On 28 May 2021, ESMA published an updated version of the Questions & Answers (hereinafter the “Q&A”) on the implementation of the Regulation (EU) 2016/1011 of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (hereinafter referred to as the “Benchmarks Regulation”).
Some of the key changes reflected in the updated Q&A are as follows:
i. Transitional provisions applicable to third country benchmarks – modifying the answer to Question 9.3, ESMA clarifies that the meaning of the term “where the benchmark is already used in the Union” in Article 51(5) of the Benchmarks Regulation is “where the benchmark is already used in the Union on or before 31 December 2023” and not “where the benchmark is already used in the Union on or before 31 December 2021” as it used to be the case before.
This change clarifies that, in the absence of an equivalence decision as referred to in Article 30(2) or (3) of the Benchmarks Regulation or unless an administrator has been recognised or endorsed pursuant to Articles 32 and 33 of the Benchmarks Regulation respectively, the use in the European Union by supervised entities of a benchmark provided by an administrator located in a third country is only permitted for such financial instruments, financial contracts and measurements of the performance of an investment fund that already reference such benchmark or which add a reference to such benchmark prior to, 31 December 2023.
ii. Questions and Answers on EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks – ESMA included a new set of questions & answers on ESG related matters, addressing the following, inter alia, subjects:
- It was confirmed that an administrator does not have to take into account all the ESG factors listed in Annex II of the Delegated Regulation (EU) 2020/1816 when publishing or making available an explanation of how the key elements of the methodology reflect ESG factors. An administrator only needs to provide information on those ESG factors that are taken into account in the benchmark methodology for the selection, the weighting and any exclusion of the underlying assets.
- ESMA clarified that it does not consider that the list of ESG factors in Annex II of the Delegated Regulation (EU) 2020/1816 is an exhaustive list to be considered for the methodology and that an administrator can take into account in the key elements of the methodology additional ESG factors that are not included in that list.
- If an administrator provides benchmarks that do not take into account any of the ESG factors listed in Annex II of the Delegated Regulation (EU) 2020/1816, it can still disclose the information on these other ESG factors in the template of the Delegated Regulation (EU) 2020/1817 detailing how these factors are taken into account for the selection, weighting or exclusion of the underlying assets. In addition, this administrator should disclose in the benchmark statement the score of these other ESG factors.
- ESMA clarified that when a benchmark pursues ESG objectives, its administrator should provide in its benchmark statement as a minimum all the ESG factors (as well as the scores of such factors) listed in Annex II of the Delegated Regulation (EU) 2020/1816 that are not flagged as voluntary, in order to ensure the comparability of the information provided for different benchmarks and to allow investors to make informed choices.
- On the contrary, ESMA clarified that in case a benchmark pursues ESG objectives without taking into account any of the factors listed in Annex II of the Delegated Regulation (EU) 2020/1816, then the administrator of such benchmark should nevertheless disclose the score of the list of ESG factors that are not flagged as voluntary according to said Annex, and in case the administrator discloses additional ESG factors (which are not listed in said Annex) in the key elements of the methodology used then this administrator should also disclose the score of these additional ESG factors in its benchmark statement.
- ESMA emphasised that by 31 December 2021, all benchmark administrators, with the exception of administrators of interest rate and foreign exchange benchmarks, should indicate in their benchmark statement how their methodology takes into account the target of carbon emissions or how it attains the objective of the Paris Agreement as well as disclose the elements detailed in Section 3 of Annex I of the Delegated Regulation (EU) 2020/1816.
- ESMA clarified that, as there is no identified field in the relevant template referred to in the Delegated Regulation (EU) 2020/1817 for disclosing whether a benchmark pursues ESG objectives so as to comply with Article 1(5) of the said regulation, administrators should disclose separately in the key elements of the methodology whether they do or do not pursue ESG objectives.
- Another important clarification given by ESMA is that, in the absence of specific standards that administrators should use for the calculation of the ESG factors listed in Annex II of the Delegated Regulation (EU) 2020/1816, these standards could include, where relevant: (i) the details of the key elements of the methodology used to compute the ESG factors and the main assumptions and the precautionary principles underlying the estimations; (ii) the international standards on which the computation is based; (iii) the percentage of reported vs estimated data used for the calculation; and (iv) any specific definition used in the calculation of the ESG factors.