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Press articles

“Climate change: how ‘portfolio temperatures’ improve our understanding and ability to act” – an opinion piece by Lionel Paquin

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Lionel Paquin, CEO of Lyxor Asset Management, explains in an opinion piece in daily newspaper L’Opinion that assessing portfolio temperatures, due to the straightforward and rigorous nature of temperatures as an indicator, enables asset managers to educate investors on the need to reallocate capital in a way that actively supports the transition to a low carbon economy. "As a new gauge for investment decisions that is both rigorous and comprehensible, the portfolio temperature is a formidable tool to educate and raise awareness".

Find the English translation below and the original French version here.

Image détail
Tribune Lionel Paquin l'Opinion

The reality is that the climate emergency affects all of us.

The practical consequences are apparent around the world to a certain extent, and no longer just as spectacular but isolated phenomena. Climate change is disrupting our ecosystem and our lives. More than ever, we must all pull together to try to keep global warming below 1.5 degree Celsius, in line with the historic target set out in the Paris Agreement reached five years ago at the COP21 summit.
In the world of economics and entrepreneurship, our sector – asset management – has a vital role to play in the fight against climate change.
Year after year, asset managers channel the world’s savings and investments: these tens of trillions of dollars mean that it is our duty and our responsibility to take action. But they may also represent an opportunity.

The asset management industry is not starting from scratch in this respect. We already help re-orient investors towards socially responsible investments that protect the planet and its inhabitants, in particular through an ever-expanding range of innovative products that are now frequently labelled as responsible investments by independent institutions. Asset managers are also becoming increasingly stringent in how they exercise their voting rights and engage in ongoing dialogue with issuers, keen to use these two powerful levers at their disposal to prompt companies to adopt more sustainable practices and business models.

Arbitrage: This trend has gone from desirable to absolutely essential. 2020 marked a turning point in this regard: ESG assets not only elicited very strong demand among investors, demonstrating the space’s resilience even in the middle of an acute crisis (over EUR 45 billion for ESG ETFs alone – a record figure), but they also generally outperformed non-ESG assets, putting the supposed trade-off between performance and sustainability into perspective.

This paradigm shift – one that is also affecting the regulatory landscape – represents a landmark opportunity. Asset managers must seize this chance to channel savings and investments even more proactively towards sustainable assets and causes. But which companies, which sectors, which indices and which portfolios are on the trajectory targeted by the Paris Agreement? Which compass will set us on the right course? What measures will be both sufficiently rigorous to be functional and – this is key – simple enough to be understood by all, and so adopted?

Asset managers must embrace the practice of taking the “temperature of the portfolio”. This measure translates the euro and dollars invested in specific instruments into degrees of planetary warming, offering a dynamic overview of the CO2 emitted by companies and hence the extent to which they are – or are not – in line with the objectives of the Paris Agreement.
In the very near future, this temperature will be nothing less than a “new instrument on the dashboard”. this powerful management tool will surely be just as important as value-at-risk and maybe even be as prominent as [...] financial performance. We are all familiar with “risk budgets” and investment objectives; now, we must prepare our funds for temperature budgets and climate risk.

Scenarios: Accurately calculating the degree of warming associated with an investment portfolio requires advanced methods. It requires the introduction of a robust analysis framework, underpinned by temperature scenarios that are devised by authoritative international organisations in the fight against climate change (such as the International Energy Agency or the Intergovernmental Panel on Climate Change (IPCC) and tapping into a vast array of climate and environmental data that will need to be supplied by research teams and data providers with expertise in this field.

As a new gauge for investment decisions that is both rigorous and comprehensible, the portfolio temperature is a formidable tool to educate and raise awareness. Is it the summary depiction of a reality that is vastly more complex? Of course. Is it a concept everyone can easily discuss? Yes, and so much the better! Asset managers have an opportunity to educate in this regard, to raise awareness among as many people as possible and to roll out a new kind of financial education: at last!