Report on benchmarks

24/06/2019 | EIFR

Executive Summary

The agreement reached by the European co-legislators on the regulation amending Regulation (EU) 2016/2011, as part of the Commission's Action Plan on Financing Sustainable Growth, resulted in two essential measures regarding investment benchmarks. The first is the creation of two types of climate benchmarks11, i.e. the 'EU Climate Transition Benchmark (EU CTB) and EU Paris-aligned Benchmark (EU PAB)’. The second measure is the definition of Environmental, Social and Governance (ESG) disclosure requirements that shall be applicable to all investment benchmarks12.

The main objectives of the new climate benchmarks are to (i) allow a significant level of comparability of climate benchmarks methodologies while leaving benchmarks’ administrators with an important level of flexibility in designing their methodology; (ii) provide investors with an appropriate tool that is aligned with their investment strategy; (iii) increase transparency on investors’ impact, specifically with regard to climate change and the energy transition; and (iv) disincentivize greenwashing.

Context. While conceptually, the two types of climate benchmarks are closely linked to the objectives of the Paris Agreement, the TEG wants to clearly acknowledge the fact that the current state of methodologies and available issuer-level data does not allow for an evident and irrefutable conversion of climate scenarios into detailed and informed portfolio construction methodologies at the time of writing this report. In order to ensure the highest level of ambition for climate benchmarks, the TEG therefore largely relies on already available proxies and currently evolving methodologies, sometimes already used by market participants. In this context, the TEG also strongly recommends a review of all minimum standards after a three-year period to ensure the highest level of ambition for climate benchmarks in accordance with potential future enhancements in the state of the research and practices around scenario analysis applied to investment strategies.

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