ESMA to Run Surveillance Exercise over ESG Benchmarks in the EU

Operators of ESG indexes will be placed under scrutiny this year as the European Securities and Markets Authority (ESMA) launches a surveillance and assessment exercise in cooperation with other EU member state regulatory authorities.

In the first exercise of its kind since ESMA was provided with a mandate to supervise this area in January 2022, the authority will check compliance for supervised benchmarks administrators, located either in the EU or elsewhere, which have been authorised, registered, or recognised under the EU Benchmarks Regulation. It has required benchmark administrators to include details of how ESG factors are reflected in their methodology documents and benchmark statements since April 2020.

EU ESG benchmark administrators are subject to both the Benchmark Regulation (BMR), which came into effect in January 2018, and established a framework for the oversight and governance of benchmarks, including ESG benchmarks, as well as the

Sustainable Finance Disclosure Regulation (SFDR). Coming into effect in March 2021, the SFDR outlines the disclosure requirements for financial products more broadly, including benchmarks, claiming to have environmental or social objectives. In November 2019, EU Climate Transition and EU Paris-aligned benchmarks were added to the scope.

Benchmark providers from outside the EU, which can offer ESG and climate indexes in the EU under equivalence, recognition or endorsement regimes, will also be covered by the surveillance exercise.

Details of requirements and guidance for compliance can be found in ESMA’s recent updated guidance on climate and ESG benchmarks. Updated in December 2023, it notes for example that administrators should take into account those factors that are taken into account in the benchmark methodology for the selection, the weighting and any exclusion of the underlying assets only. Interest rate and foreign exchange benchmarks are exempt.

The EU Climate Benchmark Regulation set a list of ESG factors to be disclosed by benchmark administrators, for those that pursue ESG objectives, depending on the type of underlying assets concerned (equity, fixed income, sovereign). They have to source the information directly from undertakings or obtain information from external rating/data providers. It gives benchmark administrators the option of disclosing information on ESG ratings of the benchmarks.

ESMA's responsibility for supervising ESG benchmarks officially began in March 2021, aligning with the implementation of the Sustainable Finance Disclosure Regulation (SFDR).