ESG investing
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After a compliance review of ESG disclosures by financial benchmarks, which found inconsistent and divergent reporting practices, European regulators are recommending changes to simplify the disclosure rules.

In a new report, the European Securities and Markets Authority (ESMA) outlined the results of a compliance review that was undertaken by the various regulators in the region under the rules governing financial benchmarks. The review looked at benchmarks’ ESG disclosures generally and specific disclosure requirements in the methodologies of climate benchmarks.

The report said that the review — which sought to assess how benchmark administrators comply with ESG disclosure requirements intended to allow investors to compare the ESG characteristics of benchmarks — aimed to help enhance transparency and prevent greenwashing “with a view to protecting investors and further supporting the development of a credible ESG market.”

Among other things, the review found that a lack of specific guidance on the definition and calculation of certain ESG factors resulted in inconsistent calculation and disclosure practices across benchmarks and benchmark administrators. 

The lack of guidance and inconsistencies in underlying assumptions and methodologies hampers investors’ ability to compare benchmarks, it noted.

In response, the report provides added guidance on definitions and methodologies, aims to clarify regulators’ expectations for benchmark administrators and details the good practices that it did find.

It also recommends proposed reforms to streamline ESG disclosure requirements, which would reduce the compliance burden for benchmark administrators while maintaining the value of these disclosures to investors.

ESMA said that it will continue working with the national regulators and European policymakers on follow-up actions, including the use of tools to “promote effective, sound and consistent supervision regarding ESG disclosure.”