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EU watchdog backs ESG ‘quality label’ for market benchmarks
Global Banking & Finance Review®
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LONDON (Reuters) – The European Union’s markets watchdog said on Friday that a ‘quality label’ for market benchmarks would help prevent investors being misled by environmental, social and governance (ESG) claims.
Benchmarks are used by asset managers to pick investments for clients, helping to channel millions of euros into sustainable funds and projects, but the criteria behind them vary widely, leading to claims of “greenwashing”.
The absence of clear labelling “raises questions on the inclusion of firms with a negative environmental or social impact in these benchmarks,” the European Securities and Markets Authority (ESMA) said in a statement on Friday.
ESMA was responding to a public consultation from the EU’s executive European Commission on updating rules for benchmarks.
Specifying minimum methodology standards should underpin an EU quality label, ESMA said.
“Further, ESMA believes that the introduction of an EU ESG benchmark label would be an extra supporting tool against greenwashing.”
Compilers of ESG benchmarks based outside the EU should comply with EU rules and supervision if they want investors inside the bloc to use them, in order to minimise the risk of greenwashing and regulatory arbitrage, the watchdog said.
The commission is expected to set out proposed changes to the rules in due course, which would likely need approval from the European Parliament and EU states.
(Reporting by Huw Jones;Editing by Elaine Hardcastle)
ESG stands for Environmental, Social, and Governance. It refers to the three central factors used to measure the sustainability and societal impact of an investment.
Greenwashing is the practice of companies misleading consumers regarding their environmental practices or the environmental benefits of a product or service.
Market benchmarks are standards or points of reference used by investors to measure the performance of investments or portfolios.
Regulatory compliance refers to the process of ensuring that an organization follows relevant laws, regulations, and guidelines.
ESMA is an independent EU authority that contributes to safeguarding the stability of the EU's financial system by enhancing the protection of investors and promoting stable and orderly financial markets.
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