On December 9, 2019, the European Parliament and the Council adopted Regulation (UE) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 (hereinafter the “Benchmark Regulation”) as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks (hereinafter the “Regulation”).
The Regulation is being presented in parallel with Regulation (UE) 2019/2088 on sustainability-related disclosures in the financial services sector which aims at making financial market participants and financial advisers integrate environmental, social and governance (hereinafter “ESG”) criteria into their internal processes and to inform their clients (the “Disclosure Regulation”). The latter was the subject of our first “Sustainable Finance” newsflash published on 10 December 2019.
Both the Disclosure Regulation and the Regulation are within the framework of the Paris Agreement adopted by the EU in November 2016 under the United Nations Framework Convention on Climate Change (the “Paris Agreement”). The Paris Agreement seeks to strengthen the response to climate change by, among other things, making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.
TWO NEW BENCHMARKS
The Benchmark Regulation establishes uniform rules for benchmarks in the Union and caters for different types of benchmarks. It provides that supervised entities (such as, but not limited to, investment firms, UCITS or, UCITS management companies and AIFMs) may use benchmarks in the Union if the benchmark is provided by an administrator located in the Union or a third country and is included in the register of administrators and benchmarks maintained by the European Securities and Markets Authority (“ESMA”) in accordance with Article 36 of the Benchmark Regulation.
As an increasing number of investors pursue low-carbon investment strategies and use low-carbon benchmarks to measure the performance of investment portfolios, the Regulation amends the Benchmark Regulation by introducing two new categories of benchmarks: the EU Climate Transition Benchmarks (hereinafter the “EUCT Benchmark”) and the EU Paris-aligned Benchmarks (hereinafter the “EUPA Benchmark”). Introducing a regulatory framework at EU level, which lays down minimum requirements for such benchmarks, increases transparency and will help to prevent greenwashing.
EUCT and EUPA Benchmarks are indices, i.e., any figure that are regularly determined on the basis of the value of one or more underlying assets or prices, including estimated prices, actual or estimated interest rates, quotes and committed quotes, or other values or surveys.
The EUCT Benchmark is an index whose underlying assets are selected, weighted or excluded in such a manner that the resulting benchmark portfolio is on a decarbonisation trajectory, i.e., a measurable, science-based and time-bound trajectory towards alignment with the objectives of the Paris Agreement by reducing carbon emissions.
The EU Paris-aligned Benchmark is an index whose underlying assets (i) are selected, weighted or excluded in such a manner that the resulting benchmark portfolio’s carbon emissions are aligned with the objectives of the Paris Agreement and (ii) do not significantly harm other ESG objectives.
The administrators of EUCT and EUPA Benchmarks, will have to follow the methodology set out in the new Annex III to the Benchmark Regulation and comply with minimum standards to be laid down in delegated acts to be adopted by the Commission which will supplement the Regulation.
STEP PLAN OF THE BENCHMARK ADMINISTRATORS ’ DUTIES AND RIGHTS
New administrator’s duties
By 30 April 2020, all benchmark administrators shall:
- publish or make available an explanation of how the key elements of the methodology that the administrator uses reflect ESG factors for each benchmark or family of benchmarks, with the exception of interest rate and foreign exchange benchmarks;
- publish, in their benchmark statement, an explanation of how ESG factors are reflected in each benchmark or family of benchmarks provided and published. For those benchmarks or families of benchmarks that do not pursue ESG objectives, it shall be sufficient for benchmark administrators to clearly state in the benchmark statement that they do not pursue such objectives. Where no EUCT or EUPA benchmarks are available in the portfolio of an individual benchmark administrator or they have no benchmarks that pursue ESG objectives or take into account ESG factors, this shall be stated in the benchmark statements of all benchmarks provided by that administrator.
By 30 April 2020, EUCT and EUPA benchmark administrators shall:
- formalise, document and make public any methodology used for the calculation of the benchmark, giving the information listed in the Annex III of the Regulation for each of the EUCT and EUPA Benchmarks, including, but not limited to, the list of the main constituents of the benchmark and all criteria and methods, including selection and weighting factors, metrics and proxies used in the benchmark methodology;
- adopt and disclose publicly procedures for introducing changes to their methodology, such methodology having to be examined on at least an annual basis.
By 31 December 2021, benchmark administrators shall, for each benchmark or, where applicable, each family of benchmarks, with the exception of interest rate and foreign exchange benchmarks, include in their benchmark statement an explanation of how their methodology aligns with the target of carbon emission reductions or attains the objectives of the Paris Agreement.
By 1st January 2022, benchmark administrators located in the Union shall endeavour to provide one or more EUCT Benchmarks when they provide significant benchmarks determined on the basis of the value of one or more underlying assets or prices.
By 31 December 2022, EUCT Benchmark administrators shall select, weight, or exclude underlying assets issued by companies that follow a decarbonisation trajectory in accordance with the following requirements:
(i) the companies disclose measurable carbon emission reduction targets to be achieved within specific timeframes;
(ii) the companies disclose a reduction in carbon emissions which is disaggregated down to the level of relevant operating subsidiaries;
(iii) the companies disclose annual information on progress made towards those targets;
(iv) the activities relating to the underlying assets do not significantly harm other ESG objectives.
In addition to delegated acts relating to the minimum standards for EUCT and EUPA benchmarks, the Commission is empowered to adopt delegated acts relating to an explanation of the methodology used, the sectors to be excluded because they do not have measurable carbon emission reduction targets with specific deadlines that are aligned with the objectives of the Paris Agreement and specifying the information to be provided in the benchmark statement.
Transitional provisions for benchmark administrators and index providers
Until 31 December 2021, an index provider may continue to provide an existing benchmark and an existing benchmark may be used for existing and new financial instruments, financial contracts, or for measuring the performance of an investment fund where:
- Such existing benchmark has been recognised as a critical benchmark by an implementing act adopted by the Commission or,
- The index provider submits an application for authorisation to act as an administrator by 1st January 2020.
A Benchmark provided by an administrator located in a third country may still be used by supervised entities in the Union under the following conditions:
- The benchmark was already in use in the Union as a reference for financial instruments, financial contracts, or for measuring the performance of an investment fund; and
- The use of the benchmark is limited to such financial instruments, financial contracts and measurements of the performance of an investment fund that already reference the benchmark in the Union on or which add a reference to such benchmark prior to, 31 December 2021.
REVIEW OF THE DURATION OF MANDATORY ADMINISTRATION OF A CRITICAL BENCHMARK
- If an administrator of a critical benchmark intends to cease providing such benchmark, the period for which the competent authority may compel the administrator to continue to publish the benchmark shall not exceed five years in total (as opposed to 24 months in total before) ;
- In case a supervised contributor wishes to cease to contribute in-put data, and in the event that the competent authority considers that the representativeness of a critical benchmark is put at risk, the supervised contributor can be forced to continue to contribute such input data, for a maximum period of five years in total (as opposed to 24 months in total before).
ENTRY INTO FORCE
The Regulation enters into force on the 10 December 2019 and is binding in its entirety and directly applicable in all Member States.