ISDA and AFME Respond to EC Consultations on Climate Benchmarks
ISDA and the Association for Financial Markets in Europe (AFME or Associations) issued a response to EC consultations on three draft delegated acts that specify requirements of EU Climate Transition Benchmarks and EU Paris-aligned benchmarks. From a standard-setting perspective, the Associations welcome the proposed Carbon Benchmark requirements, as the proposals include vital elements necessary for creating standard templates while allowing some degree of flexibility to benchmark administrators. An EU standardized climate benchmarks framework would undoubtedly result in a less fragmented landscape on the data provision front for all market participants. In addition to specific comments on the three draft delegated acts, the Associations also emphasize a few general concerns of their members in relation to the approach of EC to specifying requirements in the relevant Level 2 legislation.
The EC consultations being referred to are the draft delegated acts on:
- Establishing minimum standards for EU Climate Transition Benchmarks and Paris-aligned Benchmarks (Delegated Act on EU Climate Transition Benchmarks).
- Minimum content of the explanation on how environmental, social, and governance (ESG) factors are reflected in the benchmark methodology (Delegated Act on Benchmark Methodology)
- The explanation in the benchmark statement of how ESG factors are reflected in each benchmark provided and published (Delegated Act on Benchmark Statement).
The Associations stressed that the requirements suggested in the draft delegated act in relation to ESG disclosures in the benchmark statement and the related Annexes do not fully take into account market practices in relation to maintenance of benchmark statements. In the event that benchmark administrators would not have flexibility to deviate from the suggested template for the benchmark statement, they will have to endure disproportionate costs to apply the suggested template for all benchmarks and families of benchmarks. The Associations are of the view that the suggested approach would strongly discourage benchmark administrators from providing ESG benchmarks and would, therefore, run contrary to the objective of the Regulation, which is to mainstream the provisions of ESG benchmarks. In this context, it is important to note that significant channeling of financial resources into sustainable economic activities will only occur if a wide variety of benchmark administrators are incentivized to market EU Climate Transition and EU Paris-aligned Benchmarks.
The Associations encourage EC to set out a clear definition of “ESG objectives” to ensure that all ESG-labeled benchmarks meet a minimum standard of what is considered ESG, in addition to the underlying factor disclosures. The Associations note that the draft Delegated Act on Benchmark Methodology lists "Commodity benchmarks" in its Article 1(3)(f). However, Title II of the Benchmarks Regulation, with the exception of Article 10, does not apply to commodity benchmarks as specified in Article 19(1) of the Benchmarks Regulation. Therefore, the Associations requested EC to remove Article 1(3)(f) from the final Delegated Act on Benchmark Methodology. The Associations support the efforts of EC to close the gap between required data resulting from all relevant sustainable finance legislation but would also urge EC to allow more flexibility for benchmark administrators, until relevant data points become comparable and accessible under affordable cost structures. The Associations also specified that proportionality is needed in relation to ESG disclosures and requested further clarification in relation to asset class differentiation.
Related Link: Response to EC (PDF)
Keywords: Europe, EU, Banking, Insurance, Securities, ESG, Climate Benchmarks, Climate Change Risk, Sustainable Finance, Benchmarks Regulation, Delegated Act, Climate Transition Benchmarks, Paris Agreement, AFME, EC, ISDA
Michael Denton, PhD, PE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
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