Esma calls for greater clarity over EU ESG benchmark rules

The timing of an EU ESG benchmark label should be assessed to ensure alignment with other sustainable finance legislation, says financial markets watchdog.

The European Securities and Markets Authority has expressed its support for the creation of an ESG benchmark to improve consumer and investor protection in the EU but warned about the need for alignment with the green taxonomy and the Sustainable Finance Disclosures Regulation.

In its response to a review of the Benchmarks Regulation (BMR), Esma told the European Commission that the disclosure rules currently applicable to ESG benchmarks are not sufficient to ensure harmonisation between the various available methodologies.

A difference in approaches and a “strong growth” in the use of ESG benchmarks have caused a fragmentation “because it is not clear to users […] what level of ambition is underpinning different categories of ESG benchmarks”, Esma said in its feedback to the commission. It noted that the lack of clear labelling raises questions on the inclusion in these benchmarks of firms that have a negative environmental or social impact.

It also said that an EU ESG benchmark label should be accessible to third country (that is, non-EU) administrators on the condition that these are also subject to BMR and properly supervised.

In order to avoid conflict and confusion, Esma has urged the commission to provide clarity on how the requirements under other sustainable finance regulation align with the creation of an ESG benchmark and that the timing of its creation “should be carefully assessed”.

Esma said that it “would like to highlight to the commission that having clarity on the other pieces of legislation (SFDR, taxonomy) is paramount to avoid the situation where the requirements established through the creation of an ESG benchmark label might conflict with other regulatory requirements.”

In particular, Patrick Simion, head of public affairs at BNP Paribas Asset Management, pointed to the issues caused by a potential misalignment between BMR and principal adverse impacts disclosures under SFDR. “If asset managers do not receive information on the various benchmarks they use, they cannot disclose on PAIs for index products,” he said.

Simion echoed Esma’s concerns over a lack of consistency between the information that benchmark providers are required to disclose and the information that benchmark users need in order to comply with their own disclosure obligations.

A total of 445 Article 8 funds and 67 Article 9 funds follow an ESG benchmark, according to Morningstar data analysed by Sustainable Views’ sister title Ignites Europe. Under SFDR, Article 8 funds are those that include environmental and social considerations in their investment decisions, while Article 9 funds have sustainable investment as their core objective.

Streamlining disclosures would create efficiencies for both providers and users, as well as ensuring consistency for end investors, said Simion. Further, he added: “Minimum standards for ESG benchmarks or ESG fund labels should not only be based on alignment with the EU taxonomy, which covers only a small part of the investment universe, but should also allow investors to finance companies that are taking significant steps to transitioning towards a net zero economy.”

The commission is set to present a final report with recommendations on the BMR to the European Parliament and Council later this year.