Solactive AG
Solactive AG, a German multi-asset class index provider, specializes in tailor-made indices.
ID: 107952029066-77
Lobbying Activity
Response to References to ESG factors enabling market participants to make well-informed choices
6 May 2020
[1] Article 1 of the Delegated Regulation (DR) defines five types of benchmarks while Annex II refers to a sixth type “Other Benchmarks” (section 6 of Annex II of the DR). While the natural understanding is to put any benchmark that is not covered by the definitions in Article 1 of the DR into the category “Other Benchmarks”, a provision in the DR that reflects this understanding would be welcome.
[2] In the context of point [1] above we see missing guidance for benchmarks that are a combination of the types of benchmarks defined in Article 1, for example a benchmark that comprises fixed income instruments from corporate and sovereign issuers. Based on our understanding these benchmarks would be categorized as “Other Benchmarks”. We believe that the disclosures to be made in accordance with section 6 of Annex II would be misleading because: (1) The disclosed data points, which are calculated on an aggregate level, would blend underlying data for sovereign and corporate issuers. The ESG rating for a sovereign issuer depends on a different set of criteria than that for a corporate issuer. Blending the two in a weighted average is misleading. GHG intensities for corporate issuers are defined in the DR while such definition is not available for sovereign issuers – even if it were, the two numbers should hardly be blended in a single GHG intensity for the entire benchmark. (2) Some data points are only available for and applicable to one of the two asset classes, e.g. exposure to the tobacco sector (available for corporate issuers), income inequality (available for sovereign issuers).
In summary, it can be stated that for benchmarks that blend several asset classes the DR does not contain provisions on the requirements to be met for the specific reporting (as listed in Annex II for the individual types of benchmarks). Additionally, any classification of benchmarks that blend several asset classes as “Other Benchmarks” leads to misleading, uninterpretable and incomparable disclosed data points depending on the specific blend of asset classes represented in the benchmark.
[3] We would raise concerns with regard to the classification and subsequent disclosures for fixed income benchmarks containing bonds issued by development banks. Following Article 1 (c) our understanding is that development banks are either a sovereign issuer or a sovereign third country issuer and thus the associated disclosure requirements are listed in section 3 of Annex II of the DR (“Sovereign Debt Benchmarks”). In this context, we would like to point out that many of the required disclosures that do apply to countries do in fact not apply to development banks, e.g.: (1) average human rights performance of the issuers; (2) average income inequality score, measuring the distribution of income and economic inequality among the participants in a particular economy; (3) average freedom of expression score measuring the extent to which political and civil society organizations can operate freely; (4) average corruption score measuring the perceived level of public sector corruption; (5) average political stability score, measuring the likelihood that the current regime will be overthrown by the use of force; and (6) average rule of law score, based on the absence of corruption, respect for fundamental rights, and the state of civil and criminal justice.
This inconsistency can easily be extended to other supranational institutions. As a potential solution, the DR might either abandon the disclosure requirements for such benchmarks or introduce separate disclosure requirements for supranational institutions. Such requirements could be a slightly reduced version of the requirements for Fixed Income Corporate benchmarks (abandoning e.g. exposure to the tobacco sector, exposure to the companies the activities of which fall under Divisions 05 to 09, 19 and 20 of Annex I to Regulation (EC) No 1893/2006).
Read full responseResponse to Minimum standards for benchmarks labelled as EU Climate Transition and EU Paris-aligned Benchmarks
6 May 2020
[1] For fixed income benchmarks (FIBs) that comprise only debt securities that are admitted to trading the decarbonization trajectory has to be determined based on the greenhouse gas (GHG) intensity. In accordance with Article 1 (c) this requires the publication of information by the issuer of debt securities that allow to determine the enterprise value including cash (EVIC). It can be observed that this is not the case for all issuers of debt securities admitted to trading on a trading venue. Some of the issuers have not issued ordinary shares or their shares are not traded on a trading venue and hence the market capitalization of ordinary shares – an incremental part to determine the EVIC - cannot be assessed. It is unclear from the Delegated Regulation (DR) whether the decarbonization trajectory has to be calculated based on absolute GHG emissions for all debt instruments. A combination of the two approaches (absolute GHG emissions and GHG intensity) is not possible as this would lead to distorted results. Therefore, the same approach must be adopted for all debt instruments. We believe that the decarbonization trajectory based on GHG intensity provides results that are more accurate and more realistic. Accordingly, we are supportive of calculating the GHG intensity based on the book value of the issuer’s equity and liabilities (sourced from publicly accessible documents such as in annual reports). Such solution would also avoid any unintended preferred treatment of listed issuers of debt securities over un-listed issuers of debt securities. In order to maintain comparability and a consistent methodology for the determination of GHG intensity, benchmark administrators should be allowed to use the book value of equity, for all issuers of debt instruments represented in the index provided that at least for one issuer the market capitalization of ordinary shares is not available. If this approach is not supported by the Commission or raises concerns, we would welcome clear guidance in Article 7 of the DR that absolute GHG emissions should be used for all for all constituents of a FIB where for at least one constituent, the decarbonization trajectory has to be calculated based on absolute GHG emissions. As a consequence, Article 7(1) should not prescribe a calculation method based on the listing of a bond on a trading venue but rather allow both GHG intensity as well as absolute GHG emissions-based decarbonization trajectory calculations for FIBs in general. Alternatively, we would also welcome clear provisions in Article 7 that govern the following scenarios: (1) for FIBs that contain only debt instruments of issuers for which EVIC is available the decarbonization trajectory should be based on GHG intensity; (2) for FIBs that contain only debt instruments of issuers for which EVIC is not available the decarbonization trajectory should be based on absolute GHG emissions; and (3) for FIBs contain both debt instruments of issuers for which EVIC is available and debt instruments of issuers for which EVIC is not available (we see this as the most relevant and most common case) the decarbonization trajectory should be based on absolute GHG emissions.
[2] With regard to the EVIC for the issuers of debt instruments represented in a benchmark we are of the view that the enterprise inflation factor, as currently set out in Article 7(3), is only a valid adjustment if the benchmark decarbonization trajectory is determined based on GHG intensity (i.e. if EVIC is part of the determination). As only the denominator of GHG intensity ratio is affected by the inflation rate, one should omit this factor when using absolute emissions. The DR does not provide clear guidance as to a situation where absolute GHG emissions are used to determine the decarbonization trajectory. Thus, we note that any adjustment to the DR, that addresses the concerns laid down above, should also take into account clear guidance on the use of an inflation factor.
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