Regulation EU 2019/2089 – Climate related benchmarks, a contribution to a greener future?

Regulation EU 2019/2089 – Climate related benchmarks, a contribution to a greener future?

On 9 December 2019, Regulation 2019/2089 (“2019/2089”) of the European Parliament and of the Council of 27 November 2019 was published in the official journal of the European Union.  2019/2089 amends Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks.

Background

The EU is committed to the objectives of the ‘Paris Agreement’ on climate change.  To this end it has introduced measures which are intended to promote the ‘greening’ of financial investment. Specifically, the intention is to ensure that financial players are driven towards investment strategies that have regard to the reduction both of pollution and of ‘Greenhouse’ gas emissions, the preservation of water supplies, the prevention of deforestation and, the promotion of a circular economy.  An important element in this strategy is ensuring that existing and potential investors are presented with unambiguous information concerning the environmental impact of any investment portfolio in which they are being asked to place their funds. Importantly, such information must also be consistent across member states in terms of both its presentation and its underlying methodology.  Without such a harmonized benchmark framework covering the main categories of ‘environmentally friendly’ benchmarks which are used in many individual and collective investment portfolios, the potential exists for differences in approaches across member states. Such differences can impede the smooth running of the internal market and, impair consumer and investor protections.  It was therefore deemed necessary to amend the existing Benchmark Regulation 2016/1011 to create a harmonized benchmark framework.

2019/2089

The amended regulation introduces two new types of benchmark and their minimum requirements.  The benchmarks are aimed at giving investors greater information on an investment portfolio’s carbon footprint.  The regulation lays down minimum requirements for:

  • EU Climate Transition Benchmarks, and
  • EU Paris Aligned Benchmarks.

“EU Climate Transition Benchmarks” are benchmarks which are labelled as an EU Climate Transition Benchmark and:

  1. Their underlying assets are selected, weighted or excluded in such a manner that the resulting benchmark portfolio is on a decarbonisation trajectory; and
  2. They are constructed in accordance with the minimum standards referred to in 2019/2089.

“EU Paris-aligned Benchmarks” are benchmarks which are labelled as an EU Paris-Aligned Benchmark and:

  1. their underlying assets are selected, weighted or excluded in such a manner that the resulting benchmark portfolio’s carbon emissions are aligned with the objectives of the ‘Paris Agreement’ approved by the EU on 5 October 2016;
  2. they are constructed in accordance with the minimum standards referred to in 2019/2089, and
  3. the activities relating to the underlying assets do not significantly harm other environmental, social, and governance (ESG) objectives.

Compliance issues

  1. Benchmark administrators providing climate related benchmarks must comply with 2019/2089 by 30 April 2020 and must endeavour to provide a minimum of one EU Climate Transition Benchmarks by 1 January 2022.
  2. To facilitate transparency and enrich disclosure, benchmark administrators will be required to produce a benchmark statement which includes, from 30 April 2020:
    1. An explanation of how they reflect ESG factors in those benchmarks provided and published by them,
    2. A clear statement identifying benchmarks that do not pursue ESG objectives
    3. For climate-related benchmarks and, for significant equity and bond benchmarks, details as to whether or not (and to what extent) they ensure a degree of alignment with the target of reducing carbon emissions or, the attainment of the objectives of the Paris Agreement.

From 31 December 2021 an explanation must also be provided for each benchmark, or family of benchmarks, which provides an explanation of how their methodology aligns with the target of reduced carbon emissions or, how it attains the objectives of the Paris Agreements.  An exemption to this exists in respect of interest rate and foreign exchange benchmarks.

Conclusion

The publication of 2019/2089 alongside Regulation 2019/2088 (Sustainability related disclosures) underlines a growing momentum in favour of ESG principles within the European Union.  In the “European Green Deal” presented by the European Parliament on 11 December 2019 one core strategy element was the direction of private capital towards more sustainable investments.  Regulations 2019/2088 and 2019/2089 represent keys stages of this plan.

The full text of Regulation 2019/2089 may be seen here.

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