Securities regulators may wish to consider dedicating greater attention to the use of ESG ratings and data products and the activities of their providers to potentially boost trust, umbrella forum IOSCO has said.

The recommendation is one of a set that the watchdog’s board has today published in a final report following a consultation launched in July. Respondents (61) were broadly in agreement with the draft recommendations, IOSCO said.

The finalised recommendations are addressed at regulators, providers, users, and corporates.

The overarching recommendation for more regulatory oversight comes as the market for ESG ratings and data has grown over the past few years, with IOSCO attributing this in part due to the lack of consistent information disclosures by companies and noting that the market did not typically fall within the remit of securities regulators.

Ashley Alder, chair of IOSCO and chief executive officer of the Hong Kong securities regulator, said the significance and usefulness of ESG ratings and third-party data products would only continue as capital markets intensified efforts to support the shift towards a net-zero economy.

“This is why IOSCO has undertaken this work,” he said.

“This report represents an important milestone in the development of ESG markets.”

Erik Thedéen, chair of the IOSCO sustainable finance task force and director general of Sweden’s Finansinspektionen

Erik Thedéen, chair of the IOSCO sustainable finance task force and director general of Sweden’s Finansinspektionen, added: “This report represents an important milestone in the development of ESG markets. Investors should be able to understand and trust the ESG ratings and data products they use; implementation of IOSCO’s recommendations will help achieve that outcome.”

The watchdog set out specific recommendations on what regulators could consider when developing the framework, underpinning these with more specific guidance.

For example, it said regulators could consider whether there were opportunities to encourage industry participants to develop and follow voluntary common industry standards or codes of conduct.

IOSCO highlighted that its recommendations included promoting more transparency regarding the methodologies that ESG ratings and data product providers use in developing their products; ensuring their procedures for managing conflicts of interest were appropriate; and improving communication channels between providers and the entities covered by their ESG ratings or data products without undermining their impartiality.

For users of ESG ratings and data products, IOSCO has issued recommendations that promote the adoption of written policies and procedures designed to address the conduct of due diligence, or information gathering and review, and governance to help ensure mechanistic reliance on ESG ratings and data products is avoided where at all possible.

IOSCO’s work on ESG ratings and data products has been paralleled by efforts to drive convergence in corporate sustainability reporting, with IOSCO strongly supporting the establishment of the International Sustainability Standards Board, announced at COP26.

The regulators umbrella forum said efforts to drive international consistency and comparability in sustainability-related information, backed up by an audit and assurance framework, could have the additional benefit of increasing users’ trust in products developed by ESG ratings and data products providers.

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