EU draft delegated acts on Climate Benchmarks and ESG disclosure regulations: what is divergent from the TEG Final Report?
Following the publication of the EU TEG Report on Benchmarks in September 2019, the European Commission (EC) has published three consultations on draft delegated regulations for ESG Disclosure and EU climate benchmarks.
They aim at detailing the implementation of the amendments of the EU Benchmark Regulation (BMR) that were adopted at the end of 2019 by the European Union on EU Climate Transition Benchmarks (CTB), EU Paris-aligned Benchmarks (PAB) and sustainability-related disclosures of benchmarks (see Natixis’ dedicated Special Report on TEG Report on Benchmark).
All in all, the EC preserved most TEG recommendations on EU CTB and PAB climate benchmarks. The main modification concerns the exclusion of tobacco producers from EU PAB. Albeit consistent with overall do not harm principles, we don’t think this exclusion should have significant impacts on the construction of climate benchmarks.
The delegated acts nevertheless deviate from the TEG’s report in a number of instances, in particular in relation to ESG disclosure requirements. As mentioned in the text, “the objective is to streamline and simplify the TEG’s approach to provide more clarity on the set of indicators and on the information that benchmark administrators are expected to disclose”.
Main new features & amendments added by the Commission:
- The European Commission ruled that benchmark providers with non-ESG objectives will not be bound to disclose ESG information – while TEG wanted all providers to disclose ESG information because it was allegedly expected by all investors. In practice, this modification in the final wording does not have major impacts as in the final TEG report, the “non-ESG objectives” checkbox allows benchmarks that don’t pursue ESG objectives not to disclose ESG indicators.
- Two separate delegated acts have been introduced: “the Commission believes there is a need to distinguish between ESG disclosure requirements as regards the methodology and ESG disclosure requirements in the benchmark statement, as they do not pursue the same objectives for investors”. The main difference between the two disclosure templates consists in the level of granularity:
- The benchmark methodology template requires key elements of the ESG methodology. They can be displayed at the benchmark family level.
- The benchmark statement template requires more detailed indicators that must be disclosed at the benchmark level. This approach introduces a significant shift in the market practices as most benchmark statements are currently published at the benchmark family level.
- While the TEG report recommends the use of a ‘green to brown share ratio’, such metric is not included in the delegated acts, as those notions have not yet been defined at EU level and are being considered in a separate and parallel work stream under the upcoming taxonomy Regulation.
- For significant equity benchmarks (ESG-focused or not), significant bond benchmarks, EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, benchmark administrators shall also disclose the temperature scenario used for the alignment with the target of reducing GHG emissions or the attainment of the objectives of the Paris Agreement. In the context of the BMR, “significant benchmarks” mean benchmarks with AuM > EUR 5 billion. We welcome this mandatory ESG disclosure as it allows a better transparency of ESG quality of significant benchmarks. We regret however that only the temperature scenario is required, and not the carbon footprint, nor the exposure to controversial sectors.
- In the benchmark statement, weighted average ESG rating as well as E, S and G ratings of the benchmark became voluntary.
- Finally, several new/modified indicators requested for equity ESG benchmarks in the benchmark statement are difficult to put in practice given their low availability of data:
- Exposure of the benchmark portfolio to activities included in the environmental goods and services sector, as defined in Article 2, point (5) of Regulation (EU) No 691/2011 of the European Parliament and of the Council.
- Exposure of the benchmark portfolio to renewable energy as measured by capital expenditures (CapEx) in those activities (as a share of total CapEx by energy companies included in the portfolio).
- Exposure of the benchmark portfolio to climate-related physical risks, measuring the effects of extreme weather events on companies’ operations and production or on the different stages of the supply chain (based on issuer exposure).
These rules are currently set to come to force in late April. However, as the Level 2 text is still under consultation, financials and trade groups put pressure in the European Union to delay the Climate Benchmark and Disclosure Regulation national enforcement: they call for hampering divergence in implementation and for an increase in harmonization and comparability of disclosures.
 See TEG final report on the EU taxonomy, March 2020, https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-final-report-taxonomy_en.pdf