Despite the obstacles posed by the current environment, the European Commission has kept up the momentum with respect to its progress on the European Green Deal Investment Plan. This plan, which was presented at the beginning of the year and which aims to mobilise €1 trillion of sustainable investments over the next decade, has progressed significantly on a number of initiatives in the last few months. Most noteworthy, there were developments on the EU Taxonomy which has now entered into force as well as on the sustainability-related disclosures with the launch of the public consultation on the review of the non-financial reporting directive (NFRD).

These complement other global Sustainable Finance developments in the last few months including:

  • Publication of a PRA Dear CEO letter in July which stipulates that firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021
  • Disclosure framework developments with the launch of the new CDSB guidance as well as the announcement of the collaboration between the SASB and the GRI.

Benchmarks, one of the other key focus areas of the EU’s Sustainable Finance work stream, are expected to play a crucial role in re-orienting capital flows towards green investments. On 17 July 2020, the European Commission adopted three delegated acts containing requirements on benchmark ESG disclosures as well as minimum standards for the EU Climate Transition Benchmarks and EU Paris-aligned benchmarks (collectively ‘EU Climate Benchmarks’). These delegated acts will supplement the EU Benchmarks Regulation and aim to provide transparency to investors who are targeting climate-conscious investment strategies. Adoption follows the recommendations set-out by the Technical Expert Group (TEG) on Sustainable Finance in their final report and accompanying handbook on EU climate benchmarks and benchmark ESG disclosures published in September and December of 2019 respectively.

Additional Requirements on disclosure of ESG factors 

 The first two delegated acts contain requirements regarding the explanation in benchmark statements of how ESG factors are reflected in respective benchmarks and the minimum content of the explanation on how ESG factors are reflected in the benchmark methodology. The first delegated act describes how benchmark administrators should incorporate ESG factors in their published benchmark statement. The second delegated act describes the requirements of the disclosure of ESG factors in the benchmark methodology. In addition, they note that:

  • Benchmark methodologies should include appropriate explanations regarding the ESG factors that have been taken into account  while designing the  methodology, including whether they pursue ESG objectives or not;
  • Both delegated acts clearly specify exclusions to this requirement for benchmarks that do not have an impact on climate change such as interest rate and foreign exchange benchmarks;
  • Both provide relevant templates to meet these requirements, as set out in Appendix D of the TEG final report[1]; 
  • The ESG factors disclosures are subject to annual review and updates in the benchmark statements and benchmark methodologies; and
  • ESG factors are to be determined by the underlying assets and for multi-asset benchmarks, there should be explanations to reflect ESG factors for each respective underlying asset.  

Minimum Standards for EU Climate Benchmarks   

The third delegated act sets out the minimum standards for EU Climate Transition Benchmarks (CTB) and EU Paris-aligned Benchmarks (PAB). In summary:

  • The act contains 15 Articles and is intended to complement the existing EU BMR articles.
  • These 15 articles include definitions, minimum requirements regarding equity allocation, emissions data and targets, rules regarding transparency and accuracy as well as baseline reduction of emissions for the EU Climate Benchmarks.
  • Both specific minimum standards to EU CTB and EU PAB contain exclusions of companies based on certain criteria.
  • EU CTB exclusions currently require benchmark administrators to disclose how and if any companies have been excluded in their methodology with some additional specifics to be complied by 31 Dec 2022.
  • Conversely, benchmark administrators of EU PAB will need to include more specific exclusions in the methodology design.[2] 

What companies should be doing

  • ESG factors will be a determining competitive factor among benchmark administrators, which will provide users with the transparency required to be able to choose and use benchmarks that are aligned to their “green appetite”. Monitoring benchmark inventories and methodologies in order to assess the extent to which they are compliant, will be key. 
  • ESG factors disclosure will require careful consideration and review for each benchmark family when updating the relevant published benchmark methodologies and benchmark statements. 
  • Furthermore, this needs to be factored in the development and design phase of the benchmark methodology on a go forward basis, as this develops as the “new normal”.  

Next steps

ESMA had previously issued a No Action Letter to National Competent Authorities (“NCAs”), stating that NCAs should not prioritise supervisory or enforcement action against administrators regarding these new requirements until the delegated Acts apply. We note that the acts are under scrutiny for the 3 months post adoption in which the European Parliament and Council can reject or accept the text as a whole without amendments. The acts will come into force 20 days after their publication in the Official Journal of the EU.


[1] This notes that clear explanations should be provided for the ESG factors disclosed, including a reference to the sources of data and the relevant standards used as prescribed by the relevant templates mentioned above

[2] For example the exclusion of companies carrying certain activities such as controversial weapons and tobacco, and/or companies deriving their revenue from any business activity relating to fossil fuels