsset ManagerBanks & Capital MarketsInstitutional InvestorWealth ManagerRegulators & Public BodiesConsultantsMediaAcademicsOthers

Job Title*

Country*

Select your countryArgentinaAustraliaAustriaAzerbaijanBelgiumBoliviaBrazilBulgariaCanadaChileChinaColombiaCosta RicaCroatiaCyprusCzech RepublicDenmarkEstoniaFinlandFranceGermanyGreeceGuernseyHong KongHungaryIcelandIndiaIrelandIsraelItalyJapanJerseyKuwaitLatviaLiechtensteinLithuaniaLuxembourgMalaysiaMexicoMonacoNetherlandsNew ZealandNigeriaNorwayPeruPhilippinesPolandPortugalQatarRomaniaSaudi ArabiaSingaporeSlovakiaSloveniaSouth AfricaSouth KoreaSpainSwedenSwitzerlandTaiwanThailandUnited Arab EmiratesUnited States of AmericaOther

City

Choices*

I acknowledge that Scientific Portfolio will process my personal information in accordance with its Privacy Policy. I can opt out from Scientific Portfolio’s marketing emails at any time by clicking an unsubscribe link.

https://scientificportfolio.com/wp-content/uploads/2025/09/Climate-Equity-Performance-Needs-Close-Attention.pdf

Download the PDF