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
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
Previous ArticleIASB Amends IFRS 9 and IFRS 7 in Response to IBOR Reform
The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.
The European Banking Authority (EBA) recently published a report that recommends enhancements to the Pillar 1 framework, under the prudential rules, to capture environmental and social risks.
As a follow on from its prudential standard on the treatment of crypto-asset exposures, the Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto-asset exposures of banks.
The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have published results of the Basel III monitoring exercise.
The Prudential Regulation Authority (PRA) recently issued a few regulatory updates for banks, with the updated Basel implementation timelines being the key among them.
The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment.
The European Commission (EC) launched a stakeholder survey on the draft International Guiding Principles for organizations developing advanced artificial intelligence (AI) systems.
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.