Press Release - Boston, London, Nice, Paris, Singapore, Tokyo, December 4, 2020
Scientific Beta reiterates reservations on EU Climate Benchmark and Sustainability Disclosures regulation
Climate Benchmark standards encourage greenwashing and cannot be considered an informative label on the sustainability of the indices that refer to them
With the publication of the delegated acts laying out the minimum contents of explanations about ESG incorporation into Benchmarks and their standard format and specifying minimum standards for the construction of EU Climate Benchmarks, the European co-regulators have completed the ESG overhaul of the Benchmark Regulation.
The delegated act pertaining to Benchmark Statement disclosures establishes a long list of ESG indicators to be provided where the higher level text called for an “explanation of how ESG factors are reflected.” With limited exceptions, these new disclosures pertain to data not typically made public by companies. This is not only a boon for ESG data providers, but it also harms competition in the index provision market because the conditions for fair and non-discriminatory access cannot be met. Last but not least, a lack of standardisation further limits the relevance of these disclosures for decision making around sustainability.
By anchoring to traditional benchmarks and requiring a sharp reduction of carbon intensity at onset and then a uniform year-on-year compression without properly considering sector dimensions, the delegated act laying out the standards for the EU Climate Benchmarks reduces the scope of the regulation and incentivises portfolio greenwashing over the adoption of investment solutions that promote the reorientation of capital flows towards a more sustainable economy. Greenwashing is further facilitated by mandating the use of a carbon intensity metric that needlessly substitutes for the market standard and introduces equity market volatility into measurement and by incentivising index construction on unreliable emissions data.
Commenting on the publication of the delegated acts, Frederic Ducoulombier, ESG Director at Scientific Beta, said, “While we regret the introduction of costly disclosure obligations that create an unlevel playing field between benchmarks and between administrators without delivering material benefits for end-investors, we are most concerned by the counterproductive nature of the Climate Benchmark standards. The European Commission's combination and technical specification of decarbonisation approaches incentivise portfolio greenwashing over the promotion and reward of decarbonisation in the real economy consistent with the Paris Agreement. Since the new labels cannot be trusted, impact-concerned investors will need to perform in-depth due diligence on EU Climate Benchmark methodologies and data to avoid associating with greenwashing and to identify features contributing to alignment with the Paris Agreement.”
The Scientific Beta white paper on the subject can be accessed through the link below:
A Critical Appraisal of Recent EU Regulatory Developments Pertaining to Climate Indices and Sustainability Disclosures for Passive Investment
Issues with decarbonisation metric and emissions data are further discussed in two other white papers:
Carbon Intensity Bumps on the Way to Net Zero
Understanding the Importance of Scope 3 Emissions and the Implications of Data Limitations
Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.
Scientific Beta, 1 George Street, #15-02, Singapore 049145. For further information, please contact: contact@scientificbeta.com, Web: www.scientificbeta.com.
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