A climate benchmark is defined as an investment benchmark that incorporates – next to financial investment objectives - specific objectives related to greenhouse gas (GHG) emission reductions and the transition to a low-carbon economy - based on the scientific evidence of the IPCC - through the selection and weighting of underlying benchmark constituents (TEG Final report of 30 September 2019 on climate benchmarks and benchmarks’ ESG disclosures).

         
          
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In May 2018, the European Commission put forward a legislative proposal proposing the creation of two new categories of low carbon benchmarks (European Parliament and Council reached a political agreement thereon in February 2019):

 

- the EU Paris-aligned Benchmark (PAB),

 

- the EU Climate Transition Benchmark (CTB);

 

and requiring ESG (environmental, social and corporate governance) disclosure for all benchmarks.


The said TEG Report of 30 September 2019 indicates that the climate benchmark can serve as:

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See also:

 

EU climate benchmarks and benchmarks’ ESG disclosures, European Commission website

 

Sustainable finance

  • underlying for passive investment strategies;
  • an investment performance benchmark for GHG emission-related strategies;
  • an engagement tool;
  • a policy benchmark to help guide strategic asset allocation (SAA).


While benchmarks incorporating constraints or objectives related to GHG emissions have primarily been built around a (tail) risk reduction objectives, EU CTBs and EU PABs have broader ambitions.

 

Investors using these new types of benchmarks not only intend to hedge against climate transition risks (risk objective) but also have the ambition to direct their investments towards opportunities related to the energy transition (opportunity objective).

 

However, only transition risks and opportunities are considered as part of the minimum standards for both indices, the physical risks associated with climate change are included in the disclosure recommendations.



Differentiation criteria

 

 

The two types of climate benchmarks are pursuing a similar objective but differentiate themselves in terms of their level of restrictiveness and ambition:

  • EU PABs are designed for highly ambitious climate-related investment strategies and are characterised by stricter minimum requirements, while EU CTBs allow for greater diversification and serve the needs of institutional investors in their core asset allocation;
  • the main users of EU CTBs are institutional investors such as pension funds and (re)insurance companies with the objective of protecting a significant share of their assets against various investment risks related to climate change and the transition to a low-carbon economy, labelled as transition risks by the TCFD (Task Force on Climate-related Financial Disclosures);
  • the main users of EU PABs are institutional investors which aim to display more urgency than CTB investors and want to be at the forefront of the immediate transition towards a +1.5°C scenario.
  • EU PABs allow for a higher decarbonisation of the investment relative to the underlying investable universe;
  • EU PABs have additional activity exclusions;
  • EU PABs have a stronger focus on opportunities with a significantly enhanced green share / brown share ratio (factor 4).

 

 


Commission Delegated Regulation (EU) 2020/1818 of 17 July 2020 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, Articles 9 - 12

Article 9
Baseline reduction of GHG intensity or absolute GHG emissions for EU Climate Transition Benchmarks

The GHG intensity or, where applicable, absolute GHG emissions for EU Climate Transition Benchmarks, including Scope 1, 2 and 3 GHG emissions, shall be at least 30 % lower than the GHG intensity or absolute GHG emissions of the investable universe.
For the purposes of the first subparagraph, Scope 3 GHG emissions shall be construed in accordance with the phase-in implementation period set out in Article 5.

Article 10
Exclusions for EU Climate Transition Benchmarks

1. Administrators of EU Climate Transition Benchmarks shall disclose in their methodology whether and how they exclude companies.
2. By 31 December 2022, administrators of EU Climate Transition Benchmarks shall comply with the requirements set out in Article 12(1), points (a), (b) and (c), and Article 12(2).

Article 11
Baseline reduction of GHG intensity or absolute GHG emissions for EU Paris-aligned Benchmarks

The GHG intensity or, where applicable, absolute GHG emissions for EU Paris-aligned Benchmarks, including Scope 1, 2 and 3 GHG emissions, shall be at least 50 % lower than the GHG intensity or absolute GHG emissions of the investable universe.
For the purposes of the first subparagraph, Scope 3 GHG emissions shall be construed in accordance with the phase-in implementation period set out in Article 5.

Article 12
Exclusions for EU Paris-aligned Benchmarks

1. Administrators of EU Paris-aligned Benchmarks shall exclude all of the following companies from those benchmarks:
(a) companies involved in any activities related to controversial weapons;
(b) companies involved in the cultivation and production of tobacco;
(c) companies that benchmark administrators find in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises;
(d) companies that derive 1 % or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite;
(e) companies that derive 10 % or more of their revenues from the exploration, extraction, distribution or refining of oil fuels;
(f) companies that derive 50 % or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels;
(g) companies that derive 50 % or more of their revenues from electricity generation with a GHG intensity of more than 100 g CO2 e/kWh.
For the purposes of point (a), controversial weapons shall mean controversial weapons as referred to in international treaties and conventions, United Nations principles and, where applicable, national legislation.
2. Administrators of EU Paris-aligned Benchmarks shall exclude from those benchmarks any companies that are found or estimated by them or by external data providers to significantly harm one or more of the environmental objectives referred to in Article 9 of Regulation (EU) 2020/852 of the European Parliament and of the Council (8), in accordance with the rules on estimations laid down in Article 13(2) of this Regulation.
3. Administrators of EU Paris-aligned Benchmarks shall disclose in their benchmark methodology any additional exclusion criteria they use and which are based on climate-related or other environmental, social and governance (ESG) factors.

 

Transparency of methodology

 

 

Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks introduces new requirements with regards to the transparency of benchmarks methodology (Article 13 of Regulation 2016/1011)

 

The amendments provide that an index administrator has to deliver an explanation of how the key elements of the methodology reflect ESG factors for each benchmark or family of benchmarks, with the exception of currency and interest rate benchmarks.

 

The deadline for this requirement has been set on 30 April 2020 (see in this regard the ESMA No Action Letter of 29 April 2020 regarding the new environmental, social and governance (ESG) disclosure requirements for benchmark administrators under the Benchmarks Regulation).

 

The European Commission is empowered to adopt delegated acts on the minimum content of the said explanation as well as the standard format to be used in this regard.

 

 

Benchmark statement

 

 

Regulation (EU) 2019/2089 amending Regulation (EU) 2016/1011 introduces new requirements with regards to the “benchmark statement” (Article 27 of Regulation 2016/1011).

 

The new requirement provides that “a benchmark statement shall contain an explanation of how ESG factors are reflected in each benchmark or family of benchmarks provided and published” for all elements outlined under paragraph 2 of Article 27 of Regulation (EU) 2016/1011, ie.:
(a) the definitions for all key terms relating to the benchmark;
(b) the rationale for adopting the benchmark methodology and procedures for the review and approval of the methodology;
(c) the criteria and procedures used to determine the benchmark, including a description of the input data, the priority given to different types of input data, the minimum data needed to determine a benchmark, the use of any models or methods of extra­polation and any procedure for rebalancing the constituents of a benchmark's index;
(d) the controls and rules that govern any exercise of judgement or discretion by the administrator or any contributors, to ensure consistency in the use of such judgement or discretion;
(e) the procedures which govern the determination of the benchmark in periods of stress or periods where transaction data sources may be insufficient, inaccurate or unreliable and the potential limitations of the benchmark in such periods;
(f) the procedures for dealing with errors in input data or in the deter­mination of the benchmark, including when a re-determination of the benchmark is required; and
(g) the identification of potential limitations of the benchmark, including its operation in illiquid or fragmented markets and the possible concentration of inputs.

 

 

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Commission Delegated Regulation (EU) 2020/1818 of 17 July 2020 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks

Recital 11 

The main parameter to calculate the decarbonisation trajectory should be the GHG intensity, because that parameter ensures comparability across sectors and is not biased for or against a particular sector. To calculate the GHG intensity, the market capitalisation of the concerned company is necessary. However, where benchmarks apply to fixed-income corporate instruments, the market capitalisation might not be available for companies that do not have equity securities listed. It should therefore be laid down that where EU Climate Transition Benchmarks or EU Paris-aligned Benchmarks apply to fixed-income corporate instruments, benchmark administrators should be allowed to use GHG emissions calculated on an absolute basis, rather than on the basis of GHG intensity.

Recital 15

In order to support a decrease in the use of polluting energy sources and a proper transition to renewable ones, it is also appropriate that companies that derive more than a set percentage of their revenues from coal, oil or gas are excluded from the EU Paris-aligned Benchmarks. The changes in the share of those energy sources out of the global primary energy supply from 2020 to 2050, as expected in the IPCC scenario, should be taken into account to set out those specific exclusions. In particular, according to table 2.6 of the Special Report on Global Warming of 1,5 °C from the IPCC, between 2020 and 2050, the use of coal is expected to drop between 57 % and 99 % and the use of oil between 9 % and 93 %, while the use of gas is expected to go up by 85 % or to drop by 88 %. Gas can be used during the transition to a low carbon economy, in particular as a replacement for coal, which explains its wider expected range of evolution, although the expected median decrease of its use is 40 %. For the same reason, it is necessary to exclude companies that derive more than a set percentage of their revenues from electricity generation activities.

 


Questions and Answers on EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks

ESG factors reflected in the benchmark statement and methodology
Updated: 28/05/2021

Q.10.1 Does an administrator have to take into account in the key elements of the methodology all the ESG factors listed in Annex II of the Delegated Regulation (EU) 2020/1816?

A.10.1 No. 
Article 13(1)(d) of BMR requires that administrators publish or make available an explanation of how the key elements of the methodology reflect ESG factors for each benchmark or family of benchmarks, with the exception of interest rate and foreign exchange benchmarks. Recital 4 of the Delegated Regulation (EU) 2020/1817 mentions that different ways of explaining how the key elements of the benchmark methodology reflect ESG factors, could lead to a lack of comparability between benchmarks and a lack of clarity as to the scope and the objectives of the ESG factors.
Therefore, when an administrator takes into account ESG factors in the methodology of the calculation of the benchmark, it should not provide information on all, voluntary and non- voluntary, ESG factors listed in Annex II of the Delegated Regulation (EU) 2020/1816 but only on those factors that are taken into account in the benchmark methodology for the selection, the weighting and any exclusion of the underlying assets.

Q.10.2 Does the Delegated Regulation (EU) 2020/1817 allow an administrator to take into account in the key elements of the methodology additional ESG factors not listed in the Delegated Regulation (EU) 2020/1816?

A.10.2 Yes.
Article 1(4) of the Delegated Regulation (EU) 2020/1817 allows administrators to include in the explanation provided additional ESG factors that the administrator takes into account in its methodology together with the related information.
Further, items 5 and 6 of the Annex of the Delegated Regulation (EU) 2020/1817 require administrators to list those ESG factors that are taken into account in the benchmark methodology, taking into account the ESG factors listed in Annex II of the Delegated Regulation (EU) 2020/1816.
Therefore, ESMA considers that the list of ESG factors in Annex II of the Delegated Regulation (EU) 2020/1816 is not 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.
Q.10.3 What should an administrator disclose in the key elements of the methodology if it provides benchmarks that do not take into account any of the ESG factors listed in Annex II of the Delegated Regulation (EU) 2020/1816?
A.10.3 Article 1(1) of the Delegated Regulation (EU) 2020/1817 requires administrators, when designing their benchmark methodology, to explain which of the ESG factors referred to in Annex II to the Delegated Regulation (EU) 2020/1816 they have taken into account. Further, Article 1(4) of this same regulation allows administrators to include additional ESG factors and related information.
Therefore, in case an administrator does not take into account any of the factors listed in Annex II of the Delegated Regulation (EU) 2020/1816, but takes into account other ESG factors not listed in the said Annex, then this administrator can 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 as referred to in Q10.5.

Q.10.4 Should the details provided under item 6 and item 7 of Annex I of the Delegated Regulation (EU) No 2020/1816 include scores for each of the ESG factors listed in Annex II of that same regulation?

A.10.4 Yes. Article 2(2) of the Delegated Regulation (EU) No 2020/1816 provides that an administrator has to provide the scores of the ESG factors listed in Annex II of the said regulation when responding to items 6 and 7 of Annex I of the same regulation.
As a consequence, when a benchmark’s methodology pursues ESG objectives, the administrator should provide in its benchmark statement as a minimum all the ESG 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.
In addition, administrators providing such information are expected to hold the necessary data to comply with this disclosure obligation.

Q.10.5 What should an administrator disclose in the benchmark statement if it provides benchmarks that pursue ESG objectives but do not take into account any ESG factor listed in Annex II of the Delegated Regulation (EU) 2020/1816?

A.10.5 Article 2(6) of the Delegated Regulation (EU) 2020/1816 provides that administrators that disclose additional ESG factors in accordance with Article 1(4) of Commission Delegated Regulation (EU) 2020/1817 shall include the score of those additional ESG factors in the benchmark statement.
Therefore, 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 the said Annex.
In addition, in case the administrator discloses additional ESG factors in the key elements of the methodology (as stated in Q10.3) then this administrator should also disclose the score of these additional ESG factors in the benchmark statement.

Q.10.6 Can administrators at the same time disclose that the benchmarks they provide do not pursue ESG objectives in item 5 of the Annex I of the Delegated Regulation (EU) 2020/1816 but still disclose the information listed in items 6 and 7 of the same Annex?

A.10.6 Pursuant to items 6 and 7 of Annex I of the Delegated Regulation (EU) 2020/1816, when the response to Item 5 is positive, i.e. the benchmark or family of benchmarks pursues ESG objectives, the administrator should provide the details in relation to the ESG factors listed in Annex II of the same regulation. Therefore, it is only when the benchmark pursues ESG objectives that the BMR requires the administrator to disclose in the benchmark statement the details in relation to the ESG factors.
So, when the benchmark does not pursue ESG objectives, the administrator should not disclose in the benchmark statement template the details of the ESG factors for the purpose of compliance with the BMR in order not to undermine the comparability of the information provided for different benchmarks and to allow investors to make informed choices.

Templates in the benchmark statement and the methodology
Updated: 28/05/2021

Q.10.7 Does an administrator have to use the templates provided in the Annex I of the Delegated Regulation (EU) 2020/1816 and the Annex of the Delegated Regulation (EU) 2020/1817 when it chooses to make the information available on its website?

A.10.7 No. Pursuant to Article 1(2) of the Delegated Regulation (EU) 2020/1817 and Article 2(3) of the Delegated Regulation (EU) 2020/1816, for individual benchmarks, administrators may, rather than providing all the information required in the template laid down in the Annexes of the said regulations, replace that information by a hyperlink to a website that contains all that information. This hyperlink can be included in the benchmark statement or in the key elements of the methodology.
ESMA believes that these provisions aim at reducing the burden on administrators, who for example, provide a significant number of benchmarks or they have already in place a system that allows for the disclosure of the ESG factors.
Therefore, with regard to item 6 of the Delegated Regulation (EU) 2020/1817 and item 7 of the Delegated Regulation (EU) 2020/1816, administrators are not required to amend the benchmark statement or the key elements of the methodology of each individual benchmark to include the templates as provided in the Annexes of the delegated regulations but they can simply provide a link to where the information can be found on their website.

Q.10.8 Do all administrators have to disclose the elements detailed in Section 3 of Annex I of the Delegated Regulation (EU) 2020/1816 by 31 December 2021?

A.10.8 Yes. Pursuant to Article 27(2a) of the BMR, 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.
To this end, and at the latest by 31 December 2021, all administrators, with the exception of administrators of interest rate and foreign exchange benchmarks, should disclose the elements detailed in Section 3 of Annex I of the Delegated Regulation (EU) 2020/1816.
These elements include whether the benchmark aligns with the target of reducing carbon emissions or the attainment of the objectives of the Paris Agreement together with additional information on the temperature scenario used. Further, administrators should disclose all the information listed in Section 3 even if the answer to item 10 (a) of the Section 3 of the Annex I of the Delegated Regulation (EU) 2020/1816 is negative.

Q.10.9 How can administrators comply with the requirement to clearly state whether they do or do not pursue ESG objectives pursuant to Article 1(5) of the Delegated Regulation (EU) 2020/1817?

A.10.9 Pursuant to Article 1(5) of the Delegated Regulation (EU) 2020/1817, benchmark administrators shall clearly state in the explanation provided whether they do or do not pursue ESG objectives.
Under item 4 of the Annex of the Delegated Regulation (EU) 2020/1817, an administrator has to disclose whether the benchmark provided takes into account ESG factors, however, there is no identified field in the template for disclosing whether such benchmark pursues ESG objectives.
Therefore, and in order to comply with Article 1(5) of the Delegated Regulation (EU) 2020/1817, administrators should disclose separately in the key elements of the methodology whether they do or do not pursue ESG objectives. For example, if the administrator does pursue ESG objectives, it should indicate this in the key elements of the methodology and should provide details on the different ESG objectives pursued in items 5 or 6 of the Annex of the Delegated Regulation (EU) 2020/1817.

Q.10.10 What standards should the administrators use for the calculation of the ESG factors listed in Annex II of the Delegated Regulation (EU) 2020/1816?

A.10.10 Pursuant to Article 2(5) of the Delegated Regulation (EU) 2020/1816, administrators shall include in the explanation provided according to the Annex of that Regulation a reference to the sources of data and standards used for the ESG factors disclosed. Further, item 8 of the Annex I of the Delegated Regulation (EU) 2020/1816 requires administrators providing the details on the ESG factors to list the supporting standards used for the reporting under item 6 and/or item 7 of that same annex.
Therefore, while the Delegated Regulation (EU) 2020/1816 leaves flexibility to the administrator and does not specify the methodology to be used for the calculation of the ESG factors, it requires administrators to disclose the standards used and the source of the data used.
ESMA believes that these standards could include, where relevant,
- 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;
- the international standards on which the computation is based;
- the percentage of reported vs estimated data used for the calculation;
- any specific definition used in the calculation of the ESG factors.

EU Climate Transition Benchmarks and EU Paris-Aligned Benchmarks
Updated: 16/07/2021

Q10.11 What are the disclosure requirements that an administrator of an EU Climate Transition Benchmark (EU CTB) or an EU Paris-aligned Benchmark (EU PAB) should comply with?

A10.11 Chapter III of the Delegated Regulation (EU) 2020/1818 on the minimum standards for EU CTB and EU PAB includes transparency requirements for administrators of EU CTB and EU PAB on the methodology used for the estimation, the decarbonisation trajectory and the data sources.
Further, pursuant to Articles 3(1)(23a) and (23b) of the BMR, the underlying assets of such benchmarks are selected, weighted or excluded in such a manner that the resulting portfolio of an EU CTB is on a decarbonisation trajectory whereas the resulting portfolio’s carbon emissions of an EU PAB are aligned with the objectives of the Paris Agreement.
As a consequence, the EU CTB and EU PAB pursue ESG objectives according to item 5 of Annex I of the Delegated Regulation (EU) 2020/1816 on the disclosure in the benchmark statement of the ESG factors.
Therefore, in addition to the aforementioned requirements laid down in Chapter III of the Delegated Regulation (EU) 2020/1818, administrators of EU CTB and administrators of EU PAB should disclose in their benchmark statement also the ESG factors listed in, and in accordance with, Annex II of the Delegated Regulation (EU) 2020/1816.

Q10.12 What should an administrator disclose in items 10 (b) to (e) of the Section 3 of the Annex I of the Delegated Regulation (EU) 2020/1816?

A10.12 Pursuant to Article 27(2a) of the Benchmarks Regulation (BMR) and as outlined in Q&A 10.8, at the latest by 31 December 2021, all administrators, with the exception of administrators of interest rate and foreign exchange benchmarks, should disclose the elements detailed in Section 3 of Annex I of the Delegated Regulation (EU) 2020/1816. Q&A 10.8 further explains that administrators should disclose all the information listed in Section 3 even if the answer to item 10 (a) of the Section 3 of the Annex I of the Delegated Regulation (EU) 2020/1816 is negative.

Items 10(b) to 10(e) of that section require a benchmark administrator to specify:
- the temperature scenario used for the alignment with the target of reducing
greenhouse gas emissions or the attainment of the objectives of the Paris
Agreement (item 10(b));
- the provider of such temperature scenario (item 10(c));
- the methodology used (item 10(d));
- the link to the website of the temperature scenario (item 10(e)).
With regard to the disclosure, applicable to the temperature scenario and the corresponding provider, an indicative example is available in Article 2 of the Delegated Regulation (EU) 2020/1818 which establishes the reference temperature scenario that administrators of EU CTB and EU PAB shall use when designing the benchmark methodology. That article sets the degree of the temperature scenario (1,5 °C scenario), the type of the scenario (with no or limited overshoot) and the provider (the Special Report on Global Warming of 1,5 °C from the Intergovernmental Panel on Climate Change (IPCC)).
For benchmarks that are neither EU CTB nor EU PAB, the BMR does not establish a specific temperature scenario that administrators should use as part of the benchmark methodology. When the benchmark aligns with the target of reducing carbon emissions or the attainment of the objectives of the Paris Agreement, the administrator shall disclose the related information in accordance with the aforementioned Section 3. For instance, in addition to the temperature scenario used for the EU CTB and EU PAB, other categories of emissions pathways can be used for the calculation of a benchmark that meet other temperature goals.
Notwithstanding the above, administrators of such benchmarks should avoid any sort of confusion either in the disclosed information or in the labelling of the benchmark that could lead benchmark users to think that those benchmarks are EU PAB or EU CTB where they are not.
Finally, where the benchmark does not align with the target of reducing carbon emissions or attaining the objectives of the Paris Agreement, it should be sufficient to indicate in items 10(b) to 10(e) of Section 3 that the benchmark does not use any temperature scenario for the alignment with the target of reducing greenhouse gas emissions or attaining the objectives of the Paris Agreement.

ESG factors and ESG objectives

Answer provided by the European Commission in accordance with article 16b(5) of the ESMA Regulation
Updated: 19/11/2021

Q10.13 What is the difference between taking into account ESG factors and pursuing ESG objectives?

A10.13 When it comes to the consideration of ESG factors by benchmarks, the Benchmark Regulation (BMR) refers to benchmarks that “take into account ESG factors” or benchmarks that “pursue ESG objectives”. Both terms refer to the same situation, a benchmark that integrates ESG factors within its methodology. Both sets of terms can be used interchangeably, and should be understood as substitutable.
In practical terms, the BMR provides for two scenarios:
- either the benchmark or family of benchmarks does not integrate ESG factors in its design: benchmark administrators should clearly mention this as part of methodological and benchmark statement disclosures; or
- the benchmark or family of benchmarks integrates ESG factors in its design: the benchmark is considered to be taking into account ESG factors or, interchangeably, pursuing ESG objectives, and should therefore comply with all relevant methodological and benchmark statement and transparency requirements.