EU says planned low carbon index rules will help tackle market greenwash

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The European Commission says its proposal to develop minimum standards for low carbon benchmarks will help tackle what it says is ‘greenwashing’ in the market.

As part of its Action Plan on sustainable finance, the Commission is proposing amending the regulations around investment benchmarks, to create a new category of benchmarks comprising low-carbon and what is termed positive carbon impact benchmarks.

The aim is to provide investors with better information on the carbon footprint of their investments.

“The Commission believes,” according to a new FAQ on the work of the Technical Expert Group for the Action Plan, “that low-carbon benchmarks can already help tackling the existing lack of transparency and ‘greenwashing’ currently in the market” (exact wording).

In August, RI reported that the market was critical of the proposals, arguing they go beyond the original proposals of the High Level Expert Group, the body that preceded the Technical Expert Group.

Another aspect of its work is on improving the disclosure requirements for ESG benchmarks more broadly. It says a variety of index firms (or “benchmark administrators” as the Commission calls them) claim that their products pursue ESG objectives.

“However, investors do not always have the necessary information on the extent to which the methodology of these benchmarks takes into account those ESG objectives.”

It held a ‘targeted’ workshop on the benchmarks in Brussels on October 17 with asset owners identified as “knowledgeable and advanced” on sustainable finance.

There is a lot of focus in the new document on the planned sustainable investments taxonomy. It mentions that the proposed regulation in this area foresees the setting up of a ‘Platform on Sustainable Finance’.

This is the body will review and update the taxonomy: “This process should not lead to uncertainty or liability risks for investors.”Once the taxonomy is developed, it will have to be used by ALL financial market participants offering environmentally sustainable products, “or investments having similar characteristics”.

“They would have to disclose information on how the criteria for environmentally sustainably economic activities are used to determine the environmental sustainability of the investment.”

It’s stressed that the taxonomy is not a mandatory list of activities in which to invest and that the requirement to use the taxonomy relates to disclosures only — “they are not behavioural requirements”.

Earlier this month RI and the Principles for Responsible Investment hosted a webinar on the taxonomy. It is available here.

Also included amongst the new documents is a detailed overview of how the Technical Expert Group plans to consult with both technical experts and other stakeholders.

The TEG is divided into four working groups: taxonomy, green bonds, low carbon benchmarks and climate-related disclosures.

The taxonomy working group (TWG) expects to publish its consultation strategy by the end of November, consisting of a broad “open” consultation, a technical “targeted” consultation and an open consultation of the usability of the taxonomy.

As for green bonds, the sub-group aims to prepare a report by the second quarter 2019. The low carbon benchmark group aims for an interim report by end-February 2019. The climate-related disclosures group, which held a workshop on October 18, will need to issue a report by early 2019.

Meanwhile, advocacy group the Climate Bonds Initiative has released a new report saying that the first quarter of this year was the first period in which green bonds have performed better than “vanilla equivalents” in both EUR and USD in terms of having larger book cover and greater spread compression. It said that 17 out of 23 EUR green bonds and 6 out of 6 USD bonds had larger oversubscription than vanilla equivalents.