Climate benchmarks and ESG disclosure
The Benchmarks Regulation deals with sustainable finance in two key areas:
- the introduction of two categories or labels of climate benchmarks; and
- the transparency through ESG disclosure requirements.
The creation of new benchmarks that consider the carbon footprint of underlying assets is aimed at assisting investors who are looking into sustainable investment products. Also, the disclosure of the different ESG factors in the benchmark statement and the methodology enables market participants to make well-informed choices with the overall objective of protecting consumers and investors through greater transparency.
Climate benchmarks
The Regulation on the EU Climate Transition Benchmarks (2019) creates two new categories, or labels, of climate-related benchmarks:
- the EU climate transition benchmark (EU CTB) which brings the resulting benchmark portfolio on a decarbonisation trajectory; and
- the EU Paris-aligned benchmark (EU PAB) which brings the resulting benchmark portfolio's carbon emissions in line with the Paris Climate Agreement target to limit the global temperature rise to 1.5C° compared to pre-industrial levels.
For those two new benchmarks, a Delegated Regulation (2020) specifies the minimum standards of the benchmarks methodology.
ESG disclosure
The Delegated Regulations on the benchmark statement and the methodology (both 2020) further specify ESG disclosure requirements for all benchmarks with the exception of interest rate and currency benchmarks. In particular, such benchmarks should disclose within their benchmark statement whether they pursue ESG objectives and have to provide an explanation of how their methodology reflects ESG factors.
ESMA uses its different policy tools to promote a consistent and convergent application of the requirements across the EU and to provide clarity to market participants. ESMA has already issued a number of Q&As on different aspects related to the EU CTB and EU PAB and the ESG disclosure requirements.
In addition, ESMA issued a No Action Letter to promote coordinated action by National Competent Authorities (NCAs) regarding the new ESG disclosure requirements for benchmark administrators under the Benchmarks Regulation. ESMA also issued an Opinion to the European Commission on the need for prompt adoption of the relevant Delegated Acts.