First Recommendations for the EU Low Carbon Benchmarks
On Monday 25 February 2019, the European authorities agreed to create a new generation of “low-carbon” and “positive carbon” benchmarks to accelerate investment in green projects and assets. It was part of a series of legislative proposals in the European Union's Sustainable Finance Action Plan presented on Thursday 24 May 2018 by European Commission Vice-President Valdis Dombrovskis. Indeed, although the trialogue agreement has yet to be approved by the European Parliament and the EU Council before being implemented, the TEG* has published a progress report in which several recommendations have been made for the structure of these two types of indices.
We are interested above in the recommendations made for the LCB, “low-carbon benchmark”, which ultimately aims to value companies that have begun their climate transition. One of the key measures of this index is the maximum possible integration of all emissions scopes into carbon intensity and carbon footprint metrics. In addition, despite the fact that there is no consensus to date on Scope 3 emissions, the TEG stresses the importance of this perimeter for sectors with high climate challenges, such as transport or oil & gas. They insist on the transparent nature of any methodologies for estimating this scope of emissions. It was also noted that the performance of the carbon intensity of the LCB must be consistent compared to its parent benchmark, and represent a reduction of at least 50%.
The TEG also presents initial elements regarding sectoral allocation and stock-picking to build the LCBs. Exposure to the low-carbon sectors must be at least equal to that of the benchmark and any companies with more than 50% of these revenues generated by coal should be excluded based on the TEG’s recommendations. However, the differentiation between sectors and companies may evolve with the implementation of the upcomming green taxonomy, being itself part of the announced European legislative proposals.
*Technical Expert Group on Sustainable Finance: a group of experts that supports the Commission on how to structure new indices in line with the Paris Agreement.
Félix Fouret, Carbon/Climate Analyst
Source: Beyond Ratings, AEF Info, TEG’s “Progress Report”