Benchmark Regulation and the low carbon benchmark package
One of the important developments in the capital markets concerns benchmark managers. Based on the EU Action Plan on Financing Sustainable Growth, the European Commission has amended the Benchmark Regulation, requiring managers to report on how sustainability (by way of ESG factors) is incorporated in their methodology and benchmark statements.
This means that benchmark managers must include information in accordance with the Delegated Regulations in their disclosure to benchmark users. In addition, two new benchmark categories or labels have been created for so-called ‘low carbon benchmarks’: the ‘Paris-Aligned Benchmark (PAB)’ and the ‘Climate Transition Benchmark (CTB)’. In order to use these labels, a benchmark must meet certain strict requirements defined in the Benchmark Regulation. This will ensure investors that they are investing in accordance with a truly green benchmark when investing in instruments that refer to one of these benchmark categories. Moreover, with effect from 31 December 2021, managers of all benchmarks (apart from interest-rate and foreign-exchange benchmarks) must explain in their benchmark statements how their methodology aligns with the objective for carbon emission or how the benchmark achieves the objectives of the Paris Agreement. Overall, there will be more and more information available for investors as it regards green benchmarks.
In view of the continuing increase in passive investing and the growing popularity of green investments, the AFM is devoting specific attention to the way in which benchmark managers under supervision comply with the legal ESG requirements. Through the Benchmarks Network within ESMA, the AFM also actively contributes to the development of policy, for instance by issuing Q&As in order to provide clarity regarding the rules.
On 7 June 2021, ICE Futures Europe transferred trading in European Union emission allowance contracts (EUA) from its UK platform to the regulated market of ICE Index in the Netherlands. Emission allowance derivatives contracts entitle the holder to emit a specific amount of greenhouse gas (CO₂). With this market instrument, the EU aims to achieve its own climate goals (Paris) and the goals of the Kyoto Protocol.
The move from the United Kingdom to the Netherlands has brought a large proportion of European trading in emission allowance contracts under the supervision of the AFM. This involves secondary trading in futures and options contracts with emission allowances ‘European Union Allowances (EUA)’ and ‘European Union Aviation Allowances (EUAA)’ as the underlying security. The primary trading in these emission allowances is conducted on the European Energy Exchange (EEX) in Germany. Dutch market parties holding emission allowances and wishing to engage in trading need to be registered with the Dutch Emissions Authority (the NEA). The AFM works together with the NEA as well as with the ACM and the German supervisor Bafin when it comes to trading in EUA.
The development of the sustainability transition is clearly visible in the bond market, which is growing rapidly in Europe.
This market actually doubled in size in the Netherlands in 2019 and 2020 and is continuing to grow at a similar rate in 2021. In its report ‘Sustainable Bonds in the Netherlands’, the AFM endorses the importance of this positive development. The AFM however also notes the importance of transparency in prospectuses, reporting of relevant non-financial information and standardisation.
The European Commission published its legislative proposal for a European Green Bond Standard (GBS) on 6 July 2021. This proposal creates a voluntary standard for bonds intended to raise finance for sustainable investment. This EU GBS is expected to become the standard for businesses and governments wishing to issue green bonds to fund large investments, while strict sustainability requirements will ensure investor protection. By complying with the EU GBS, issuers will be able to demonstrate that they are indeed financing legitimately green projects (as defined in the EU taxonomy). This will enable investors to more easily compare investments and assess whether their investments are indeed sustainable, thereby reducing the risk of greenwashing. The four core elements of the EU GBS are:
- In line with the taxonomy: The proceeds of the bond must be allocated to projects that are in line with the EU taxonomy.
- Transparency: Full transparency on how the proceeds of a green bond are allocated, by means of detailed reporting.
- External review: All European green bonds must be checked by an external reviewer to ensure compliance with this regulation and the taxonomy
- European supervision of external reviewers: Reviewers providing services to issuers of European green bonds must be registered with the European Security and Markets Authority (ESMA) and will fall under its supervision.