Scientific Beta

This white paper reviews the proposals of the TEG and finds that they do not respect the spirit of the Regulation and are ultra vires, that they are unduly influenced by commercial interests and champion the interests of ESG data and services providers rather than sustainability, and that they are flawed, do little to discourage greenwashing in the financial industry or support decarbonisation efforts in the real economy, and fail to promote better decision-making around sustainability. The paper makes three series of remedial recommendations that involve promoting high decarbonisation across all index strategies, adopting metrics that recognise the decarbonisation efforts of corporates and investors, and avoiding misleading or irrelevant ESG disclosures and keeping ESG data costs under check.

The 2019 update of the European Benchmark Regulation (Regulation (EU) 2019/2089, hereafter the "Regulation") creates labels for Benchmarks that are on a decarbonisation trajectory or are aligned with the Paris Agreement under the United Nations Framework Convention on Climate Change (hereafter "Climate Benchmarks"). The Regulation also introduces a requirement for the Benchmark methodology and statement to include explanations of how Environmental, Social and Governance (hereafter "ESG") dimensions are reflected when a Benchmark pursues ESG objectives. The EU Climate Transition and EU Paris-aligned Benchmarks labels are meant to harmonise and improve transparency of the climate change index market at the EU level and to ensure a high level of investor protection by combatting misleading claims as to the environmental credentials of investments, or greenwashing. The introduction of disclosure requirements with respect to ESG incorporation into Benchmarks is intended to facilitate cross-border comparisons and help market participants make well-informed choices.

In this context, the legislator has empowered the European Commission to adopt delegated acts both to specify minimum standards in terms of asset selection and weighting and the determination of the decarbonisation trajectory and to lay out the minimum contents of explanations about ESG incorporation and their standard format. To assist in these matters, the European Commission has set up a Technical Expert Group, or TEG, on sustainable finance.

This white paper reviews the proposals of the TEG that are to be used in the preparation of the delegated acts and finds them wanting: 

Against this backdrop, the paper makes three series of remedial recommendations: