- EU Paris Aligned Benchmarks: their aim is to minimise CO2 emissions so as to limit the rise in global temperatures to 1.5°, as set out in the Paris climate agreement (2016), by selecting constituents from the sectors with the lowest environmental impact;
- EU Climate Transition Benchmarks: their aim is to promote the energy transition and the reduction of emissions by selecting constituents from across all sectors and by selecting companies with decarbonisation plans.
EU PABs are characterised by very ambitious climate-related investment strategies and very strict minimum requirements. They are therefore suited to institutional investors who want to actively support the transition to a sustainable economy.
In its final report, the Technical Expert Group (TEG) defined the minimum technical standards that every administrator wishing to market a climate benchmark must comply with from 30 April 2020. Benchmarks that meet the minimum technical requirements may therefore describe themselves as an ‘EU Paris-Aligned Benchmark’ or ‘EU Climate Transition Benchmark’. The European Regulation also provides that, from 1 January 2022, the administrators of the main benchmarks in the EU must provide one or more Climate Transition Benchmarks.
What’s new for benchmarks
In 2023 and 2024, the European Commission proposed a revision of the Benchmarks Regulation to reduce the regulatory burden on benchmark users and administrators. The proposed amendments aim to limit the scope of the rules to benchmarks that are significant for EU markets. A benchmark is considered significant if it is used for financial instruments or contracts with a total value exceeding 50 billion euros. This revision aims to simplify compliance while still ensuring transparency and investor protection.
The amendments also include narrowing the scope of the rules for third-country benchmarks, limiting them to those relevant to EU markets, and removing the obligation for EU users to individually check the regulatory status of indices. This approach aims to avoid the loss of access to numerous benchmarks that are essential to the day-to-day operations of market participants in the EU, while maintaining an adequate level of investor protection and ensuring a level playing field between EU and third-country benchmarks.
The work of Europe’s financial experts has therefore been considerable. However, some issues remain to be better defined. First among them is the quality and availability of emissions data. Despite the many steps forward made in recent years, industry experts estimate that data quality is still rather low, and estimation models are not fully reliable either. Moreover, the standardisation of data collection and reporting methods remains a challenge, further complicating the accurate assessment of the environmental impact of financial investments.
For more details, you can consult the European Commission’s FAQs on the Benchmarks Regulation here and the TEG reports on sustainable finance available on the official websites of the Commission and ESMA.
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