IOSCO issues recommendations on ESG ratings

October 8, 2021

The International Organisation of Securities Commissions (IOSCO) plans to establish a framework for members to understand and mitigate potential risks in working with ESG ratings and data providers.

The experience of existing members has highlighted that multiple ESG ratings and data providers raise concerns of reliability and greenwashing. Recognised as the global standards setter for securities regulation, the IOSCO consultation proposes 10 recommendations on how these challenges can be addressed. 

Challenges identified, such as lack of transparency regarding the methodology underpinning ratings or products, could create gaps and inconsistencies when applied to investment strategies. Conflicts of interest were also identified as potential challenges, including fee structures and insufficient separation of business between advisory services and issuers.

The IOSCO makes the recommendation to regulators that a review of existing regulatory regimes should be carried out to establish whether they offer sufficient oversight of ESG ratings and data products. The consultation further recommends regulators consider potential conflicts of interests, and whether organisational and operational structures of the provider are sufficient to handle such conflicts. Other proposals include improving the reliability, comparability, and interpretability of ESG ratings and data products, transparency of methodology.

This consultation recognises the opportunity in the market for regulators to engage with industry participants and work together to create industry-wide standards. The IOSCO stands ready to assist in the formation of such standards.

Following the consultation, the OECD released a report calling for G20 nations to introduce policies to strengthen ESG investment practices and further align environmental metrics in ESG ratings. The OECD warns that competing dynamics risk compromising market integrity, eroding investor confidence, and masking environmental impacts of investment decisions.

The OECD calls for greater international cooperation by the G20 in order to adopt policies that will allow for more transparency in ESG approaches and strengthen practices to assess ESG-related investments.

Although some countries are already required to report investor and company claims of their environmental impact, the OECD report encourages policymakers to go further and introduce a policy that would govern frameworks of “standardised core metrics to form baseline reporting for the E, S and G pillars for use by market participants”.