On July 26, the International Organization of Securities Commissions (IOSCO) released a Consultation Report containing a set of proposed recommendations regarding Environmental, Social and Governance (ESG) Ratings and Data Product Providers.
The Consultation Report includes ESG rating and data products providers practical steps that may help improve the usability and reliability of the information companies currently disclose. The proposed practical steps, listed hereunder, follow IOSCO request for feedback during a fact-finding exercise:
Use of one existing report as a primary form for ESG disclosure by companies (e.g., annual sustainability report).
Companies should ensure consistency with regard to the KPIs provided in these reports (e.g., clarity on where figures are being restated from a previous year, regarding the scope of the figures that are being presented, provision of time series information).
More transparency about the timing of disclosures and dialogues with ESG rating and data products providers (to help ESG rating and data products providers align their review frequencies with the availability of information).
More dialogue between companies and ESG ratings and data products providers to understand when ESG ratings and data products will be subject to review/update to ensure both are aware of when engagement may be beneficial to address information gaps, or errors/omissions in ESG rating and data products.
Based on the fact-finding exercise, IOSCO is proposing some improvements from the users’ perspective by setting out proposed high-level recommendations and possible action points for meeting the objectives of the proposed recommendations that are described below.
Proposed recommendations on possible regulatory and supervisory approaches
IOSCO recommends that Regulators be more focused on the use of ESG ratings and data products and ESG ratings and data products providers in their jurisdictions.
To meet this proposed recommendation, IOSCO is suggesting, among others, that regulators consider the following:
Existence of potential conflict of interest
Public disclosure of the information the provider relies on
Public disclosure of the provider’s methodologies
Whether the provider’s ESG ratings and data products issued are consistent with the relevant methodologies
Whether the processes underlying ESG ratings and data products are subject to written policies and procedures and/or internal controls that are rigorous, systematic, and applied in a continuous manner.
Proposed recommendations on the internal processes of ESG ratings and data products providers
Through the issuance of high quality ESG ratings and data products based on publicly disclosed data sources where possible and other information sources where necessary, using transparent and defined methodologies.
To meet this proposed recommendation, providers of ESG ratings and data products should:
Adopt and implement written procedures designed to ensure that the ESG ratings and data products they issue are based on a fair and thorough analysis of all relevant information available to them.
Adopt, implement and provide transparency around methodologies for their ESG ratings and data products that are rigorous, systematic, applied continuously.
Ensure that these methodologies are subject to regular review, with sufficient communication regarding changes made to the methodologies.
Provide transparency around the sources of data used in determining their ESG ratings and data products, including the use of any industry averages, estimations or other methodologies when actual data is not available. This may include transparency around whether the data used is up to date, publicly sourced or proprietary in nature, including through approximations.
IOSCO is also recommending that ESG ratings and data products providers ensure that their decisions are, to the best of their knowledge, independent and free from political or economic pressures and from conflicts of interest arising due to the ESG ratings and data products providers’ organizational structure, business or financial activities, or the financial interests of the ESG ratings and ESG data products providers’ employees.
Another recommendation is for ESG ratings and data products providers to make their best-efforts basis, avoid activities, procedures or relationships that may compromise or appear to compromise their independence and objectivity when running their operations.
Proposed recommendations concerning the use of ESG ratings and data products
The Report indicated that financial market participants could consider conducting due diligence on the ESG ratings and data products that they use in their internal processes. This due diligence could include an understanding of what is being rated or assessed by the product, how it is being rated or assessed and, limitations and the purposes for which the product is being used.
This evaluation could cover, among others:
The sources of information used in the product, the timeliness of this information, whether any gaps in information are filled using estimates, and if so, the methods used for arriving at these estimates.
An evaluation of the criteria utilized in the ESG assessment process, the relative weighting of these criteria in the process, the extent of qualitative judgement and whether the covered entity was involved in the assessment process.
Proposed recommendations concerning the interactions of ESG ratings and data products providers with entities subject to assessment by ESG ratings and data products providers.
ESG ratings and data products providers may improve their information gathering processes with entities covered by their products in a manner that is efficient and leads to more effective outcomes for both the providers and these entities.
They could also consider responding to and addressing issues flagged by entities covered by their ESG ratings and data products.
Proposed Recommendation on how covered entities could consider interacting with ESG ratings and data products providers
These entities may consider to streamline their disclosure processes for sustainability by taking into account other legal requirements in their jurisdictions.
Comments are to be submitted by on or before 6 September 2021.