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European Securities and Markets Authority issues first no action letter regarding ESG benchmarks

The European Securities and Markets Authority (ESMA) has used its new power to issue a "no action" letter for the first time. ESMA said national regulators should not prioritise supervision or enforcement action against benchmark providers that failed to adhere to environmental, social and governance (ESG) requirements under the EU Benchmarks Regulation, which came into force on April 30.

ESMA lobbied hard to be given the power to issue "no action" letters when the regulatory tools available to the three European supervisory authorities were reviewed and amended by lawmakers in 2019. Steven Maijoor, chairman of ESMA, said at the time that "no action" letters would be especially useful "in cases where certain regulations can be conflicting and/or not compatible with dynamically changing market realities".

Regulators have scrambled to push back the start dates for new financial rules since the onset of the novel coronavirus, and ESMA said it was acting out of concern to avoid adding an unnecessary compliance burden for benchmark administrators at this time. The primary reason ESMA was forced to take action, however, was due to a misalignment in the European legislative programme, rather than the pandemic.


The Benchmarks Regulation introduced a requirement for benchmark administrators to publish ESG data for their benchmarks, as well explain how they allowed for ESG factors when calculating a benchmark's underlying methodology. ESMA was concerned that, because the delegated acts setting the standards for ESG disclosures have not yet been finalised, national regulators could find themselves lacking the legal certainty they required to prosecute non-compliance.

"Without the delegated acts, there is no specific selection of ESG factors or appropriate level of transparency specified by the new requirements. This gives rise to legitimate doubts on their legal consequences and proper application. The range of potential approaches by administrators will cause the sustainability-related aspects of benchmarks to be incomparable by users of benchmarks, preventing them from being able to choose appropriately among benchmarks in relation to ESG factors for investment purposes. This risks generating a fragmented approach to sustainability-related disclosures for benchmarks in the Union, which is contrary to the objectives of the new disclosure requirements," ESMA said in an opinion to the European Commission dated April 29.

The European financial regulatory system requires legislative action to alter a start date for regulations, which makes postponing a start date more complex than in other jurisdictions. ESMA's "No Action" letter, dated April 29, in effect achieves the same outcome, without the need for a parliamentary change, by simply instructing EU27 regulators not to pursue action against firms that have failed to comply with the regulation until such time as the delegated acts have been adopted.

"[It is] ESMA's opinion that [national competent authorities] should not prioritise supervisory or enforcement action against administrators regarding these new requirements until the delegated acts apply," it said in the "no action" letter.

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