Unsustainable Proposals

Press Release - Boston, London, Nice, Paris, Singapore, Tokyo, Feb. 25, 2020

Unsustainable Proposals

By failing to represent investors' interests and through its deficiencies, the proposal for the new European regulation on sustainable benchmarks is not the right answer to climate transition

In a comprehensive analysis of the recent proposals from the Technical Expert Group (TEG), which the European Commission mandated to assist it in drawing up delegated acts implementing the Regulation on Climate Benchmarks and Sustainability Disclosures of Benchmarks (2019/2089), Scientific Beta underlines that these proposals go against the legislator's goal of an ambitious reorientation of investment flows in support of climate transition and sustainability.

Where the Regulation was calling for explanations of how ESG dimensions are incorporated into sustainable benchmarks, the TEG champions the imposition of extensive and expensive ESG disclosures. These onerous reporting requirements would discourage the offering and adoption of benchmarks that pursue Climate Change or other ESG objectives. In addition, the proposed disclosures would fail to promote informed decision-making in terms of sustainability. This is both because they centre on ESG ratings whose inherent divergence frustrates the possibility of meaningful comparisons and because the TEG fails to standardise disclosures in respect of ESG metrics that could have relevance. Hence, the TEG proposals set out strong ambitions on ESG disclosure and allow each benchmark administrator to use its own definitions, for example in respect of controversial activities. In this, the TEG proposals not only do little to promote sustainability but also and most perversely allow ESG-washing to be performed under the falsely protective mantle of sustainability regulation.

Scientific Beta also questions the relevance and adequacy of the exotic carbon exposure metric introduced by the TEG. The recommendation of the TEG to deviate from the generally-accepted carbon exposure metric is supported neither by a literature review nor a cost/benefit analysis. In addition, Scientific Beta shows that this alternative metric suffers from significant biases and flaws and that it may lead to disregarding the efforts made by companies to mitigate their greenhouse gas emissions. This final effect is a pathetic travesty of the design of the regulation.

Last but not least, by anchoring the construction of Climate Benchmarks to cap-weighted references, the proposal fails to take account of the variety of benchmarks used by institutional investors and their desire, which has been expressed for many years, to distance themselves from inefficient cap-weighted indices. Here too, the poor quality of the proposals will be a hurdle to broad adoption of Climate Benchmarks by investors, who will be forced to choose between meeting fiduciary and ESG objectives.

In conclusion, Scientific Beta regrets that this text was drawn up hastily by a working group that was dominated by providers of ESG data and services and did not include pension funds and that it puts forward pointless and costly reporting obligations for which no impact study was carried out by the Commission.

The Scientific Beta white paper can be accessed through the link below:

Unsustainable Proposals, February 2020, Scientific Beta Publication

As part of its policy of transferring know-how to the industry, EDHEC-Risk Institute has set up Scientific Beta. Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.
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