ISDA and Association for Financial Markets in Europe (AFME) responded to the interim report on climate benchmarks and environmental, social and governance (ESG) disclosures of benchmarks by the EU Technical Expert Group (TEG) on sustainable finance. ISDA-AFME discusses the need for flexibility in benchmark methodologies and proportionality in relation to ESG disclosure requirements under the EU Benchmarks Regulation.
Proportionality in the European Benchmarks Regulation shall apply in relation to ESG disclosures for non-ESG benchmarks. ISDA and AFME would welcome that the requirements for non-significant benchmarks in relation to ESG criteria and carbon emissions disclosures should follow a consistent proportionality approach—that is, ESG disclosure requirements for significant benchmarks shall be more comprehensive than for non-significant benchmarks. ISDA and AFME would welcome the TEG final report to reflect this proportionality, as disclosure of ESG factors and Key Performance Indicator (KPIs) should be in the form of guidelines rather than being mandatory for non-significant benchmarks.
Differentiation by asset class, type of benchmarks, and investor need is necessary for effective ESG disclosures. Given the characteristics and diversity of benchmarks, ISDA and AFME welcome the TEG approach to adapt disclosure requirements to different asset classes. ISDA and AFME welcome that derivative instruments for the transfer of credit risk, such as credit default swaps or CDS, should not apply ESG disclosure, agreeing with the TEG analysis that setting any ESG disclosures for a CDS index would essentially require disclosing the characteristics of a second-level structured product. ISDA and AFME support an exemption of the ESG disclosures for all derivatives benchmarks that do not specifically pursue ESG objectives. ISDA and AFME would like to call on EC to consider the different types of investment styles when preparing the delegated act on minimum requirements for ESG disclosure.
Availability of high-quality and affordable data needs to be enhanced. ISDA and AFME support the TEG recommendation for a non-disclosure option in the template for the methodology and the benchmark statement. This is also in line with the primary legislation (level 1 text of the EU Benchmarks Regulation). If ESG data disclosure requirements are too rigid, the required growth of the ESG market, needed to fulfill the overarching objective of the sustainable finance agenda may be jeopardized. To facilitate the availability of data, the co-legislators and the EC, depending on the type of legislation, shall align disclosure requirements resulting from other financial services legislation with the requirements of the Benchmarks Regulation.
Keywords: Europe, EU, Banking, Securities, Sustainable Finance, Climate Benchmarks, ESG, Disclosures, Proportionality, Benchmarks Regulation, AFME, ISDA
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