CELEX: 
Language: en
Date: 2020-07-17 00:00:00
Title: COMMISSION DELEGATED REGULATION (EU) …/... supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards the minimum content of the explanation on how environmental, social and governance factors are reflected in the benchmark methodology

EUROPEAN
                          COMMISSION
                                                  Brussels, 17.7.2020
                                                  C(2020) 4748 final
               COMMISSION DELEGATED REGULATION (EU) …/...
                                      of 17.7.2020
   supplementing Regulation (EU) 2016/1011 of the European Parliament and of the
   Council as regards the minimum content of the explanation on how environmental,
      social and governance factors are reflected in the benchmark methodology
                               (Text with EEA relevance)
EN                                                                                 EN
 ---pagebreak---                                  EXPLANATORY MEMORANDUM
   1.        CONTEXT OF THE DELEGATED ACT
   1.1.      General background
   In 2015, the European Union signed the Paris Climate Agreement. The Paris Climate
   Agreement sets the objective to strengthen the response to climate change, among other
   means by making investments flows consistent with a pathway towards low greenhouse gas
   emissions and climate-resilient development.
   The European Green Deal communication confirms the need for long-term signals to direct
   financial and capital flows to green investment and to avoid stranded assets. This delegated
   act will contribute to this specific objective. It also follows up on the earlier Action Plan
   ‘Financing Sustainable Growth’ of March 2018, launching an ambitious and comprehensive
   strategy on sustainable finance and aiming to reorient capital flows towards sustainable
   investment to achieve sustainable and inclusive growth.
   More broadly, the European Green Deal is the European Union’s response to the climate and
   environmental challenges that are this generation’s defining task. It is a new growth strategy that
   aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and
   competitive economy where there are no net emissions of greenhouse gases in 2050, where the
   environment and health of citizens are protected, and where economic growth is decoupled from
   resource use. Since companies and households will have to provide the bulk of the sustainable
   investments in the next decade, it is crucial to put in place clear long-term signals to guide
   investors to sustainable investment.
   Regulation (EU) 2016/1011 of the European Parliament and of the Council1 (the Benchmark
   Regulation) introduces a common framework to ensure the accuracy and integrity of
   benchmarks referenced in financial instruments, financial contracts or investment funds in the
   European Union. In doing so, it aims to contribute to the functioning of the internal market,
   while achieving a high level of consumer and investor protection.
   On 24 May 2018, the Commission published its proposal to amend the benchmark regulation,
   in accordance with the Action Plan ‘Financing Sustainable Growth’, with the objectives to put
   forward standards for the methodology of low-carbon benchmarks in the Union.
   Regulation (EU) 2019/2089 of the European Parliament and of the Council2, amending the
   Benchmark Regulation, introduces a new category of benchmarks, so-called EU Climate
   benchmarks (the EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks), and
   sustainability-related disclosures for all benchmarks.
   1.2.      Objective of the Delegated Regulation
   The objective of this Delegated Regulation is to lay down the minimum content of the
   explanation of how the key elements of the benchmark methodology reflect environmental,
   social and governance (ESG) factors for each benchmark, with the exception of interest rate
   and foreign exchange benchmarks, as well as the standard format to be used.
   1
           Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices
           used as benchmarks in financial instruments and financial contracts or to measure the performance of
           investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No
           596/2014 (OJ L 171, 29.6.2016, p. 1).
   2
           Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019
           amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned
           Benchmarks and sustainability-related disclosures for benchmarks (OJ L 317, 9.12.2019, p. 17).
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 ---pagebreak---    1.3.      Legal background
   This Delegated Regulation is based on the empowerment set out in Article 13(2a) of the
   Benchmark Regulation.
   2.        CONSULTATIONS PRIOR TO THE ADOPTION OF THE ACT
   In June 2018, the Commission set up a Technical Expert Group on Sustainable Finance
   (TEG). The mission of the TEG included the provision to the Commission of
   recommendations regarding the ESG disclosure requirements to form part of the benchmark
   statement.
   In June 2019, the TEG published an interim version of the report, which was subject to a call
   for feedback running over the summer 2019.
   On 30 September 2019, the TEG published its final report. This final report is available at
   https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/docum
   ents/190930-sustainable-finance-teg-final-report-climate-benchmarks-and-disclosures_en.pdf.
   The Commission staff held meetings with stakeholders to discuss the future delegated
   measures in the fall of 2019 and during the first half of 2020. In accordance with Better
   Regulation rules, the draft delegated acts were published on the Better Regulation portal for a 4
   weeks feedback period between April and May 2020. In total, 36 stakeholders answered to such
   consultation. Furthermore, at the meeting of the Expert Group of the European Securities
   Committee (EGESC) in May 2020, the draft delegated acts were presented to and discussed
   among Member States’ experts, with observers from the European Parliament.
   3.        IMPACT ASSESSMENT
   In accordance with the Benchmark Regulation as amended by Regulation (EU) 2019/2089,
   the Commission is empowered to specify sustainability-related measures for benchmarks. It
   includes three topics: minimum requirements for the construction of EU Climate Transition
   Benchmarks and EU Paris-aligned Benchmarks, the minimum content of the explanation of
   how the key elements of the benchmark methodology reflect ESG factors and the information
   the benchmark administrator has to provide in the benchmark statement on how ESG factors
   are reflected.
   The TEG was mandated by the Commission to deliver technical recommendations on all of
   those aspects. The TEG published its final report on climate benchmarks and benchmarks’
   ESG disclosures in September 2019, following numerous engagement with stakeholders via
   roundtables, workshops and a 6-week call for feedback that was conducted in the summer
   2019.
   TEG report
   The TEG final report contains a set of minimum requirements for the construction of EU
   Climate Transition Benchmarks and EU Paris-aligned Benchmarks and minimum ESG
   disclosure requirements that should be applicable to all benchmarks, with some exceptions.
   The Commission has considered all representations received, including the TEG’s report and
   the responses to the TEG’s call for feedback, as well as the input provided to the Commission
   by stakeholders during bilateral meetings or conference calls.
   While the Commission generally agrees with the approach taken by the TEG, the delegated
   acts nevertheless deviate from the TEG report in a number of instances, in particular in
   relation to ESG disclosure requirements. The objective is to streamline and simplify the
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 ---pagebreak---    TEG’s approach to provide more clarity on the set of indicators and on the information that
   benchmark administrators are expected to disclose. The amendments are put in simple terms
   and clarify the technical recommendations put forward by the TEG, improve the level of
   transparency and provide greater predictability for benchmark administrators.
   When specifying the minimum criteria for the construction of EU Climate Transition
   Benchmarks and EU Paris-aligned Benchmarks and ESG disclosure requirements, the
   Commission kept in mind the overarching principle of proportionality, while maintaining a
   certain level of flexibility for benchmark administrators.
   Proportionality
   The delegated acts further specify the empowerments relating to the new EU Climate
   Benchmarks and the ESG disclosure requirements that are contained in the Benchmark
   Regulation, ensuring the proportionate application of the latter.
   Taking into account the TEG report and the feedback received from stakeholders, the
   Commission has sought to introduce a proportionate approach to the minimum requirements
   for constructing EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, and
   minimum ESG disclosure requirements for benchmark administrators.
   In accordance with the empowerments contained in the Benchmark Regulation, the
   Commission believes there is a need to distinguish between ESG disclosure requirements as
   regards the methodology and ESG disclosure requirements in the benchmark statement, as
   they do not pursue the same objectives for investors.
   Benchmark administrators are currently not required to disclose a list of ESG factors,
   although a number of them already do so, within so-called ‘factsheets’. Hence, this exercise
   will be new only to some of them. The objective of the Commission is to align to the extent
   possible on already existing market practices and indicators to avoid disproportionate costs.
   For this reason, the ESG factors are based on the recommendation of the TEG report that has
   been subject to extensive market consultation. The Commission also proposes to refine further
   the approach suggested by the TEG, streamlining in particular the list of ESG factors to be
   disclosed, simplifying the terminology used and referring, where applicable, to international
   standards, treaties and conventions.
   Furthermore, the Commission does not intend to mandate the disclosure of ESG ratings for all
   benchmarks, as this topic is being addressed in a separate and parallel work stream under the
   Action Plan on Sustainable Finance.
   Finally, while the TEG report recommends the use of a ‘green to brown share ratio’, such
   metric is not included in the delegated acts, as those notions have not yet been defined at EU
   level and are being considered in a separate and parallel work stream under the upcoming
   taxonomy Regulation.
   Flexibility
   The requirements laid down under the delegated act as regards minimum standards for EU
   Climate Transition Benchmarks and EU Paris-aligned Benchmarks maintain a certain degree
   of flexibility in the design of the methodology of benchmarks, in order to allow room for the
   market to develop innovative strategies and adapt to the specific need of investors.
   Regarding the delegated act on the minimum content of the explanation of how ESG factors
   are reflected in the benchmark methodology, benchmark administrators should only report on
   the ESG factors that they use when pursuing ESG objectives, and how they do so.
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 ---pagebreak---    Finally, regarding the delegated act on the benchmark statement, benchmark administrators
   that do not pursue ESG objectives will not be bound by the requirements when they explicitly
   state this in the relevant template annexed to the benchmark statement.
   3.1       Analysis of costs and benefits
   One of the delegated acts specifies minimum standards for designing EU Climate Transition
   Benchmarks and EU Paris-aligned Benchmarks. Both benchmarks are voluntary labels and
   therefore the requirements set out in the related delegated act only apply to benchmark
   administrators that choose to opt-in for the rules. Since the delegated act lays down minimum
   standards, benchmark administrators will be allowed to maintain a certain degree of flexibility
   in their design, so that compliance costs would be limited. More generally, this approach
   would provide clear and harmonised rules on how to design such benchmarks, which should
   allow to possibly reduce the costs of developing internal policies, but also allow room for the
   market to develop innovative strategies, and address the demand of investors willing to make
   climate-conscious investment strategies.
   The two delegated acts on, respectively, minimum ESG disclosures on the methodology and
   on minimum ESG disclosures in the benchmark statement, will require benchmark
   administrators to adapt their IT infrastructure to accommodate the new flow of information
   and disclosure requirements. It is to be highlighted it is already current market practice for
   benchmark administrators to disclose ESG information in so-called ‘factsheets’, therefore
   compliance costs with the new rules are expected to be limited.
   The ESG information to be disclosed by benchmark administrators will improve the level of
   comparability among benchmarks and provide clarity for investors willing to make informed
   climate related investments.
   3.2       Subsidiarity
   The Benchmark Regulation is binding in its entirety and directly applicable in all Member
   States. The Benchmark Regulation contains a transitional period for critical benchmarks and
   third country benchmarks that may continue to be used in the Union without authorisation
   until end 2021.The legal basis for the Benchmark Regulation is Article 114 of the Treaty on
   Functioning of the European Union and any changes to that Regulation shall comply with the
   same legal basis.
   An increasing number of investors pursue low-carbon investment strategies and use low-
   carbon benchmarks to measure the performance of investment portfolios.
   In order to maintain the proper functioning of the internal market for the benefit of investors
   and to ensure a high level of consumer and investor protection, the Benchmark Regulation as
   amended introduces a regulatory framework which lays down minimum requirements for EU
   Climate Transition Benchmarks and EU Paris-aligned Benchmarks at Union level. The
   establishment of EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks,
   underpinned by a methodology linked to the commitments laid down in the Paris Agreement
   regarding carbon emissions, will contribute to increase transparency and help prevent
   greenwashing.
   In the absence of a harmonised framework to ensure the accuracy and integrity of the main
   categories of low-carbon benchmarks used in individual or collective investment portfolios, it
   is likely that differences in Member States’ approaches will create obstacles to the smooth
   functioning of the internal market.
EN                                                  4                                              EN
 ---pagebreak---    4.      LEGAL ELEMENTS OF THE DELEGATED ACT
   The right to adopt delegated acts is provided for under Article 49 of Regulation (EU)
   2016/1011.
          Article 1 refers to the explanation on how ESG factors are reflected in the benchmark
           methodology;
          Article 2 clarifies when benchmark administrators are required to update the template
           for the benchmark methodology.
EN                                                5                                              EN
 ---pagebreak---                    COMMISSION DELEGATED REGULATION (EU) …/...
                                               of 17.7.2020
       supplementing Regulation (EU) 2016/1011 of the European Parliament and of the
       Council as regards the minimum content of the explanation on how environmental,
           social and governance factors are reflected in the benchmark methodology
                                       (Text with EEA relevance)
   THE EUROPEAN COMMISSION,
   Having regard to the Treaty on the Functioning of the European Union,
   Having regard to Regulation (EU) 2016/1011 of the European Parliament and of the Council
   of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts
   or to measure the performance of investment funds and amending Directives 2008/48/EC and
   2014/17/EU and Regulation (EU) No 596/20143, and in particular Article 13(2a) thereof,
   Whereas:
   (1)    The Paris Agreement adopted under the United Nations Framework Convention on
          Climate Change, approved by the Union on 5 October 2016 4 (the ‘Paris Agreement’),
          aims to strengthen the response to climate change, among other means by making
          investment flows consistent with a pathway towards low greenhouse gas emissions
          and climate-resilient development.
   (2)    On 11 December 2019, the Commission adopted its Communication to the European
          Parliament, the European Council, the Council, the European Economic and Social
          Committee and the Committee of the Regions ‘The European Green Deal’5. The
          European Green Deal represents a new growth strategy that aims to transform the
          Union into a fair and prosperous society, with a modern, resource-efficient and
          competitive economy where there are no net emissions of greenhouse gases in 2050
          and where economic growth is decoupled from resource use. The implementation of
          the European Green Deal requires that investors are offered clear, long-term signals to
          avoid stranded assets and to raise sustainable finance.
   (3)    Regulation (EU) 2016/1011 requires benchmark administrators to explain how for
          each benchmark provided and published the key elements of the benchmark
          methodology reflect environmental, social and governance (“ESG”) factors.
   (4)    Different ways of explaining for each benchmark or family of benchmarks how the
          key elements of the benchmark methodology reflect ESG factors, would lead to a lack
          of comparability between benchmarks and a lack of clarity as to the scope and
          objectives of the ESG factors. It is therefore necessary to set out the minimum content
          of such explanations as well as a template to be used.
   3
          OJ L 171, 29.6.2016, p. 1.
   4
          Council Decision (EU) 2016/1841 of 5 October 2016 on the conclusion, on behalf of the European
          Union, of the Paris Agreement adopted under the United Nations Framework Convention on Climate
          Change (OJ L 282, 19.10.2016, p. 1).
   5
          COM(2019) 640 final.
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 ---pagebreak---    (5)  In order to better adapt the information for investors, the requirement to explain how
        the key elements of the methodology reflect ESG factors for each benchmark or family
        of benchmarks provided and published should take into account the underlying assets
        on which benchmarks are based. This Regulation should not apply to benchmarks
        which do not have underlying assets that have an impact on climate change such as
        interest rate benchmarks and foreign exchange benchmarks. In accordance with Article
        19 of Regulation (EU) 2016/1011, this Regulation should not apply to commodity
        benchmarks.
   (6)  The explanation on how key elements of the benchmark methodology reflect ESG
        factors should be made at an aggregated weighted average value, and should not be
        disclosed for each constituent of the benchmarks. Where relevant and appropriate,
        benchmark administrators should be able to provide additional ESG information.
   (7)  In order to provide benchmark users with accurate and up-to-date information,
        benchmark administrators should update the information provided in the template to
        reflect any changes made to the methodology, and should indicate the reason and the
        dates at which the information was updated.
   (8)  In order to provide investors with maximum transparency, benchmark administrators
        should clearly state whether they do or do not pursue ESG objectives,
   HAS ADOPTED THIS REGULATION:
                                                Article 1
       Explanation on how ESG factors are reflected in the benchmark methodology
   1.     Benchmark administrators shall explain, using the template laid down in the Annex
          to this Regulation, which of the environmental, social and governance (ESG) factors
          referred to in Annex II to Commission Delegated Regulation (EU) …/… [PO please
          insert a reference to Commission Delegated Regulation supplementing Regulation
          (EU) 2016/1011 of the European Parliament and of the Council as regards the
          explanation in the benchmark statement of how environmental, social and
          governance factors are reflected in each benchmark provided and published]6 they
          have taken into account when designing their benchmark methodology. They shall
          also explain how those factors are reflected in the key elements of that methodology,
          including for the selection of underlying assets, weighting factors, metrics and
          proxies.
          The requirement set out in the first subparagraph shall not apply to commodity
          benchmarks.
   2.     For individual benchmarks, benchmark administrators may, rather than providing all
          the information required by the template laid down in the Annex to this Regulation,
          replace that information by a hyperlink in the explanation provided, to a website that
          contains all that information.
   3.     Where benchmarks blend different types underlying assets, benchmark
          administrators shall explain how ESG factors are reflected for each of the relevant
          underlying asset.
   6
        Commission Delegated Regulation (EU) …/… of … supplementing Regulation (EU) 2016/1011 of the
        European Parliament and of the Council as regards the explanation in the benchmark statement of how
        environmental, social and governance factors are reflected in each benchmark provided and published
        (OJ L …, …, p. …).
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 ---pagebreak---    4.       Benchmark administrators may include in the explanation provided additional ESG
            factors and related information.
   5.       Benchmark administrators shall clearly state in the explanation provided whether
            they do or do not pursue ESG objectives.
   6.       Benchmark administrators shall include in the explanation provided a reference to
            the sources of data and standards used for each ESG factor disclosed.
                                               Article 2
                                 Update of the explanation provided
   Benchmark administrators shall update the explanation provided whenever the benchmark
   methodology is changed, and in any case on an annual basis. They shall state the reasons for
   the update.
                                               Article 3
                                  Entry into force and application
   This Regulation shall enter into force on the twentieth day following that of its publication in
   the Official Journal of the European Union.
   This Regulation shall be binding in its entirety and directly applicable in all Member States.
   Done at Brussels, 17.7.2020
                                                 For the Commission
                                                 The President
                                                 Ursula VON DER LEYEN
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 ---documentbreak---                           EUROPEAN
                          COMMISSION
                                                 Brussels, 17.7.2020
                                                 C(2020) 4748 final
                                                 ANNEX
                                       ANNEX
                                        to the
               COMMISSION DELEGATED REGULATION (EU) .../...
   supplementing Regulation (EU) 2016/1011 of the European Parliament and of the
   Council as regards the minimum content of the explanation on how environmental,
      social and governance factors are reflected in the benchmark methodology
EN                                                                                 EN
 ---pagebreak---                                                       ANNEX
            TEMPLATE FOR EXPLAINING HOW THE KEY ELEMENTS OF THE
     BENCHMARK METHODOLOGY REFLECT ENVIRONMENTAL, SOCIAL AND
                                      GOVERNANCE (ESG) FACTORS
         EXPLANATION OF HOW ESG FACTORS ARE REFLECTED IN THE KEY
                        ELEMENTS OF THE BENCHMARK METHODOLOGY
   Item 1. Name of the benchmark administrator.
   Item 2. Type of benchmark or family of benchmarks.
   Choose the relevant underlying asset from the list
   provided in Annex II to Commission Delegated
   Regulation (EU) …/… [PO please insert a reference to
   Commission Delegated Regulation supplementing
   Regulation (EU) 2016/1011 of the European
   Parliament and of the Council as regards the
   explanation in the benchmark statement of how
   environmental, social and governance factors are
   reflected in each benchmark provided and published].
   Item 3. Name of the benchmark or family of
   benchmarks.
   Item 4. Does the benchmark methodology for the            □ Yes □ No
   benchmark or family of benchmarks take into account
   ESG factors?
   Item 5. Where the response to Item 4 is positive, please list below, for each family of benchmarks, those ESG
   factors that are taken into account in the benchmark methodology, taking into account the ESG factors listed in
   Annex II to Delegated Regulation (EU) …/…[PO please insert a reference to Commission Delegated Regulation
   supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards the
   explanation in the benchmark statement of how environmental, social and governance factors are reflected in
   each benchmark provided and published].
   Please explain how those ESG factors are used for the selection, weighting or exclusion of underlying assets.
   The ESG factors shall be disclosed at an aggregated weighted average value at the level of the family of
   benchmarks.
   a) List of environmental factors considered:                       Selection, weighting or exclusion:
   b) List of social factors considered:                              Selection, weighting or exclusion:
   c) List of governance factors considered:                          Selection, weighting or exclusion:
   Item 6. Where the response to Item 4 is positive, please list below, for each benchmark, those ESG factors that
   are taken into account in the benchmark methodology, taking into account the ESG factors listed in Annex II to
   Delegated Regulation (EU) …/…[[PO please insert a reference to Commission Delegated Regulation
   supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards the
   explanation in the benchmark statement of how environmental, social and governance factors are reflected in
   each benchmark provided and published], depending on the relevant underlying asset concerned.
EN                                                        1                                                        EN
 ---pagebreak---    Please explain how those ESG factors are used for the selection, weighting or exclusion of underlying assets.
   The ESG factors shall not be disclosed for each constituent of the benchmark, but shall be disclosed at an
   aggregated weighted average value of the benchmark.
   Alternatively, all of this information may be provided in the form of a hyperlink to a website of the benchmark
   administrator included in this explanation. The information on the website shall be easily available and
   accessible. Benchmark administrators shall ensure that information published on their website remains available
   for five years.
   a) List of environmental factors considered:                      Selection, weighting or exclusion:
   b) List of social factors considered:                             Selection, weighting or exclusion:
   c) List of governance factors considered:                         Selection, weighting or exclusion:
   Hyperlink to the information on ESG factors for each
   benchmark:
   Item 7. Data and standards used
   a) Data input.
   (i) Describe whether the data are reported, modelled
   or sourced internally or externally.
   (ii) Where the data are reported, modelled or sourced
   externally, please name the third party data provider.
   b) Verification and quality of data.
   Describe how data are verified and how the quality of
   those data is ensured.
   c) Reference standards
   Describe the international standards used in the
   benchmark methodology.
   Date on which information has been last updated
   and reason for the update:
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