Legal definition of the EU Paris-aligned Benchmark (PAB) is stipulated in Article 3(1)(23b) of Regulation (EU) 2016/1011 the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 as amended by 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 (Benchmarks Regulation).
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3 December 2020 Publication in the EU Official Journal of:
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According to the said provision ‘EU Paris-aligned Benchmark’ means 'a benchmark which is labelled as an EU Paris-aligned Benchmark and fulfils the following requirements:
(a) for the purposes of point 1(b)(ii) of this paragraph and of the delegated act referred to in Article 19c, its underlying assets are selected, weighted or excluded in such a manner that the resulting benchmark portfolio’s carbon emissions are aligned with the objectives of the Paris Agreement adopted under the United Nations Framework Convention on Climate Change, approved by the Union on 5 October 2016 (the ‘Paris Agreement’);
(b) it is constructed in accordance with the minimum standards laid down in the delegated acts referred to in Article 19a(2); and
(c) the activities relating to its underlying assets do not significantly harm other environmental, social and governance (ESG) objectives'.
Further detailed requirements in this regard are set out in Chapter 3A of the said Regulation.
Regulation (EU) 2016/1011 the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014
as amended by
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 (Benchmarks Regulation).
Article 3(1)(23b)
‘EU Paris-aligned Benchmark’ means a benchmark which is labelled as an EU Paris-aligned Benchmark and fulfils the following requirements:
(a) for the purposes of point 1(b)(ii) of this paragraph and of the delegated act referred to in Article 19c, its underlying assets are selected, weighted or excluded in such a manner that the resulting benchmark portfolio’s carbon emissions are aligned with the objectives of the Paris Agreement adopted under the United Nations Framework Convention on Climate Change, approved by the Union on 5 October 2016 (the ‘Paris Agreement’);
(b) it is constructed in accordance with the minimum standards laid down in the delegated acts referred to in Article 19a(2); and
(c) the activities relating to its underlying assets do not significantly harm other environmental, social and governance (ESG) objectives
Chapter 3A
EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks
Article 19a
EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks
1. The requirements laid down in Annex III shall apply to the provision of, and contribution to, EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, in addition to the requirements of Titles II, III and IV.
2. The Commission is empowered to adopt delegated acts in accordance with Article 49 to supplement this Regulation by laying down the minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks to specify:
(a) the criteria for the choice of the underlying assets, including, where applicable, any criteria for excluding assets;
(b) the criteria and method for the weighting of the underlying assets in the benchmark;
(c) the determination of the decarbonisation trajectory for EU Climate Transition Benchmarks.
3. Benchmark administrators which provide an EU Climate Transition Benchmark or an EU Paris-aligned Benchmark shall comply with this Regulation by 30 April 2020.
Article 19b
Requirements for EU Climate Transition Benchmarks
Administrators of EU Climate Transition Benchmarks shall select, weight, or exclude underlying assets issued by companies that follow a decarbonisation trajectory by 31 December 2022, in accordance with the following requirements:
(i) the companies disclose measurable carbon emission reduction targets to be achieved within specific timeframes;
(ii) the companies disclose a reduction in carbon emissions which is disaggregated down to the level of relevant operating subsidiaries;
(iii) the companies disclose annual information on progress made towards those targets;
(iv) the activities relating to the underlying assets do not significantly harm other ESG objectives.
Article 19c
Exclusions for EU Paris-aligned Benchmarks
1. The Commission is empowered to adopt a delegated act in accordance with Article 49 in order to supplement this Regulation by identifying, in respect of EU Paris-aligned Benchmarks, the sectors to be excluded because they do not have measurable carbon emission reduction targets with specific deadlines that are aligned with the objectives of the Paris Agreement. The Commission shall adopt that delegated act by 1 January 2021 and update it every three years.
2. When drawing up the delegated act referred to in paragraph 1, the Commission shall take into account the work of the TEG.
Article 19d
Endeavour to provide EU Climate Transition Benchmarks
By 1 January 2022, administrators which are located in the Union and which provide significant benchmarks determined on the basis of the value of one or more underlying assets or prices shall endeavour to provide one or more EU Climate Transition Benchmarks.
Annex III
EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks
Methodology for EU Climate Transition Benchmarks
(1) The administrator of an EU Climate Transition Benchmark shall formalise, document and make public any methodology used for the calculation of the benchmark, giving the following information, while ensuring confidentiality and the protection of undisclosed know-how and business information (trade secrets) as defined in Directive (EU) 2016/943 of the European Parliament and of the Council
(a) the list of the main constituents of the benchmark;
(b) all criteria and methods, including selection and weighting factors, metrics and proxies used in the benchmark methodology;
(c) the criteria applied to exclude assets or companies that are associated with a level of carbon footprint or a level of fossil fuel reserves that are incompatible with inclusion in the benchmark;
(d) the criteria for the determination of the decarbonisation trajectory;
(e) the type and source of data used to determine the decarbonisation trajectory for:
(i) Scope 1 carbon emissions, namely emissions generated from sources that are controlled by the company that issues the underlying assets;
(ii) Scope 2 carbon emissions, namely emissions from the consumption of purchased electricity, steam, or other sources of energy generated upstream from the company that issues the underlying assets;
(iii) Scope 3 carbon emissions, namely all indirect emissions that are not covered by points (i) and (ii) that occur in the value chain of the reporting company, including both upstream and downstream emissions, in particular for sectors with a high impact on climate change and its mitigation;
(iv) whether the data uses the Product and Organisation Environmental Footprint methods as defined in points (a) and (b) of point 2 of Commission Recommendation 2013/179/EU or global standards such as those of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures;
(f) the total carbon emissions of the index portfolio.
Where a parent index is used for the construction of an EU Climate Tran sition Benchmark, the tracking error between the EU Climate Transition Benchmark and the parent index shall be disclosed.
Where a parent index is used for the construction of an EU Climate Tran sition Benchmark, the ratio between the market value of the securities that are in the EU Climate Transition Benchmark and the market value of the securities in the parent index shall be disclosed.
Methodology for EU Paris-aligned Benchmarks
(2) In addition to points (1)(a), (1)(b), and (1)(c), the administrator of an EU Paris-aligned Benchmarks shall specify the formula or calculation that is used to determine whether the emissions are in line with the objectives of the Paris Agreement, while ensuring confidentiality and the protection of undisclosed know-how and business information (trade secrets) as defined by Directive (EU) 2016/943.
Changes to the methodology
(3) Administrators of EU Climate Transition and EU Paris-aligned Benchmarks shall adopt procedures for introducing changes to their methodology. They shall make those procedures public, and shall make public any proposed changes to their methodology and the rationale for those changes. Those procedures shall be consistent with the overriding objective that benchmark calculations be consistent with points (23a) and (23b) of Article 3(1). Those procedures shall provide:
(a) advance notice within a clear timeframe that gives users of benchmarks sufficient opportunity to analyse and comment on the impact of such proposed changes, having regard to the administrators’ calculation of the overall circumstances;
(b) for the possibility for users of benchmarks to comment on those changes and for the administrators to respond to those comments, and shall make those comments accessible after any given consultation period, except where the commenter has requested confidentiality.
(4) Administrators of EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks shall regularly examine their methodologies on at least an annual basis to ensure that their benchmarks reliably reflect the stated objec tives, and shall have a process in place for taking the views of all relevant users into account.
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 11, 12
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.
Interlinkages with the SFDR Regulation
Article 9(1) and (2) SFDR apply: “Where a financial product has sustainable investment as its objective”. In addition, Article 9(3) SFDR requires:
Where a financial product has a reduction in carbon emissions as its objective, the information to be disclosed pursuant to Article 6(1) and (3) shall include the objective of low carbon emission exposure in view of achieving the long-term global warming objectives of the Paris Agreement.
By way of derogation from paragraph 2 of this Article, where no EU Climate Transition Benchmark or EU Paris-aligned Benchmark in accordance with Regulation (EU) 2016/1011 of the European Parliament and of the Council is available, the information referred to in Article 6 shall include a detailed explanation of how the continued effort of attaining the objective of reducing carbon emissions is ensured in view of achieving the long-term global warming objectives of the Paris Agreement.
EU climate benchmarks and benchmarks’ ESG disclosures, the European Commission website
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European Supervisory Authorities (ESAs) letter of 7 January 2021 to the European Commission (Priority issues relating to SFDR application, JC 2021 02) identifies the following questions regarding the application of Article 9 of the SFDR in the context of the PAB and EU Climate Transition Benchmark (EU CTB):
- Must a product to which Article 9(1), (2) or (3) SFDR applies only invest in sustainable investments as defined in Article 2(17) SFDR? If not, is a minimum share of sustainable investments required (or would there be a maximum limit to the share of “other” investments)?
- Where an EU CTB or EU PAB exists, is it necessary for a product to track an EU PAB or an EU CTB on a passive basis for Article 9(3) SFDR to apply to it?
- If the questions above are answered in the affirmative and if the minimum standards of an EU PAB or an EU CTB do not require the index components to be sustainable investments, can the product fall within the scope of Article 9(3) SFDR?
The European Commission adopted a set of Q&As on 5 April 2023 to clarify that the SFDR deems products passively tracking Climate Transition Benchmarks and Paris-aligned Benchmarks to have ‘sustainable investments’, as defined in the SFDR, as their objective.
Regulatory chronicle
3 December 2020
Publication in the EU Official Journal of:
29 April 2020
20 December 2019
17 November 2019
30 September 2019
TEG Final report on climate benchmarks and benchmarks’ ESG disclosures
Documentation