Technical Expert Group recommends minimum requirements for two new benchmarks.

By Paul A. Davies and Michael D. Green

On 30 September 2019, the EU Technical Expert Group on Sustainable Finance (TEG) published its final report on climate benchmarks and environmental, social, and governance (ESG) disclosures (the Report), as well as a summary of the Report. The Report makes recommendations regarding the minimum technical requirements for the methodology that pertains to two new climate benchmarks. The Report also makes recommendations for suggested ESG disclosures on a wide range of benchmarks. This post will examine the TEG recommendations and their implications for the future of these climate benchmarks.

The Report

EU co-legislators introduced the two new climate benchmarks in a February 2019 decision, which resulted in the creation of the EU Climate Transition Benchmark (CTB) and the EU Paris-Aligned Benchmark (PAB).

The amendment also introduced a requirement for ESG disclosures for all benchmarks (with limited exceptions), not just for the CTB and the PAB. Pursuant to the amendment, the TEG was tasked with producing recommendations for the content of the CTB, the PAB, and the ESG disclosures. The Report is the TEG’s response to this mandate.

The Climate Benchmarks

In the Report, the TEG sets out the rationale behind the CTB and the PAB, and discusses what the group views as the failings of previous low-carbon benchmarks. It considers these failings to be: (i) a lack of harmonisation in methodologies, and (ii) a lack of clarity on the objectives pursued. These shortcomings are said to have affected the comparability, reliability, and adoption of low-carbon indices. This, in turn, has led to limited acceptance and adherence to existing indices by the market.

The TEG intends that, by having standardised minimum technical requirements, the CTB and PAB will allow investors to not only hedge against climate transition risks, but also to direct their investments towards opportunities related to the transition to a low-carbon economy. The two benchmarks have slightly different target audiences, with the PAB designed for highly ambitious climate-based investment strategies (as it is aligned with the Paris Agreement’s 1.5°C goal), and the CTB focused more on institutional investors, and allowing those investors greater opportunity for diversification.

The Minimum Standards

The proposed benchmarks also seek to address the risks of “greenwashing”, whereby all low-carbon indices can be promoted as equally relevant, despite their fundamentally different characteristics. Under the recommendations promulgated in the Report, several criteria have to be met for an investment portfolio to qualify as a CTB or a PAB. These criteria are:

  • Demonstrating a significant decrease in overall greenhouse gas (GHG) emissions intensity as compared with the underlying investment universe or parent index. This minimum relative decrease in GHG emission intensity is set at 30% for the CTB, and 50% for the PAB.
  • Sufficient exposure to sectors that the TEG views as “relevant to the fight against climate change”. These sectors are stated in the Report and include, among others, mining, manufacturing, and electricity and gas supply. In order to qualify for either the CTB or the PAB, exposure to these sectors must be “at least equal to the exposure of the underlying investable universe”.
  • Demonstrating the ability to reduce their own GHG emissions intensity on an average annual basis by 7%. This figure represents the reduction specified in the Paris Agreement as required to achieve the 1.5°C goal.
  • Exclusion of certain companies, such as those involved in controversial weapons and those that have violated global norms (such as the OECD Guidelines). The PAB shall further exclude companies that derive certain percentages of their revenue from coal, oil, natural gas, or GHG-intensive electricity generation.

The TEG also recommends a further voluntary criterion, whereby the ratio of “green to brown” activities shall be calculated by benchmark administrators, and must be at least 1:1 for the CTB and at least 4:1 for the PAB.

ESG Disclosure

The second part of the TEG’s mandate was to form a set of ESG disclosures that apply to the CTB and the PAB and to a wide range of other benchmarks. The ESG disclosures intend to create a level of transparency and comparability of information across benchmarks, which is not currently possible.

The Report recognises that the ESG disclosure requirements will apply to a variety of asset classes, and the way in which ESG can be integrated in the valuation of assets across these asset classes differs significantly. As a result, the Report’s recommendations on minimum disclosure vary based on the maturity of ESG data and considerations in a given asset class. However, many disclosure requirements that the TEG recommends apply to a wide variety of asset classes. These include consolidated ratings for each element of ESG, as well as for ESG as a whole, and also disclosure on alignment with the Paris Agreement.

Further Investigation

The Report also recommends areas in which the TEG feels further work should be carried out. These areas include the alignment of the CTB and the PAB with the proposed EU Green Taxonomy, as and when the Green Taxonomy is finalized, and the integration of the UN Sustainable Development Goals within corporate disclosures, by collecting more quantifiable data on companies’ alignment with those goals.


The Report will inform the preparation of further regulation by the European Commission, which the Council of the EU will likely adopt and publish by the end of 2019. These acts will then be subject to a consultation procedure, after which they are expected to be adopted in mid-2020.

Whilst it is too early to say the extent to which the Commission will implement the TEG proposals, the concept of industry-wide benchmarks to assist ESG-conscious investors in their investment strategies, and to combat the risks of “greenwashing”, is a welcome one. In conjunction with the proposed EU Green Taxonomy, this program is further evidence that the EU is committed to improving the consistency and comparability of “green labels” across the economy, although it is too early to ascertain whether this commitment will achieve the intended outcome.

Latham & Watkins will continue to monitor developments in this area.

This post was prepared with the assistance of James Bee in the London office of Latham & Watkins.