The International Organisation of Securities Commissions (IOSCO) has proposed recommendations aimed at mitigating risks stemming from the activities of ESG ratings and data providers.
The recommendations are also aimed at addressing challenges faced by users of products and services from these providers, and the companies that are subject to their assessment.
The umbrella organisation said it found a lack of transparency about the methodologies underpinning ratings or data products, and “an often uneven coverage of products offered across industries and geographical areas”.
“IOSCO has observed that this could lead to gaps and inconsistencies when applied to investment strategies and raise concerns around the management of potential conflicts of interest, such as fee structures and insufficient separation of business lines that provide advisory services to issuers to improve their ratings performance,” it said.
IOSCO said there was clear support for it to provide guidance in this area.
Range of recommendations
Specific suggestions included that regulators may wish to consider whether their existing regulatory regimes provided sufficient oversight of ESG ratings and data products providers in their jurisdictions.
Where they had the relevant supervisory authority, regulators may wish to consider whether data and information sources that providers relied on, and methodologies, were publicly disclosed.
The recommendations for securities regulators were at least in part reflected in those for ESG ratings and data products providers. For example, IOSCO suggested that they “consider making high levels of public disclosure and transparency an objective in their ESG ratings and data products, including their methodologies and processes”.
For users of ESG ratings and data products, meanwhile, IOSCO is seeking feedback on recommendations including that financial market participants consider conducting due diligence on the ESG ratings and data products they use in their internal processes.
Recommendations aimed at entities subject to ESG ratings and data products providers included that companies designate a dedicated internal point of contact to address any requests from or queries to providers.
“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,” said Ashley Alder, chair of IOSCO and CEO of the Securities and Futures Commission of Hong Kong.
“Users have signalled that having multiple ESG ratings and data products can cause confusion, raising serious questions about relevance, reliability and greenwashing.”
ESG ratings and data providers are the latest sustainable finance-related issue IOSCO has tackled. Erik Thedéen, chair of the IOSCO sustainable finance task force and director general of Finansinspektionen of Sweden, said IOSCO’s work on ESG rating providers complemented its efforts on addressing the lack of reliability and comparability of data at the corporate level, and recommendations set out for asset management activities in the field of sustainability.
Earlier this year, the EU financial markets watchdog called for legislative action on ESG ratings and assessment tools, following similar calls from Dutch and French regulators a month before.
In its communication about its updated sustainable finance strategy, the European Commission has said that, subject to a public consultation and an impact assessment, it will “take action to improve the reliability, comparability and transparency of ESG ratings”.