Untangled: The EU’s ESG Benchmark Rules


Benchmark providers face major disclosure obligations that have taken effect in the last two years. It’s all to do with the EU’s wider sustainable finance action plan, which aims to channel capital flows towards sustainable investment while better managing ESG risks. In nutshell, the EU Benchmark Regulation (EU 2016/2011) has been amended on two fronts.

Firstly, all investment benchmarks will have to disclose if (and how) they incorporate ESG criteria into their processes. Secondly, new standards for carbon products have also been created with two types of climate benchmarks that aim to help investors better understand the carbon impact of their investments.

While these updates are a welcome step towards a more sustainable and transparent investing universe, they also mean providers have a raft of requirements to get to grips with.

Here’s a quick run-down of key changes and how Morningstar can help.

Cracking Down on Greenwashing

To improve transparency when it comes to climate-related risks and ESG considerations, as well as disincentivise greenwashing, benchmark administrators must adhere to specific ESG disclosures set out by the European Commission. The regulation applies to any category of indexes, except interest rate and currency benchmarks.

As of 30 April 2020, benchmark administrators must disclose how key elements of their methodology reflect ESG factors for each benchmark or family of benchmarks. For those specifically pursuing ESG objectives, administrators must demonstrate how the ESG factors are reflected in the benchmark. For non-ESG focused benchmarks, administrators have a non-disclosure option that requires them to explicitly state that they do not pursue any ESG objectives.

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These disclosures ultimately raise the bar for benchmark providers, putting ESG considerations at the forefront of decisions and giving investors a better understanding of how providers stack up against their sustainability objectives, if they have any.

Two New Industry Standards

The European Commission has also introduced two new types of climate benchmarks: the EU Climate Transition Benchmark (EU CTB) and the EU Paris-Aligned Benchmark (EU PAB).

The EU CTBs and the EU PABs both set new minimum criteria for climate indexes, with more stringent criteria for those aligned to the Paris Agreement. In doing so, the EU hopes to provide a standardized tool to support low-carbon investment strategies.

In its final report, the Technical Expert Group (TEG) set out the minimum technical standards that any benchmark administrators who want to market a climate benchmark must adhere to. Benchmarks that comply with the minimum technical requirements will then be able to label themselves as an EU Paris-Aligned Benchmark or an EU Climate Transition Benchmark.

It’s also been announced that, as of 1 January 2022, administrators of significant benchmarks in the EU will have to provide one or more climate transition benchmarks.

Confidence in Compliance

Morningstar Indexes has recently introduced the Morningstar EU Climate Indexes, which include EU CTB and PAB variations. The indexes incorporate Sustainalytics’ Carbon Solutions and are fully compliant with EU Benchmark regulatory requirements.

The indexes can be used to guide strategic asset allocation, as benchmarks for actively managed strategies, or as the basis for creating passively-managed investable products. Sustainalytics will also offer a data package with ESG data that aligns with the benchmark regulation requirements in terms of disclosures and minimum standards for climate benchmarks.

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To find out more about the EU Climate Benchmarks and ESG Disclosures, as well as the relevant solutions from Morningstar and Sustainalytics, download our free guide here


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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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