knowledge | 23 July 2019 |

EU Developments in Sustainable Finance:  Benchmarks and Disclosures

As mentioned in our earlier briefings, the European Commission’s ("EC") technical expert group on sustainable finance  ("TEG") published three new important reports:

1.  a taxonomy technical report which aims to provide practical guidance for policy makers, industry and investors on how best to support and invest in economic activities that contribute to achieving a climate neutral economy (the “Taxonomy Report”);

2.  a report on EU Green Bond Standards which recommends clear and comparable criteria for issuing green bonds (the “EU GBS Report”); and

3.  a report on benchmarks which sets out the methodology and minimum technical requirements for indices that will enable investors to adopt a climate-conscious investment strategy, and address the risk of greenwashing.  The report also sets out disclosure requirements for benchmark providers in relation to environmental, social and governance (“ESG”) factors and their alignment with the Paris agreement (the “Benchmarks Report”).

This briefing is the final instalment in a series of three and considers the Benchmarks Report alongside the related guidelines on corporate climate-related information reporting.  These guidelines are aimed at providing companies with practical recommendations on how to better report the impact that their activities are having on the climate as well as the impact of climate change on their business. 

(For a discussion of the Taxonomy Report and the EU GBS Report, see our earlier briefings available here and here.)

Climate Benchmarks and Benchmark ESG disclosures

On 25 February 2019, EU co-legislators agreed to amend Regulation (EU) 2016/1011 (the “Benchmarks Regulation”), including by introducing two types of climate benchmarks:

  1. an EU Climate Transition Benchmark (“EU CTB”), which is a benchmark where the underlying assets are selected so that the resulting benchmark portfolio has fewer carbon emissions when compared to the assets that comprise a standard capital-weighted benchmark; and
  2. an EU Paris-Aligned Benchmark (“EU PAB”), which is a benchmark where the underlying assets are selected on the basis that their carbon emissions savings exceed the asset’s carbon footprint.

Under the draft amending regulation, the EC is empowered to adopt delegated acts to specify the minimum standards for low-carbon and positive carbon impact benchmarks and in this regard, it asked the TEG to suggest minimum technical requirements for both climate benchmarks and for technical advice on ESG disclosures.

In the Benchmarks Report, the TEG sets out several criteria for qualification as an EU CTB or an EU PAB:

  • climate benchmarks must demonstrate a significant decrease in overall greenhouse gas emissions intensity compared to their underlying investment universes or parent indices. This minimum relative decarbonisation is set at 30% for EU CTBs and 50% for EU PABs;
  • climate benchmarks must be sufficiently exposed to sectors relevant to the fight against climate change. In other words, decarbonisation cannot happen through a shift in the allocation from sectors with high potential impact on climate change and its mitigation to sectors with inherently limited impact. The exposure to ‘high impact sectors’ must therefore be at least the exposure of the underlying investment universe or parent index;
  • climate benchmarks must demonstrate their ability to reduce their own greenhouse gas emissions intensity on a year-on-year basis. This minimum ‘self-decarbonisation’ rate has been set in accordance with the global decarbonisation trajectory implied by the Intergovernmental Panel on Climate Change’s most ambitious scenario: 1.5°C with no or limited overshoot; and
  • when a “green to brown share ratio” is calculated by benchmark administrators based on an estimation of the green and brown shares of revenues from underlying issuers, relative to the underlying investment universe or parent index, this ratio must be at least equal for EU CTBs and multiplied by at least 4 for EU PABs.

The Benchmarks Report also covers new ESG disclosure requirements under the draft amending regulation. The TEG proposes to set out disclosure requirements based on the market’s current understanding of how ESG and climate-related considerations can be integrated into the valuation of assets across various asset classes. The recommendations on minimum disclosures for the methodology document and specifications for the benchmark statements therefore vary based on the maturity of ESG data and considerations in a given asset class.  

Regarding the requirement to disclose an assessment of ‘Paris alignment’ for each benchmark, the TEG acknowledges that no broadly accepted and established framework has yet emerged for measuring the alignment of an investment portfolio with a temperature scenario.  For that reason, in the Benchmarks Report, the aim is to address specific elements of the emerging market practice of measuring the Paris alignment of investment portfolios. In particular, the focus is on transparency regarding the choice of scenario and the data source and methodology used to measure the alignment of an index with a given scenario.

The publication of the Benchmarks Report has been followed by a call for feedback (running until the end of July – available here), where market participants and stakeholders are asked to provide feedback. Following this, the TEG will publish a final report in September 2019, which will serve as a basis for the drafting of delegated acts by the EC. The delegated acts are expected to be adopted by early 2020.

Climate-related disclosures

On 18 July 2019, the EC also published new guidelines on corporate climate-related information reporting. These guidelines were developed to provide companies with practical recommendations on how to better report the impact that their activities are having on the climate as well as the impact of climate change on their business.

The principal contents of the guidelines on climate reporting are:

  • explanations of key concepts in relation to reporting climate information under the Non-Financial Reporting Directive, including materiality, climate-related risks, opportunities, and natural capital dependencies;
  • proposals for what to report regarding the climate under each of the reporting areas identified in the Non-Financial Reporting Directive (business model, policies, outcomes, risks and indicators);
  • an annex with further guidance for banks and insurance companies, in view of the particular issues that they face regarding the reporting of climate-related information; and
  • an annex explaining how the reporting requirements of the Non-Financial Reporting Directive can be combined with the recommendations of the Task Force on Climate-related Financial Disclosures.

The Task Force on Climate-related Financial Disclosures (“TCFD”) was established by the Financial Stability Board of the G20.  It published its recommendations in 2017 and these are widely recognised as authoritative guidance on the reporting of financially material climate-related information.  The new guidelines integrate the TCFD recommendations, and provide guidance to companies that is consistent with the Non-Financial Reporting Directive and the recommendations of the TCFD.

The new guidelines on climate reporting are a supplement to the general non-binding guidelines on non-financial reporting adopted by the EC in 2017 and cover climate-related information only.  The new guidelines are non-binding, like the existing non-binding guidelines published in 2017 to which they are a supplement, and are not intended to create any new legal obligations. 

The Taxonomy Report emphasises that improvements in company disclosure of climate-related information will be necessary for the proposed Taxonomy to function effectively.  The new guidelines are intended to help fill the gap.  The guidelines propose that companies disclose the proportion of their turnover and/or capital expenditure and/or operational expenditure that meet the criteria for substantially contributing to mitigation of or adaptation to climate change as set out in the proposed Taxonomy. The guidelines say that companies should use this indicator if and when the proposed Taxonomy Regulation is approved.

Companies should be able to use the new guidelines for reports published in 2020, covering financial year 2019. The services of the EC expect to gather feedback on the use of the guidelines in the second half of 2020.


For the developing sustainable finance environment to operate effectively, it is important that investors and companies have a reliable measure of how “sustainable” an investment will be.  The amendments to the Benchmarks Regulation considered by the TEG’s Benchmark Report, alongside the further guidelines on disclosures published by the EC, will be crucial in this regard. 

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.

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