IOSCO Puts ESG Ratings and Data Providers in Regulatory Crosshairs
IOSCO, the leading international policy forum and standards setter for securities regulators, announced today the launch of a new consultation report focused on ESG ratings and data providers, including recommendations for the providers and users of the information, and for covered companies, as well as proposals for markets regulators to considering increasing focus on the ratings and data providers and products.
ESG data, service and ratings providers play an increasingly important role in investment markets as investor demand for ESG integration in the investment process grows, yet their activities and businesses often are not covered by markets and securities regulators.
Ashley Alder, IOSCO Chair and Chief Executive Officer of the Securities and Futures Commission of Hong Kong, said:
“The use of ESG rating and data products is on the rise but most jurisdictions do not have regulatory frameworks which explicitly cover the providers of these products. Users have signalled that having multiple ESG ratings and data products can cause confusion, raising serious questions about relevance, reliability and greenwashing. The recommendations made in this report are part of our efforts to address the challenges and risks faced by ESG ratings and data providers as well as by the users of these ratings and data products and the companies which are subject to them.”
The new paper follows a fact-finding exercise carried out by IOSCO with ESG ratings and data products providers, and users, as well as the companies that are the subject of these ESG ratings or data products. The study found several issues including a lack of clarity and alignment on definitions on what ratings or data products intend to measure, and little transparency regarding methodologies underlying the products. Additionally, the exercise raised concerns regarding potential conflicts of interest where the providers offer consulting services to the companies under coverage, among other issues.
Recommendations for regulators in the report include considering whether they currently provide sufficient oversight of ESG ratings and data products, and propose regulatory considerations covering the providers’ conflicts of interest issues, transparency of the providers’ methodologies and information sources, as well as the policies and procedures followed by the providers.
The report also proposes a series recommendations for the providers including ensuring transparency into methodologies and data used in their products, for users of the information, to conduct due diligence into the products they use, and for entities covered by the products to consider streamlining their disclosure processes for sustainability related information.
Erik Thedéen, Chair of the IOSCO Sustainable Finance Task Force and Director General of Finansinspektionen of Sweden, said:
“We have sought to understand all facets of the challenges and risks that may arise with regards to the use of ESG ratings and data products. This complements our efforts on addressing the lack of reliability and comparability of data at the corporate level and the recommendations we have set out for asset management activities in the field of sustainability. The proposed recommendations comprise a breadth of topics such as improving the reliability, comparability, and interpretability of ESG ratings and data products, transparency of methodology, managing conflicts of interest and the interactions with companies’ subject to ESG ratings or data products.”
IOSCO is soliciting feedback on the report, requesting comments be submitted by September 6. Click here to view the full report and recommendations.