European Commission confirms ‘premature’ ESG benchmark label on hold

Update follows floating of transition-focused ‘taxonomy-aligned’ benchmarks by EU’s Platform on Sustainable Finance.

The European Commission has told Responsible Investor that plans to introduce an ESG benchmark label have been shelved for now after it concluded that the idea was “premature”.  

When asked for an update on the long-awaited EU ESG benchmark, a spokesperson for the EU’s executive arm said: “The opportunity to include the ESG benchmark in the proposal of a review of the Benchmarks Regulation (BMR) has been assessed. The Commission concluded that this was premature.” 

They added, however, that “this does not mean that the Commission will not be considering creating such a label in the future”.  

Early this year, PwC published a Commission-sponsored report on the “feasibility, benefits and potential issues of an EU ESG benchmark”. 

The introduction of such a benchmark has been on the EU regulatory to-do list since the launch of its sustainable finance programme in 2019.   

As part of that legislative agreement, the Commission was required to present a report to the European Parliament and Council on “the feasibility of an ‘ESG benchmark’” by the end of 2022. “That report shall be accompanied, where appropriate, by a legislative proposal,” the agreement stated. 

In 2022, RI was told by the Commission that like the EU’s Paris-Aligned Benchmarks (PABs) and Climate Transition Benchmarks (CTBs), “the aim of [an ESG] label would be to further structure ESG-related claims made to benchmark users and, eventually, end-investors”.  

But RI understands that in discussions between the Commission and member state representatives, some had stressed the need to focus on revisions to existing legislation like the EU’s anti-greenwashing regulations, SFDR, before undertaking a new proposal.  

PwC’s study revealed that between 2020 and 2021, the number of financial indices incorporating ESG surged 43 percent. Demand, it reported, is still rising and surveyed ESG benchmark administrators signalled their intention to meet it.  

The consultant also found a “mixed” response when it comes to appetite within the market for an EU ESG benchmark label.  

There was also “strong pushback” to the “imposition of a mandatory standard”, with industry stakeholders “indicating that in the short term, it may be more acceptable to position both the mandatory standard and voluntary labels as automatic routes to qualifying as disclosure under SFDR Article 8 and 9, respectively, rather than as the only routes”. 

Not all opposed it, however. EU financial watchdog ESMA wrote in 2022 a letter to the Commission that a regulatory ESG benchmark is needed to raise standards and ensure consistency in the sustainable finance-themed benchmarks currently being offered to investors. 

Platform floats transition-focused benchmarks 

The update on the ESG benchmark came a day after the Commission’s official advisory body, the EU Platform on Sustainable Finance, proposed new benchmarks focused on greening capital expenditures. 

The Taxonomy-Aligning Benchmarks or TABs – published Wednesday for consultation – builds on the EU’s existing climate benchmarks, but unlike them requires no initial decarbonisation. PABs and CTBs require initial substantial decarbonisation requirements of 50 percent and 30 percent, respectively. 

Like PABs and CTBs, however, the proposed TAB benchmarks would require an annual decarbonisation rate of 7 percent, although green capital expenditure is exempt from this. 

The EU’s existing PAB and CTBs labels, which were launched in 2020, are regarded by some as one of the biggest success stories to emerge from the EU’s sustainable finance push.

According to the Platform’s report, assets managed under a PAB have grown to €116 billion in less than three years. 

Despite this success, there have been questions about the real-world impact of investors shifting to such low-carbon benchmarks and concerns that they are not contributing to the transition.  

When asked if the new proposed benchmarks are more transition focused, Helena Viñes Fiestas, the chair of the platform and commissioner of the Spanish Financial Markets Authority, told RI: “While the PAB/CTB put the accent on GHG emissions reductions and mark the pathway for portfolio decarbonisation, the TABs/TABex include a bottom-up approach by recognising the efforts of companies in greening and transforming their assets and activities in line with the Taxonomy.” 

She added that the platform is convinced of the importance of benchmarks as a “very useful tool for passive funds to mobilise capital towards sustainable investments, and of the increasing relevance of capex-alignment with the taxonomy to drive corporates’ transitions, and the role these can play in capital markets through transition-oriented financial products”. 

A spokesperson for the Commission told RI that a review clause in the climate benchmark regulation prompted it to look at how to “adapt the PAB/CTB frameworks to a union-wide framework on sustainability”. 

“On their own initiative,” they said that the Platform came up with the “new project of creating new labels”.

“It is their prerogative to make any suggestion they want, and it is not anticipating the Commission’s decision to take those recommendations on board or not,” the spokesperson added.  

The consultation on the TABs closes on 13 March.