EU regulator throws weight behind prospective ESG benchmark

EU financial regulator ESMA believes that a regulatory ESG benchmark is needed to raise standards and ensure consistency in the sustainable finance-themed benchmarks currently being offered to investors.

Current disclosure requirements for ESG benchmarks “are not sufficient to ensure an adequate level of harmonisation”, said ESMA in a letter to the European Commission on Friday, adding that it “agrees completely” that a regulatory label would help improve the quality of ESG benchmarks.

“Specifying the minimum standards for harmonisation of the methodology of these benchmarks is key to ensuring a quality label, and a high level of consumer and investor protection. In addition, the creation of such an EU ESG label should consider sufficiently ambitious minimum standards for the methodology, which would offer reassurances as to the sustainability-related impact of such benchmarks.”

A bloc-wide benchmark would also be “an extra supporting tool against greenwashing” and prevent “information assymetries” between users and providers of such benchmarks.

Benchmark providers are currently required to disclose whether their ESG products comply with Article 8 or 9 based on the degree to which they account for ESG factors, details on the ESG factors considered, adverse impacts that could result from investing in the product and their alignment to the EU green taxonomy.

Late last year, the EU appointed PwC to undertake a study on the “potential creation of an EU ESG Benchmark label”. Such a benchmark has been on the EU regulatory to-do list since the launch of its sustainable finance programme in 2019, with the EC due to present a report on its feasibility to the European Parliament and Council by the end of 2022.

Responsible Investor recently reported that PwC, as part of that study, recently closed a questionnaire aimed at benchmark providers, constituents and users. The Commission did not provide details on the number or type of respondents that participated in that questionnaire, saying they did so “on a confidential basis” and that broader feedback from the consultation would be included in a final report, slated for Q4.

Separately, ESMA has said benchmarks that comply with the EU’s Paris-aligned and Climate Transition Benchmark standards should include a predefined prefix in their names – such as EUBMR-CTP and EUBMR-PAB – as they are not easily identified.

The feedback from ESMA was made in response to a broader EC consultation to improve the robustness of financial benchmarks provided and used in the EU, including from providers based outside of the bloc.