The EU financial markets watchdog has told national supervisory authorities not to rush to any supervision or enforcement of ESG-related disclosure obligations for benchmark administrators because the rules detailing those obligations are not ready.

The European Securities and Markets Authority (ESMA) also wrote to the European Commission about the need for “prompt adoption” of the so-called delegated acts.

The draft delegated acts were published on 8 April for a one-month consultation period, while the new environmental, social and governance (ESG) disclosure requirements under the Benchmarks Regulation were applicable from yesterday. 

In its letter to the Commission, ESMA said that without the delegated acts, benchmark administrators face legal uncertainy.

“Without the delegated acts, there is no specific selection of ESG factors or appropriate level of transparency specified by the new requirements,” ESMA wrote in its “opinion” document to the EC.” This gives rise to legitimate doubts on their legal consequences and proper application.

“The range of potential approaches by administrators will cause the sustainability-related aspects of benchmarks to be incomparable by users of benchmarks, preventing them from being able to choose appropriately amongst benchmarks in relation to ESG factors for investment purposes.”

It added: “This risks generating a fragmented approach to sustainability-related disclosures for benchmarks in the Union, which is contrary to the objectives of the new disclosure requirements.”

National supervisory authorities were told not to “prioritise any supervisory or enforcement action against administrators” regarding the new requirements until the delegated acts apply.

After the Commission adopts the delegated acts they will be subject to a scrutiny period by the European Parliament and by the Council before they enter into force. The rules it has proposed are based on recommendations from the technical expert group (TEG) that has been advising it on sustainable finance.

For benchmarks pursuing ESG objectives, the disclosure duties referred to by ESMA oblige benchmark administrators to:

  • include in their methodology document an explanation of how the key elements reflect ESG factors for each benchmark or family of benchmarks; and
  • include in their benchmark statement an explanation of how ESG factors are reflected in each benchmark or family of benchmarks provided and published

The obligations stem from legislation adopted under the Commission’s sustainable finance action plan, which amends a pre-existing EU benchmarks regulation and is arguably better known for the EU climate benchmark categories and labels that it introduces. These are voluntary.

Cost benefit considerations

Smart beta index provider Scientific Beta recently commented on the draft delegated acts relating to the sustainable finance-related benchmark regulations.

Echoing criticisms it has made of the underlying TEG proposals, it said the draft delegated act relating to benchmark statement disclosures presented “long lists of ESG indicators to be compured and disclosed”.

It said “such extensive” minimum disclosures would entail material costs for benchmark administrators and stood to harm competition in the industry, with the minimum disclosures required also being of low “overall informational potential”. 

In an explanation of the delegated act, the Commission said it expected compliance costs with the new rules to be limited, arguing it was “already current market practice for benchmark administrators to disclose ESG information in so-called ‘factsheets’”.

It said it was proposing to “refine further the approach suggested by the TEG, streamlining in particular the list of ESG factors to be disclosed, simplifying the terminology used and referring, where applicable, to international standards, treaties and conventions”.