On November 23, the Board of the International Organization of Securities Commissions (IOSCO) published final recommendations applicable to the regulatory framework for Environmental, Social and Governance (ESG) Ratings and Data Product Providers. The recommendations promote more transparency, thereby increasing trust in ESG ratings and data.
Following a prior consultation in July (read our previous article here), IOSCO sought to understand the “implications of the increasingly important role of ESG ratings and data products for financial markets”. Their work revealed that there is:
Little clarity and alignment on definitions
A lack of transparency about the methodologies underpinning these ratings or data products
Uneven coverage of products offered, thereby leading to gaps for investors seeking to follow certain investment strategies
Concern about the management of conflicts of interest when providers of ESG ratings and data products provide consulting to companies that are subject to the ESG ratings or data products
A need for better communication, given the importance of ensuring the ESG ratings or other data products are based on sound information
IOSCO believes that there are various areas that could be improved from the users’ perspective:
Reliability of raw ESG data, contributing to enhancing the quality and consistency of ESG ratings and data products
Transparency on ESG ratings methodology and ESG data products to improve user ability to understand and interpret provider outputs
Reliability of ESG ratings and data products and potential conflicts of interest to help users make more informed investment decisions
Communication between ESG ratings and data products providers and entities with the goal of improving transparency on how ratings are derived and reducing errors leading users to make investment decisions based on erroneous information
In summary, IOSCO’s high-level recommendations relate to:
Authorities’ considerations concerning ESG ratings and data products including the adoption of procedures to ensure the issuance of high quality ESG ratings and data products using transparent and defined methodologies, to ensure decisions are independent, and to make public disclosure and transparency a priority
Market participants’ use of ESG ratings and data products to conduct due diligence
ESG ratings and data products providers’ interaction with entities subject to assessment to improve efficient information procurement and objectivity
Covered entities’ interactions with ESG ratings and data products providers to streamline disclosure processes