How do indices differ from financial benchmarks?
Indices and financial benchmarks are not consumer financial products. However they both can take ESG factors into account during their design process and can play an important role in developing a sustainable economy.
While the two terms are sometimes interchangeable, indices in RIAA certification refers to a set of securities and/or assets that have been aggregated based on pre-set criteria and whose aggregate value and composition is determined by pre-determined rules (CFA UK). Benchmarks, on the other hand, are used to measure the value generated by active managers, act as proxies for asset classes, and provide a reference point for determining the price or value of various financial instruments or transactions.
Indices can be used as financial benchmarks by regulators or financial institutions. Such benchmarks are usually more visible to retail consumers, and some of them are heavily regulated. In Australia, The Australian Securities and Investments Commission (ASIC) plays a key role, designating certain benchmarks as "significant" and requiring their administrators to obtain a license.
In Europe, the European Commission regulates various benchmarks, including benchmarks with climate objectives, namely Paris-aligned benchmarks and Transition benchmarks, through the EU Benchmarks Regulation.
RIAA does not intend to certify any financial benchmark, and the certification does not guarantee any compliance with benchmarks regulation in Australia, New Zealand or other jurisdictions.
Is the assessment criteria different for an index compared to other financial products/ services?
Similar to other certified financial products and services, certified indices must meet the following three criteria:
- Eligible (eligibility) - legal compliance and reliable governance
- Compliant (requirements) - minimum product or service inclusions, relevant and accessible disclosures and passing the Quality and Thresholds Tests
- Committed (commitments) – participating in the Concerns and Grievance Mechanism and other behavioural safeguards
However, as indices mainly serve institutional investors, the level of public disclosures requirement and accessibility may vary from other financial products that are directly available to consumers.
As index providers do not own the underlying constituents and make the ultimate investment decision, they are not active owners of the underlying assets and in general do not have a stewardship and responsible investment policy. Therefore, stewardship criteria are not assessed for indices.
RIAA takes an approach appropriate for index providers when assessing an index provider’s commitment to responsible investment and sustainability reporting (if applicable). For example, an index provider’s commitment to responsible investment can be illustrated by offering indices and solutions to support financial products of various RI approaches, collaboration etc.
In addition, as indices are heavy users of data, data governance tests that are unique to index certification are applied to indices seeking certification. Further details are disclosed in the Index Certification Guidance Note.
How does index certification by RIAA relate to regulator expectations?
The Responsible Investment Standard aligns well with the expectations of regulators. However, RIAA makes no guarantee that index certification guarantees legal compliance by the index provider. As with other certified products, RIAA examines index inclusions at a point in time, as well as the methodology used by the provider, but does not constantly monitor inclusions. It is the responsibility of index users to ensure ongoing due diligence of their holdings as per the regulator’s expectations. RIAA certification, while it aligns well with regulator expectations, makes no guarantee of legal compliance.
What’s the purpose of the data governance tests in the Index Certification Guidance Note?
Index providers depend on comprehensive data inputs to perform analyses and establish weightings. Gaps and inconsistencies in data can present considerable obstacles for financial product issuers striving to uphold the integrity of their outputs. The data governance test in the Guidance Note demonstrates how RIAA assesses if an index provider has exercised a reasonable level of due diligence on the sustainability data sourced for the index, and if ongoing monitoring procedures are in place to confirm that the data remains fit for purpose.
It's important to note that RIAA certification does not imply that adherence to the requirements of our data governance test is equivalent to compliance with best practice data governance standards such as ISO/IEC 38505.
