IOSCO considers rulebook for ESG data providers

July 30, 2021

Providers of data and ratings for environmental, social and governance (ESG) factors could come under an explicit international regulatory framework to ensure consistency, according to a new report from the International Organization of Securities Commissions (IOSCO).

The international body indicated that it wanted to address the challenges and risks that ESG ratings providers and data companies faced. It also wanted to tackle challenges faced by those who use the data and ratings, and companies subject to them.

Ashley Alder, IOSCO chair and chief executive of Hong Kong's Securities and Futures Commission, said in a statement: “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.”

Investor demand and inflows into ESG-themed products have driven the need for data standards and analysis, while asset managers' efforts to integrate sustainability criteria into their strategies have also increased the demand for accurate and consistent information.

However, a patchwork approach to regulation means information standards vary from jurisdiction to jurisdiction, presenting a problem for data collators and providers.

IOSCO's consultation includes several risks and challenges it believes need to be addressed, such as a lack of transparency surrounding methodologies, and uneven product coverage across industries and geographies. The international body also voiced concerns that these risks could lead to gaps and inconsistencies when applied to investment strategies.

The document also details potential improvements that IOSCO believes can be made to the reliability, comparability, and interpretability of ESG ratings and data products. It explores how to manage conflicts of interest and the best ways for providers to interact with companies that are subject to ESG ratings.

The IOSCO consultation forms part of a wider overall framework for sustainability that the body is seeking to build with the assistance of its members and other international organisations.

The standard could be ready for implementation as soon as June 2022, according to an indicative timeline published by IOSCO.