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Low Carbon Benchmarks Regulation

Low Carbon Benchmarks Regulation
  • United Kingdom
  • Financial services and markets regulation - ESG

21-01-2020

Introduction

Regulation (EU) 2019/2089, known as the Low Carbon Benchmarks Regulation, (the “Regulation”) was published in the Official Journal on 9 December 2019 and entered into force on 10 December 2019. The Regulation amends Regulation (EU) 2016/1011, the Benchmarks Regulation, with the aim of increasing transparency and uniformity in the use of low-carbon indices. Obligations under the Regulation take effect at different times. Most apply from 20 April 2020, while certain additional obligations apply from 31 December 2022.

The Regulation

The Regulation forms part of a broader EU initiative on sustainable development which seeks to place ESG considerations at the heart of the financial system and to support the move towards a greener European economy. Currently, there are a number of different low-carbon indices in the market. While commonly labelled and promoted as low-carbon benchmarks, these indices often have distinctly different aims. For example, one index branded as low-carbon may be fully-aligned to the climate change goals and principles of the Paris Agreement while another may simply seek to lower the overall carbon footprint of a standard investment portfolio. These varying degrees of ambition have led to a perceived lack of transparency and uniformity in the categorisation of low-carbon benchmarks and concerns regarding the potential for ‘green-washing’.

The Regulation seeks to ensure the integrity of low-carbon benchmarks by introducing two prescribed categories:

  • EU Climate Transition Benchmarks
  • EU Paris-Aligned Benchmarks

An EU Climate Transition Benchmark consists of underlying assets which are selected, weighted or excluded in such a way that the resulting benchmark portfolio is on a decarbonisation trajectory in light of the long-term global warming target set out in the Paris Agreement. A decarbonisation trajectory means a measurable, science-based and time-bound movement towards alignment with the objectives of the Paris Agreement.

An EU Paris-Aligned Benchmark is more urgent and ambitious in its goals and selects only components which already actively contribute to the attainment of the 2°C temperature reduction target set out in the Paris Agreement. Put simply, this means that the carbon emissions savings of each underlying asset exceed its carbon footprint.

The Regulation is intended to provide investors with a user friendly tool for comparative analysis of low-carbon benchmark methodologies by obliging benchmark administrators to make significant disclosures regarding the methodology used to measure and reconcile ESG and low-carbon factors in the composition of EU Climate Transition and EU Paris-Aligned Benchmarks.

Additionally, the Regulation requires that benchmark administrators indicate within the benchmark statement for every benchmark that they offer (bar those related to interest rates and foreign exchange) whether or not that benchmark pursues ESG objectives and whether or not the benchmark administrator’s wider offering includes such ESG-focused benchmarks.

The Regulation focuses on benchmark administrators but may have some indirect impacts for benchmark users such as asset managers. The EU Commission is empowered to create secondary legislation to create minimum standards for these benchmarks, and to exclude certain sectors from the scope of the Regulation.

The adoption of the Regulation reinforces the EU’s commitment to the transition towards a low-carbon economy, the continuing growth of sustainable finance and the positioning of Europe’s financial sector as a leading global destination for investment in green technologies.

Significant benchmark administrators are expected to endeavour to provide one or more EU Climate Transition Benchmarks by 1 January 2022.

The Eversheds Sutherland ESG timeline

Our ESG timeline sets out current and forthcoming initiatives and developments to help you to keep abreast of this rapidly evolving area. The timeline and includes links to a wealth of materials and our briefings on other aspects of ESG.

How can Eversheds Sutherland help?

Our in depth understanding of the sector means that we are well placed to advise you on the implications of the Low Carbon Benchmarks Regulation and opportunities arising from the trend towards impact investing and sustainability more generally. When it comes to legal agreements based on indices, whether derivatives or licences, we also have a variety of ways that we can assist.

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