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
Previous ArticleIMF Publishes Reports Under 2019 Article IV Consultation with Latvia
EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.
EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).
NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.
MAS published the guidelines on individual accountability and conduct at financial institutions.
APRA published final versions of the prudential standard APS 220 on credit quality and the reporting standard ARS 923.2 on repayment deferrals.
SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime.
FSB hosted a virtual workshop as part of the consultation process for its evaluation of the too-big-to-fail reforms.
ECB updated the list of supervised entities in EU, with the number of significant supervised entities being 115.
OSFI published the key findings of a study on third-party risk management.
FSB is extending the implementation timeline, by one year, for the minimum haircut standards for non-centrally cleared securities financing transactions or SFTs.