EU: ESMA makes recommendations to simplify ESG disclosure rules for benchmark administrators

The European Supervisory & Markets Authority (ESMA) has published today its final report on the outcome of its Common Supervisory Action (CSA) on ESG disclosures under the Benchmarks Regulation (BMR). The purpose of the CSA, which took place during 2024, was to assess how benchmark administrators comply with the ESG disclosure requirements set out in the BMR.

Summary

• ESMA concludes that the comparability of ESG benchmarks is hindered by the fact that there are inconsistencies between (i) the methodologies that administrators use to calculate the ESG factors, and (ii) the ESG data estimated and used as input data for the purpose of the calculation of the factors.
   
• In light of the findings, the report provides clarifications of transparency expectations for administrators as well as guidance on the definitions and methodology used for the calculation of the ESG factors, including good practices identified. 
   
• The report includes recommendations to the European Commission for potential amendments to BMR Level 2 measures, including streamlining the ESG disclosure requirements to alleviate regulatory burden (e.g., replacing the obligation to disclose on all ESG factors listed in Annex II of Delegated Regulation 2020/1816 to only those that are relevant to the sustainability objectives of the index plus a few minimum ESG factors / metrics such as GHG emissions, even if they are not relevant to the objectives of the index) . In particular, ESMA sees merit in further specifying the criteria to be used for the mandatory disclosure of ESG factors, although any such changes would need to be coordinated with a review of other SF legislations (e.g., SFDR). One area that could be explored in the review is to adapt the ESG disclosure requirements to the specific sustainability objective(s) of the benchmark. ESMA states that it stands ready to provide technical advice to the Commission for the purpose of future amendments to the Level 2 measures relating to the BMR.

Key points for Benchmark Administrators to consider

• ESMA states that Benchmarks that only apply high level exclusions criteria (i.e. exclusion of controversial weapons and/or companies involved in the tobacco sector) for the selection of the constituents should not be considered as ESG benchmarks (and ESMA goes on to state that these administrators should not then disclose ESG factors). Instead, ESMA goes on to state that benchmarks which consider ESG data in the selection of the constituents or that focus on specific ESG goals should be considered as ESG benchmarks subject to the mandatory disclosure requirements. 
   
• ESMA reiterates that ESG benchmark administrators “must do their best efforts to get the data required for the ESG calculation” and where they reweight the portfolio to calculate figures for ESG factors when data for some constituents of the benchmark is not available, they should be transparency on the calculation that is undertaken for reweighting purposes and should make users aware of the coverage / % of constituents that are included in the calculation. 
   
• In that regard, ESMA states that “a good practice could be for administrators to enhance transparency and disclose the data coverage for all ESG factors calculated. In addition, when the data coverage is low, administrators could explain the reason behind such a low coverage.”

Next steps

ESMA will continue to liaise with national regulators on this issue and their planned follow-up actions. It will also consider whether other supervisory convergence tools are needed to build supervisory culture across the EU on ESG disclosure requirements and clarify supervisory expectations for benchmark administrators. 

ESMA's press release is available here.