On Wednesday, 8 April 2020, the European Commission published three draft delegated regulations setting out sustainability criteria for benchmarks provided in accordance with the Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (BMR). These measures follow amendments to the BMR introduced by Regulation (EU) 2019/2089 EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks (“Low Carbon Benchmarks Regulation”). The draft texts published include:
- Draft Commission Delegated Regulation on the minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks The draft CDR sets out the minimum standards that EU Climate Transition and EU Paris-aligned Benchmarks should meet in order to be labelled as such, and lay down the transparency requirements on the methodology for both benchmarks. These are voluntary labels and consequently, the requirements set out in the draft CDR only apply to benchmark administrators that choose to opt-in for the regime. The draft CDR proposes minimum standards on the design of methodology that are common for both types of benchmarks, as well as bespoke standards for each of the climate benchmarks. Common standards include: reference temperature scenario, equity allocation constraint, calculation of GHG intensity or absolute GHG emissions, phase-in of scope 3 GHG emissions data in the benchmarks methodology, companies setting and publishing GHG emission reduction targets, as well as measures for setting a decarbonisation trajectory and change in GHG intensity and absolute GHG emissions. Individual minimum standards for EU Climate Transition Benchmarks and for EU Paris-aligned Benchmarks include tailored baseline reduction of GHG intensity or absolute GHG emissions. In addition, for the EU Paris-aligned Benchmarks the draft CDR sets out a list of exclusions, i.e. types of companies that cannot be included in the benchmark calculation. Finally, the draft CDR sets out transparency requirements for estimations as well as requirements on disclosure of the decarbonisation trajectory.
- Draft Commission Delegated Regulation on the minimum content of the explanation on how Environmental, Social and Governance (ESG) factors are reflected in the methodology By means of background, the BMR – as amended by the Low Carbon Benchmark Regulation – requires benchmark administrators to publish or make available an explanation of how the key elements of the benchmark methodology reflect environmental, social and governance (ESG) factors for each benchmark provided and published. These are set out in the Annex to the draft CDR and include information on the list of individual ESG factors, as well as information on data and standards used.
- Draft Commission Delegated Regulation on the explanation in the benchmark statement of how environmental, social and governance factors are reflected in each benchmark provided and published Similar to the requirements in respect of methodology, the BMR – as amended by the Low Carbon Benchmark Regulation – requires benchmark administrators to include in the benchmark statement an explanation of how ESG factors are reflected in each benchmark provided and published (with exception of administrators of interest rates and foreign exchange benchmarks). Annex to the draft CDR includes a list of specific factors that are to be disclosed by the type of benchmark (equity, fixed income corporate, sovereign debt, commodity, private equity, private debt and other benchmarks). By means of example, for “other” benchmarks, combined ESG factors should include total weighting of benchmark constituents not meeting the principles of the UN Global Compact. Examples of ESG factors for such benchmarks include (non-exhaustive): degree of exposure of the portfolio to climate-related opportunities, weighted average percentage of index constituents in the controversial weapons sector and in the tobacco sector, and percentage of underlying funds with stewardship policies in place, including measures for the planning and management of resources.
Draft delegated regulations are open for comments until 6 May 2020