The EU Technical Expert Group on Sustainable Finance has published a Handbook providing guidance on the EU’s new climate transition benchmarks (EU CTB) and Paris-aligned benchmarks (EU PAB), as well as on the environmental, social and governance disclosures that will be applicable to all investment benchmarks (other than currency and interest rate benchmarks) in the future. Conventional benchmarks do not typically reflect low-carbon considerations, but an increasing focus on sustainability has led to a proliferation in recent years of specific low-carbon benchmarks that were not subject to clear or comparable standards. The EU therefore introduced the EU CTB and EU PAB labels in December 2019 through amendments to the existing EU Benchmarks Regulation. These new labels are intended to assist investors in identifying low-carbon benchmarks that allow them to pursue low-carbon investment strategies. The Benchmarks Regulation was also amended to require that benchmark administrators make ESG disclosures for all indices, explaining how the methodologies they use to administer benchmarks reflect ESG factors. The changes to the Benchmarks Regulation came into force and apply directly across the EU from December 10, 2019.

In September 2019, the EU Technical Expert Group on Sustainable Finance (TEG) published a report providing clarification on these new Benchmark Regulation requirements. The TEG’s new Handbook aims to provide responses to frequently asked questions encountered by the TEG in response to the September 2019 report. It includes:

  • Clarification of the requirement that EU CTB and EU PAB indices decrease index carbon intensity by at least 7% on average per annum;
  • Statements of preference for climate benchmark-related terminologies;
  • An explanation of the anti-green washing measures proposed by the TEG;
  • Advice on the data sources and estimation techniques that may be used by benchmark administrators;
  • An explanation of the classifications used to determine the business sector into which companies fall for the purposes of benchmarking;
  • Advice on the relevance and comparability of ESG disclosures and ratings; and
  • Further advice on other aspects of the TEG’s climate benchmarks report, including confirmation that all market participants, including asset managers and owners, may use the climate transition investing philosophy.

The amendments to the Benchmarks Regulation form part of the European Commission’s broader package of legislative reforms on sustainable finance, published in May 2018, which are intended to ensure that environmental, social and governance considerations are consistently integrated into investment and advisory processes.