EU rules all ESG benchmarks must disclose on gender, due diligence, corruption and more

All sustainability-focused indices within the EU will have to report their performance on gender diversity and supply chain due diligence, the European Commission (EC) has now ruled.

The new disclosure requirements are among a raft of amendments proposed by the EC as it seeks the adoption of regulations which will establish two new categories of climate indices and enhanced reporting rules for sustainability-focused indices.

This comes at an advanced stage in the development of the EU’s Climate Benchmark and Disclosure programme, one of the key elements of the EU’s Sustainable Finance Action Plan. Barring any objections from co-legislators, the European Parliament and Council, the EC’s proposals will enter into force in two months.

According to the regulation’s finalised text, “benchmarks that pursue ESG objectives” will be required to disclose their constituents’ gender pay gap, ratio of female to male board members, injury and fatality rates, and violations of anti-corruption and bribery laws. Benchmark administrators will also be asked to report on product exposure to companies without due diligence policies addressing core labour rights.

Not all of this information is readily available. Gender diversity reporting, for example, has been introduced by jurisdictions such as the UK, Belgium, Austria and France, but is yet to become a statutory requirement across the EU and elsewhere. Similarly, companies such as Amazon have been able to suppress data on Covid19 cases among employees despite official requests from US state governments.

But the Commission is overhauling the rules governing EU-wide ‘non-financial’ corporate reporting in a push to make sustainability data more accessible and transparent. Ensuring that firm-level sustainability reporting standards are fit-for-purpose and aligned with the new product disclosure rules would make it simpler and cheaper for service providers to comply.

However, the EC is under pressure to take an even more active role in ensuring the data is available to meet its new rules, with the European Fund and Asset Management Association among those urging the Commission to set up a public ‘hub’ for such information. 

The latest amendments have also seen the removal of a reference to indices losing their ‘Climate Benchmark’ label if annual decarbonisation targets went unmet for two consecutive years. Now, Climate Benchmarks will only lose their status if found not compensating for missed annual targets or failing to meet targets on three occasions within 10 years.

Both Climate Benchmark categories are required to shrink their carbon footprints by at least 7% every year.

This comes two weeks after the Commission introduced an exclusions list for Climate Transition Benchmarks (CTBs), one of the two categories created by the regulations. CTBs, seen as a ‘stepping stone’ to the more ambitious Paris-aligned Benchmarks (PABs), were initially not expected to have baseline exclusions.