Benchmark administrators should review the quality of their ESG benchmark disclosures ahead of a review by EU regulators during 2024.

By Nicola HiggsBecky Critchley, Anne Mainwaring, Ella McGinn, and Charlotte Collins

On 13 December 2023, the European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, announced its plans to launch a Common Supervisory Action (CSA). Along with National Competent Authorities (NCAs), ESMA plans to review the mandatory disclosures of benchmark administrators providing benchmarks that pursue ESG objectives under the EU Benchmarks Regulation (EU BMR).

The CSA is the first that ESMA will conduct since it assumed its direct supervisory role under the EU BMR. As part of the CSA, ESMA and the NCAs will share knowledge and experience to harmonise how they supervise ESG disclosure requirements for benchmark administrators.

The scope of the review will include both EU and third-country supervised benchmark administrators that have obtained authorisation, registration, recognition, or endorsement of their benchmarks under the EU BMR. ESMA will assess the compliance of such benchmark administrators with the mandatory disclosure requirements for ESG benchmarks under the EU BMR, which will include:

  • disclosure of ESG factors in the benchmark statement and in the benchmark methodology; and
  • specific disclosure requirements regarding climate benchmark methodologies.

ESMA has not set out any specific concerns regarding ESG benchmark disclosures currently available in the market. However, it says that the CSA will contribute to enhancing transparency and addressing greenwashing (one of ESMA’s Union Strategic Supervisory Priorities for NCAs), to protect investors and support the development of a credible ESG market.

This announcement comes nine months after the FCA published its own findings following a review of ESG benchmark disclosures under the equivalent UK onshored rules. The findings took a decidedly negative tone and found the quality of ESG-related disclosures to be poor, both in relation to technical compliance with disclosure requirements and the correct application of ESG benchmark methodologies to ensure the integrity of ESG-related products (see our blog post on this topic). In the US, the Securities and Exchange Commission (SEC) is also known to be interested in benchmark disclosures claiming ESG credentials, despite the lack of a similar body of rules within that jurisdiction. The FCA or SEC have not yet taken any public enforcement action in this space.

ESMA and the NCAs plan to undertake the CSA throughout 2024 until Q1 2025. It is therefore due to be completed prior to the application of the EU BMR Level 1 review proposals. Those proposals are making their way through the EU legislative process and are likely to de-scope non-significant benchmarks from the EU BMR although the approach to ESG benchmarks has not yet been finalised (see our blog post on this topic).

Supervised EU and third-country benchmark administrators that are subject to the EU BMR ESG benchmark disclosure requirements and are providing ESG benchmarks may wish to review the quality of their ESG benchmark disclosures, if they have not done so recently, in light of this development. They should also consider what steps they can take to improve disclosure where possible, to ensure they are in the best position once the CSA is launched in early 2024.