The Technical Expert Group on Sustainable Finance (TEG), a stakeholder group designed to assist EC in developing elements of green finance policy, issued its final report on climate benchmarks and benchmarks' environmental, social, and governance (ESG) disclosures. The report recommends a list of minimum technical requirements for the methodologies of "EU Climate Transition" and "EU Paris-aligned" benchmarks, with the objective to address the risk of greenwashing. The report also recommends a set of ESG disclosure requirements, including the standard format to be used for reporting. The report will serve as a basis to the drafting of delegated acts by EC, under the empowerments in the amending climate benchmarks regulation. The draft delegated acts will be subject to a formal public consultation and are expected to be adopted in early 2020.
The TEG report details technical advice on minimum disclosure requirements to improve transparency and comparability of information across benchmarks not only for climate-related information but also on a variety of ESG indicators. These indicators are assessed by benchmark administrators either in-house or through third-party data providers and rating agencies. To ensure global alignment, references are made to the global standards and international conventions used by investors across jurisdictions for their ESG analysis. Furthermore, the perspective of various asset classes has been taken into consideration to ensure that minimum standards are available for as many asset classes as applicable and geared to the associated investment needs. The report also provides detailed technical guidance on minimum technical standards recommended by TEG for the EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks.
Finally, the report details additional context and recommendations for areas of future work as this topic further develops and matures. The areas for further work include the following:
- Alignment between benchmark disclosures and the regulation on sustainability-related disclosures in the financial services sector
- Alignment with the proposed EU Classification System of Sustainable Activities (EU Taxonomy)
- Integration of ESG considerations into investment advice under Markets in Financial Instruments Directive (MiFID) II and Insurance Distribution Directive, or IDD (suitability test)
- Technical advice by ESMA on fiduciary duty to EC
- Integration of the sustainable development goals
- Overcoming challenges with the Scope 2 and Scope 3 definition of Green House Gases (GHG) emissions
While conceptually, the two types of climate benchmarks are closely linked to the objectives of the Paris Agreement, the TEG wants to clearly acknowledge that the current state of methodologies and available issuer-level data does not allow for an evident and irrefutable conversion of climate scenarios into detailed and informed portfolio construction methodologies at the time of writing the report. To ensure the highest level of ambition for climate benchmarks, the TEG, therefore, largely relies on available proxies and currently evolving methodologies, sometimes already used by market participants. In this context, the TEG also strongly recommends a review of all minimum standards after a three-year period to ensure the highest level of ambition for climate benchmarks in accordance with the potential enhancements in the state of the research and practices around the scenario analysis applied to investment strategies.
Keywords: Europe, EU, Banking, Insurance, Securities, Sustainable Finance, TEG, Climate Benchmarks, Reporting, Action Plan, Disclosures, ESG, EC
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