EU publishes draft Climate Benchmark regulations as trade groups ask for more time

New benchmark category to exclude tobacco in divergence from TEG Final Report

The European Commission (EC) plans to exclude tobacco producers from Paris-aligned Benchmarks (PABs) – the more ambitious of two new regulatory categories for green indices, introduced under the EU Action Plan on Sustainable Finance.

The latest criteria for both product categories – PABs and Climate Transition Benchmarks (CTBs) – were presented in new draft regulations, setting out the detail on what conditions benchmark providers will need to meet if they want to secure either label, in addition to  enhanced ESG disclosure requirements for ESG indices.

The proposed Level 2 regulation – which supplements primary legislation on Climate Benchmarks adopted last year, and provides the technical detail – appears to have removed previously proposed exclusion criteria for CTBs. Earlier recommendations by the Technical Expert Group (TEG) advising the Commission, which formed the basis of the draft regulations, had included baseline exclusions for both PABs and CTBs, covering controversial weapons and companies that violate global norms.

The Commission has also rowed back on previous TEG suggestions that providers of benchmarks without an ESG focus should be given the option of not disclosing ESG information only as a “last resort”. This, the TEG reasoned, was because “ESG information is currently expected by investors even when the investment product does not pursue ESG objectives”.

But the Commission has decided that providers of benchmarks with non-ESG objectives “will not be bound” by the new disclosure requirements. The disclosure of ESG ratings for all benchmarks, it said, is currently being “addressed in a separate and parallel work stream”. 

Finally, the Commission has rejected TEG proposals for the voluntary disclosure of the share of “green activities” and “brown activities” within an index, saying that work on defining the terms was also taking place in a separate work stream.

Otherwise, the draft regulations have preserved much of the TEG recommendations including the core decarbonisation requirements for PABs and CTBs – an initial 50% and 30% reduction in carbon intensity compared to parent indices respectively and 7% every subsequent year.

In addition, the Commission has gone ahead with a widely-criticised market capitalisation-based carbon intensity metric, which is at odds with the metric recommended by the TCFD.  

The draft regulation also maintains the phase-in timeline of Scope 3 emissions for carbon intensity calculations, with benchmark providers expected to incorporate the information as soon as the regulations enter into force for the energy and mining sectors; two years later for the transportation, construction, buildings, materials and industrial sectors; and four years later for all other sectors.

Publication of the draft regulations comes as various trade groups, including the International Swaps and Derivatives Association (ISDA), The Association for Financial Markets in Europe (AFME) and The Futures Industry Association (FIA), put pressure on the EU to delay national enforcement of the Climate Benchmarks and Disclosure Regulation to provide sufficient time for implementation.

In an open letter to Steven Maijoor, Chair of EU market regulator the European Securities and Markets Authority (ESMA), the groups urged ESMA to support a delay to enforcement – the rules are currently set to come into force later this month – until the technical details have also been agreed. 

If benchmark providers were expected to comply with Climate Benchmarks and disclosure requirements without knowing the full scope of the final Level 2 regulations, the letter said, it would “lead to significant divergence in implementation, contrary to the objective of these obligations, which was to increase harmonisation and comparability in relevant disclosures”.

AFME also told RI that the 20-day period between formalising the Level 2 regulation (known as “gazetting”) and its implementation was insufficient.

The Level 2 draft regulations are now open for market feedback until May 6 and can be accessed here.