TEG Interim Report On EU Climate Benchmarks And
TEG INTERIM REPORTON CLIMATE BENCHMARKS AND BENCHMARKS’ ESGDISCLOSURESJune 2019
DisclaimerThis report represents the overall view of the members of the Technical Expert Group, and although itrepresents such a consensus, it may not necessarily, on all details, represent the individual views ofmember institutions or experts. The views reflected in this report are the views of the experts only.This report does not reflect the views of the European Commission or its services.- 2-
ContentsList of Technical Expert Group Members . 6Executive Summary . 82- Introduction . 113- Technical Advice on Minimum ESG Disclosure Requirements . 133.1OVERVIEW OF THE NEW DISCLOSURE REQUIREMENTS SET OUT BY THEAMENDING REGULATION .133.1.1The case for ESG disclosures for all benchmarks . 133.1.2ESG and climate-related disclosures as part of the amending Regulation . 143.1.3TEG deliverables in relation to benchmark disclosures . 143.2APPROACH TO DEFINING MINIMUM ESG DISCLOSURES AS PART OF THEMETHODOLOGY AND BENCHMARK STATEMENT .153.2.1Consideration of different asset classes . 153.2.2Classification of asset classes . 163.3MINIMUM CONTENT OF THE EXPLANATION OF ESG FACTORS IN THEMETHODOLOGY BY ASSET CLASS .183.3.1Technical advice on the minimum disclosure requirements by asset class . 183.3.2Detailed minimum disclosure requirement tables . 203.3.2.1Equity benchmarks (annex I) . 203.3.2.2Fixed Income corporate benchmarks (Corporate Credit Bonds, Corporate Asset BackedSecurities and Money Market) (annex II) . 213.3.2.3Sovereign bond benchmarks (Sovereign Bonds, Supranational Bonds, MunicipalBonds, Government Agency’s Bonds and Money Market) (annex III) . 223.3.2.4Commodity benchmarks (annex IV) . 233.3.2.5Infrastructure benchmarks (annex V) . 243.3.2.6Private equity/debt benchmarks (annex VI) . 253.3.2.7Hedge funds benchmarks (annex VII) . 263.4FORMAL ASPECTS RELATED TO ESG DISCLOSURES .273.4.1Availability of ESG information . 273.4.2Criteria for the template structure and content . 273.4.3Non-disclosure option . 273.53.5.1SPECIFICATIONS REGARDING THE PARIS ALIGNMENT OF ALL BENCHMARKS .28Description of disclosure requirements . 28- 3-
3.5.2Link with EU Paris Aligned Benchmark (EU PAB) . 283.5.3How to disclose the degree of alignment with the Paris Climate Agreement . 293.6TECHNICAL ADVICE ON MINIMUM ESG DISCLOSURE REQUIREMENTS ONBENCHMARKS .293.7AREAS FOR FURTHER WORK .313.7.1Alignment between benchmark disclosures and the “Regulation on sustainability-related disclosures in the financial services sector” . 313.7.2Alignment with the proposed EU Classification System of Sustainable Activities (“EUTaxonomy”) . 323.7.3Integration ESG considerations into investment advice under MiFID II and IDD(“suitability test”) . 323.7.4ESMA’s technical advice on fiduciary duty to European Commission . 334- EU CTBS / EU PABS specific disclosures and measures to preventgreenwashing . 344.1DISCLOSURES ASSOCIATED WITH THE EU CLIMATE TRANSITION BENCHMARK ANDTHE EU PARIS-ALIGNED BENCHMARK .344.2PREVENTING GREENWASHING .355- EU Climate Transition and EU Paris-aligned Benchmarks . 375.1DESCRIPTION OF CLIMATE BENCHMARKS .375.1.1Definition of EU Climate Transition and EU Paris-aligned Benchmarks . 375.1.2Issuers and asset classes in scope of climate benchmarks minimum requirements . 375.2USE CASES AND OBJECTIVES .385.3GREENHOUSE GAS (GHG) DATA .395.3.1State of the art on carbon footprint . 395.3.2Technical advice on carbon footprint . 395.3.3Technical advice on the calculation of carbon intensity . 405.3.4Phase-in of Scope 3 GHG emissions . 415.3.5Management of double counting . 425.3.6Technical advice on carbon intensity for climate benchmarks . 435.4TECHNICAL CHALLENGES .435.5CARBON BUDGETS AND CLIMATE TRAJECTORIES .445.5.1Overview of scenarios and trajectories . 445.5.2Technical advice on dynamic decarbonization for climate benchmarks . 475.6TARGET SETTING FOR COMPANIES BASED ON REFERENCE SCENARIOS .485.7SECTORAL ALLOCATION IN CLIMATE BENCHMARKS .495.7.1Rationale for weighting constraints. 49- 4-
5.7.25.8Technical advice on sectoral allocation for climate benchmarks . 49GREEN TO BROWN RATIO .505.8.1Description and methodologies . 505.8.2Technical advice on green to brown share ratio for climate benchmarks . 515.9MINIMUM REQUIREMENT ON EXCLUSIONS .515.10SUMMARY OF TECHNICAL STANDARDS .535.11REVIEW PROCESS FOR MINIMUM STANDARDS.535.12TECHNICAL ADVICE ON MINIMUM REQUIREMENTS FOR EU CTB AND EU PAB .54List of abbreviations. 58Appendix A: Investment Risk in the Age of Climate Change . 59Appendix B: Underlying Climate Science Based on IPCC . 60Appendix C: ESG Disclosure Factors . 61Appendix D: ESG Disclosure Templates . 64- 5-
List of Technical Expert Group MembersMembers of the Technical Expert Group are listed below. Members of the Benchmarks Working Groupare in bold.OrganisationNameAIG EuropeAllianz Global InvestorsBloombergBNP Paribas asset managementBorsa ItalianaCarbone 4Cassa Depositi e Prestiti S.p.A.CDP (Carbon Disclosure Project)Climate Bond InitiativeClimate KICEACBEFFASEnBW AGEurelectricFinance WatchGreen Finance Cluster FrankfurtGRI (Global Reporting Initiative)ICMAKfW BankengruppeLuxembourg Stock ExchangeMirovaMSCINordeaPRIRICSSCORSEBSwiss Re LtdRefinitiv/Thomson ReutersUnileverWiseEuropaWWFDawn SLEVINSteffen HOERTER1Curtis RAVENELHelena VIÑES FIESTASSara LOVISOLOJean-Yves WILMOTTEPierfrancesco LATININico FETTESSean KIDNEYSandrine DIXSON-DECLEVETanguy CLAQUINJosé Luis BLASCOThomas KUSTERERJesús MARTÍNEZ PÉREZ2Ludovic SUTTOR SORELKarsten LOEFFLEREszter VITORINONicolas PFAFFKarl Ludwig BROCKMANNFlavia MICILOTTA3Manuel COESLIERVeronique MENOUAila AHONathan FABIAN4Ursula HARTENBERGERMichèle LACROIXMarie BAUMGARTSClaudia BOLLIElena PHILIPOVA (Rapporteur)Michel PINTOMaciej BUKOWSKIJochen KRIMPHOFF5Andreas HOEPNER6Brenda KRAMER1Occasionally replaced by Ani Kavookjian2Replacing Nina Lazic and Mireille Martini3Replacing Jane Wilkinson4Replacing Zsolt Toth5Appointed in a personal capacity6Appointed as a representative of a common interest shared by stakeholders- 6-
OrganisationNamePaolo MASONI7Directly invited membersEuropean Banking AuthorityEuropean Central BankEuropean Insurance andPensions AuthorityEuropean Investment BankOccupationalEuropean Securities Market AuthorityEuropean Environmental AgencyPilar GUTIÉRREZ, Piers HABEN, Mira LAMRIBEN, Slavka ELEYAna Sofia MELO, Fabio TAMBURRINI8Lázaro CUESTA BARBERÁ , Marie SCHOLEREila KREIVI, Aldo ROMANI, Nancy SAICH, Peter Anderson,Dominika ROSOLOWSKA, Jean-Luc FILIPPINI, Cinzia LOSENNOAlessandro D’ERI, Roxana DAMIANOV, Michele MAZZONI,Eduardo-Javier MORAL-PRIETO, Chantal SOURLAS, JacobLÖNNQVISTAndreas BARKMAN, Stefan SPECKDirectly invited observersEuropean Bank for Reconstruction andDevelopmentOrganisation for Economic Cooperation andDevelopmentNetwork for Greening the FinancialSystem/Banque de FranceUnited Nations Environmental ProgrammeFinance Initiative7Appointed in a personal capacity8Replacing Camille Graciani9Replacing Emmanuel Buttin10Carel CRONENBERGSimon BUCKLE, Mireille MARTINILisa BIERMANNElodie FELLERReplacing Eric Usher- 7-109
Executive SummaryThe agreement reached by the European co-legislators on the regulation amending Regulation (EU)2016/2011, as part of the Commission's Action Plan on Financing Sustainable Growth, resulted in twoessential measures regarding investment benchmarks. The first is the creation of two types of climate11benchmarks , i.e. the 'EU Climate Transition Benchmark (EU CTB) and EU Paris-aligned Benchmark(EU PAB)’. The second measure is the definition of Environmental, Social and Governance (ESG)12disclosure requirements that shall be applicable to all investment benchmarks .The main objectives of the new climate benchmarks are to (i) allow a significant level of comparabilityof climate benchmarks methodologies while leaving benchmarks’ administrators with an importantlevel of flexibility in designing their methodology; (ii) provide investors with an appropriate tool that isaligned with their investment strategy; (iii) increase transparency on investors’ impact, specifically withregard to climate change and the energy transition; and (iv) disincentivize greenwashing.Context. While conceptually, the two types of climate benchmarks are closely linked to the objectivesof the Paris Agreement, the TEG wants to clearly acknowledge the fact that the current state ofmethodologies and available issuer-level data does not allow for an evident and irrefutable conversionof climate scenarios into detailed and informed portfolio construction methodologies at the time ofwriting this report. In order to ensure the highest level of ambition for climate benchmarks, the TEGtherefore largely relies on already available proxies and currently evolving methodologies, sometimesalready used by market participants. In this context, the TEG also strongly recommends a review of allminimum standards after a three-year period to ensure the highest level of ambition for climatebenchmarks in accordance with potential future enhancements in the state of the research andpractices around scenario analysis applied to investment strategies.Definition and use cases. A climate benchmark is defined as an investment benchmark thatincorporates – next to financial investment objectives - specific objectives related to greenhouse gas(GHG) emission reductions and the transition to a low-carbon economy - based on the scientificevidence of the IPCC - through the selection and weighting of underlying constituents.A climate benchmark can serve as: Underlying for passive investment strategies;An investment performance benchmark for GHG emission-related strategies;An engagement tool;A policy benchmark to help guide strategic asset allocation (SAA).While benchmarks incorporating constraints or objectives related to GHG emissions have primarily13been built around a (tail) risk reduction objectives, EU CTBs and EU PABs have broader ambitions.Investors using these new types of benchmarks not only intend to hedge against climate transition11The term ‘climate benchmarks’ is used throughout this document to reference EU Climate Transition Benchmarks and EUParis-aligned Benchmarks together.12With the exception of currency and interest rate benchmarks.13Climate transition risks as defined by the Task Force on Climate-related Financial Disclosure (TCFD). See 6/FINAL-2017-TCFD-Report-11052018.pdf for further details.- 8-
risks (Risk objective) but also have the ambition to direct their investments towards opportunitiesrelated to the energy transition (Opportunity objective). Note that only transition risks and opportunitiesare considered as part of the minimum standards for both indices. The physical risks associated withclimate change are however included in the disclosure recommendations.Differentiation. The two types of climate benchmarks are pursuing a similar objective but differentiatethemselves in terms of their level of restrictiveness and ambition. EU PABs are designed for highlyambitious climate-related investment strategies and are characterized by stricter minimumrequirements, while EU CTBs allow for greater diversification and serve the needs of institutionalinvestors in their core allocation.Table 1: Summary of minimum standards of EU CTBs and EU PABsMinimum standardsEU CTBEU PAB30%50%Scope 3 phase-in2-4 years2-4 yearsDo no significant harm principleYesYesRisk oriented minimum standards:MinimumScope1 2( 3)14intensity reductioninvestable universecarboncomparedtoOpportunity oriented minimum standards:Minimum green share / brown shareAt least equivalentSignificantly larger (factor 4)ratio compared to investableuniverseExposure constraintsMinimum exposure to sectors highly exposed to climatechange issues is at least equal to market benchmark valueYear-on-year self-decarbonization ofthe benchmarkAt least 7%: in line with or beyond the decarbonizationtrajectory from the IPCC’s 1.5 C scenario (with no orlimited overshoot)Disqualification from label if 2ImmediateImmediateconsecutive years of misalignmentswith trajectoryThe main users of EU CTBs are institutional investors such as pension funds and (re)insurancecompanies with the objective of protecting a significant share of their assets against variousinvestment risks related to climate change and the transition to a low-carbon economy, labelled as15transition risks by the TCFD. The main users of EU PABs are institutional investors which aim todisplay more urgency than CTB investors and want to be at the forefront of the immediate transitiontowards a 1.5 C scenario. Overall, EU PABs are differentiated from EU CTBs by the followingfeatures:14Scope 3 being phased-in during a four-year loads/2017/06/FINAL-TCFD-Report-062817.pdf.- 9-
EU PABs allow for a higher decarbonization of the investment relative to the underlyinginvestment universe;EU PABs have a stronger focus on opportunities with a significantly enhanced green share /brown share ratio (factor 4).Structure of the report. Section 3 details technical advice on minimum disclosure requirements toimprove transparency and comparability of information across benchmarks not only regarding climaterelated information but also on a variety of ESG indicators. These indicators are assessed bybenchmark’ administrators either in-house or through third party data providers and rating agencies.To ensure global alignment references are made to global standards and international conventionsused by investors across jurisdictions for their ESG analysis. Furthermore, the perspective of variousasset classes has been taken into consideration to ensure that minimum standards are available foras many asset classes as applicable and geared to the associated investment needs.Sections 4 and 5 provide detailed technical guidance on minimum standards recommended for the EUClimate Transition Benchmarks (EU CTBs) and EU Paris-aligned Benchmarks (EU PABs).- 10 -
2- IntroductionBenchmarks have an indirect but important impact on investments. Many asset managers andinvestors rely on them as investment monitoring solutions to track their return (passive and smart betainvestment strategies) or to define the investment universe and to measure the performance of aninvestment fund/portfolio (active investment strategy). A more recent use case for benchmarks thathas emerged in the industry is their use as an incentive tool to encourage companies at scale toimprove their ESG performance. Benchmarks play a significant role and can be a key lever in aligningthe investment and analyst community with long-term sustainability considerations and the transitiontowards a low-carbon economy.Since conventional benchmarks do not reflect low-carbon considerations in their methodologies andare not appropriate to measure the performance of sustainable investment strategies, over the pastdecade index providers have designed hundreds of ESG and ‘low-carbon’ benchmarks. The indexdesign drivers have mainly been focused on the objective of reducing investment risks related toclimate change, especially tail risks. Borrowing words from Mark Carney’s address to the Europeanst16Commission’s Sustainable Finance conference on March 21 2019 :“[W]e know that general insurers and reinsurers are on the front line of managing the physical risksfrom climate change. Insurers have responded by developing their modelling and forecastingcapabilities, improving exposure management, and adapting coverage In the process, insurershave learned that yesterday’s tail risk is closer to today’s central scenario. Sadly with climate, historyrepeats not as a farce
2016/2011, as part of the Commission's Action Plan on Financing Sustainable Growth, resulted in two essential measures regarding investment benchmarks. The first is the creation of two types of climate benchmarks 11, i.e.
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