IOSCO calls for oversight of data providers

November 26, 2021

Providers of environmental, social and governance (ESG) ratings and data should be subject to greater oversight and regulation, according to watchdogs.

The International Organization of Securities Commissions (IOSCO) earlier this month published a set of recommendations applicable to ESG ratings and data product providers.

The group said this market had grown substantially in recent years, helping investors navigate the patchy and inconsistent data issued by corporates. However, it also highlighted a lack of transparency around how ratings providers assess companies and securities, and criticised uneven coverage, with some companies and asset classes receiving far more attention than others.

Ratings providers do not typically fall under the remit of securities regulators, so IOSCO recommended that watchdogs should instead focus their attention on how products and ratings are used, and the activities of these providers within their jurisdictions.

Ashley Alder, chairman of IOSCO and CEO of the Hong Kong Securities & Futures Commission, said: “ESG ratings and third-party data products have played an important role in the ESG ecosystem so far, especially in the absence of consistent and comparable issuer disclosures.

“Their significance and usefulness will only continue as capital markets intensify efforts to support the shift towards a net zero economy. This is why IOSCO has undertaken this work.”

IOSCO's recommendations include promoting more transparency around methodologies, ensuring appropriate procedures for managing conflicts of interest, and improving communication channels between providers and the entities covered by their ratings or products without undermining impartiality.

Erik Thedéen, chair of IOSCO's Sustainable Finance Task Force and director-general of Sweden's Finansinspektionen, said the report represented 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,” he said.

Last month, IOSCO announced plans to establish a framework for its members to understand and mitigate potential risks in working with ESG ratings and data providers.