Scientific Beta launches blistering attack on EU climate benchmark proposals

Index firm Scientific Beta has described proposals put forward under the EU Sustainable Action Plan as “champion[ing] the interests of a few select ESG data and service providers, rather than sustainability”.

The firm, a unit of French investment research institution EDHEC-Risk that was acquired by Singapore Exchange earlier this year, published the criticism in response to the imminent introduction of two new regulatory product categories for green indices – Climate Transition Benchmarks (CTBs) and Paris Aligned Benchmarks (PABs) – and enhanced disclosure requirements for ESG-focused benchamarks.

The legislation was approved last year, and will come into force incrementally over the next 18 months. 

The European Commission’s Technical Expert Group (TEG) provided official advice on how the new regulatory product categories should look in terms of detail, and that advice will feed into the next stage of the law’s development. 

However, Scientific Beta says the process “fail[s] to represent investors’ interests”, claiming that the plans were “drawn up hastily by a working group that was dominated by providers of ESG data and services and did not include pension funds and that it puts forward pointless and costly reporting obligations for which no impact study was carried out by the Commission”.

The TEG recommends that CTBs and PABs must ‘self-decarbonise’ at least 7% year-on-year on aggregate in line with the IPCC’s 1.5°C scenario using a Weighted Average Carbon Intensity (WACI) metric that Scientific Beta says suffers from “significant biases and flaws” and was not sufficiently supported by research.

In accompanying analysis, the firm questions the TEG’s decision to deviate from more widely-accepted carbon exposure metrics, such as a version of WACI supported by the Taskforce on Climate-related Financial Disclosures, in favour of one it claims is more aligned with the work of Carbone 4 and Mirova – two members of the 35-strong TEG. 

The composition of the TEG has prompted disquiet for a long time, partly due to the fact that MSCI is the sole index provider officially represented. Last year, MSCI was notably the first to launch products which met the proposed standards for PABs and CTBs.

Scientific Beta also criticised the proposed disclosure rules, which include mandatory requirements for benchmark administrators to disclose the ESG ratings of securities within sustainability-focused products. CEO Noël Amenc said that the move would “almost exclusively” benefit providers of ESG data and services.

The imposition of “onerous reporting requirements”, said the firm, “would discourage the offering and adoption benchmarks that pursue climate change or other ESG objectives”.

In response to Scientific Beta, a Commission spokesperson said to RI that “a robust methodology was applied” in the selection of TEG members.

“Proven knowledge and expertise for one of the subtasks, and knowledge on the intersection between finance and the environment were the most important elements.

“It goes without saying that we have also taken into account the need for a balanced representation of relevant know-how and areas of interest, geographical distribution, gender distribution, and whether a sufficiently wide variety of financial and real economic actors and sectors would be represented.”