Guido Veul (AF Advisors): Fewer options for PAB investors

January 20, 2026

_{This column was originally written in Dutch. This is an English translation.}

By Guido Veul, Director, AF Advisors

Paris-aligned investing has matured rapidly. With the introduction of European regulations for Paris Aligned Benchmarks (PAB) in 2019, investors were given a clear standard for climate-focused index investing for the first time. The first investment products based on these new benchmarks quickly followed.

PAB has now also become a widely used building block in sustainability-oriented share portfolios in the Netherlands. Its appeal is clear: measurable CO₂ reduction, a declining emissions path and an explicit link to the Paris Agreement. At the same time, this promise is coming under increasing pressure. Since the launch of PAB products in 2020, global greenhouse gas emissions have continued to rise, after a brief dip due to the coronavirus pandemic.

Despite the growth of renewable energy, the economy is moving further and further away from the Paris Agreement targets. This has an effect that is often overlooked: the investment universe of PAB indices is shrinking rapidly. The widely used MSCI World Climate Paris Aligned Index fell from nearly 700 stocks in 2021 to around 460 at the end of 2025. That is a decline of about one-third in just four years. Other PAB indices show a similar picture.

The explanation for this decline is logical. The bar is set high, while the world as a whole is moving less quickly than the 1.5°C path requires. Paris-aligned indices select companies that, within the strict rules and optimisation, still fit within a strict emission reduction path. Companies that do not achieve sufficient emission reductions or do not have a convincing transition strategy will sooner or later be dropped. This is both the strength and the vulnerability of Paris-aligned indices. They make climate ambition concrete, but also confront investors with the reality that 1.5°C alignment is proving more difficult to achieve than many expected in 2019.

Contraction means less diversification

A smaller universe has direct investment consequences. The weight of remaining shares increases, which has several implications:

• Concentration risk: a limited number of names increasingly determine returns, both positive and negative. In the MSCI World Climate Paris Aligned Index, the top 10 holdings currently represent 31% of the total. This is higher than in the broad MSCI World Index, where this share is 27%, a level that raises questions among investors about concentration risks.
• Sector and regional tilt: large, technology-focused stock market funds score relatively well within the Paris-aligned system. For example, the entire “Magnificent Seven” is part of the index. The centre of gravity is thus shifting increasingly towards the US and the technology sector.

This changes the risks in the portfolio. An approach designed to better manage climate risks, among other things, results in increasing concentration and style risk due to the reduction of the universe.

The gap with the real economy is growing

Moreover, this process is not yet over. On the contrary, it is becoming increasingly difficult for many companies to continue to meet the criteria of Paris-aligned indices. This is all the more true now that many governments are scaling back their climate ambitions, reducing incentives and support for companies to accelerate. It is therefore likely that many more companies will disappear from Paris-aligned indices in the coming years.

The gap between the real economy and the index is also widening. Sectors such as industry, materials, transport and construction are crucial to the transition, but it is precisely in these sectors that emission reduction is complex and capital-intensive. In these sectors, 1.5°C alignment will be most difficult to achieve.

If Paris-aligned investments are increasingly limited to a relatively small group of companies that are already well advanced in the transition or naturally emit little, a fundamental question arises. What does this instrument still mean as a route towards a maximum of 1.5°C warming? Does it actually help to achieve climate targets? Or is it primarily a way of keeping an investment portfolio in line on paper, while the relationship with the real economy becomes increasingly weak?

Paris-aligned indices started out as an elegant and simple solution: translating climate targets into index investing without having to fundamentally change the investment process. But the rapid contraction of the universe makes it clear that it is not enough to look only at the climate characteristics of an index. The longer-term investment consequences also deserve explicit attention. Because if the number of companies in the index continues to decline, concentration and style risks will increase not linearly, but often exponentially.

This is no reason to write off Paris-aligned indices. However, it is wise to look ahead. Even if the strategy still fits within the investment philosophy and guidelines today, it is worthwhile exploring alternative routes for climate targets and managing climate risks while maintaining sufficient diversification. Consider combinations with broader benchmarks with climate tilts, active transition strategies and engagement, or index constructions that are less likely to end up in a (too) small universe. Paris-aligned remains a valuable approach for climate-conscious investors, but increasingly requires a conscious balance between climate ambition, investability and portfolio risk.