Performance and challenges of net-zero strategies in the context of the EU regulation

Fabio Alessandrini; Eric Jondeau; Lou-Salomé Vallée; Fabio Alessandrini; Eric Jondeau; Lou-Salomé Vallée

doi:10.3934/GF.2025021

Green Finance

2025, Volume 7, Issue 3: 545-583. doi: 10.3934/GF.2025021

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Research article

Performance and challenges of net-zero strategies in the context of the EU regulation

1.
Center for Risk Management Lausanne, University of Lausanne, Lausanne, Switzerland
2.
Banque Cantonale Vaudoise, Lausanne, Switzerland
3.
Center for Risk Management Lausanne, CEPR and Swiss Finance Institute, University of Lausanne, Lausanne, Switzerland
4.
Center for Risk Management Lausanne, University of Lausanne, Lausanne, Switzerland

Received: 23 April 2025 Revised: 03 June 2025 Accepted: 18 July 2025 Published: 10 September 2025
JEL Codes: G11

In this paper, we present a comprehensive comparative analysis of portfolio construction techniques in the context of decarbonization and the pursuit of net-zero objectives aligned with the 2015 Paris Agreement. We examined strategies qualifying as Article 9 funds under EU regulations, focusing on carbon emission reduction objectives, including screening and tracking-error minimization methods. Our findings indicate that all approaches would have achieved the targeted emission reductions over the 10-year period (2012–2021) analyzed. However, the method of decarbonization significantly affected ex-post tracking error, with the more ambitious Paris-Aligned Benchmark requiring a substantial deviation from the business-as-usual benchmark. Moreover, the tracking-error minimization approach entailed considerable reallocation of individual securities, potentially leading to possibly undesirable idiosyncratic exposures.
- Net-zero investment,
- portfolio carbon footprint,
- climate change,
- EU regulation,
- article 9 funds
Citation: Fabio Alessandrini, Eric Jondeau, Lou-Salomé Vallée. Performance and challenges of net-zero strategies in the context of the EU regulation[J]. Green Finance, 2025, 7(3): 545-583. doi: 10.3934/GF.2025021

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Abstract

In this paper, we present a comprehensive comparative analysis of portfolio construction techniques in the context of decarbonization and the pursuit of net-zero objectives aligned with the 2015 Paris Agreement. We examined strategies qualifying as Article 9 funds under EU regulations, focusing on carbon emission reduction objectives, including screening and tracking-error minimization methods. Our findings indicate that all approaches would have achieved the targeted emission reductions over the 10-year period (2012–2021) analyzed. However, the method of decarbonization significantly affected ex-post tracking error, with the more ambitious Paris-Aligned Benchmark requiring a substantial deviation from the business-as-usual benchmark. Moreover, the tracking-error minimization approach entailed considerable reallocation of individual securities, potentially leading to possibly undesirable idiosyncratic exposures.

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