On November 2nd, the Board of the International Organization of Securities Commissions (IOSCO) published its Final Report on Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management.
With global ESG assets “on track to exceed USD 53 trillion by 2025”, as per Bloomberg Intelligence, the asset management industry continues to develop new sustainability-related products targeting both institutional and retail investors. With this growth, a number of challenges have been identified, including the need for “consistent, comparable, decision-useful information” and the risk of greenwashing.
Greenwashing refers to misrepresenting the practices and/or features of sustainability-related investment products. Investors may be misled as to the impact of a product, resulting in damaging expectations and undermining confidence in the market segment.
Regulatory and supervisory expectations and requirements cover four major areas:
Governance — governance disclosures, whether they are climate-related or refer to the governance structures that determine an asset manager’s strategies, business plans and product offerings, provide valuable information to clients to help them evaluate an asset manager’s commitment to sustainability.
Investment strategy — sustainability-related risks and opportunities are factored into an asset manager’s investment strategy and process. Transparency in this process is important to enabling clients’ ability to evaluate the sustainability-related claims made by the asset managers.
Risk management — requirements for oversight of the processes to assess and manage sustainability-related risks, that can manifest in financial risks such as credit, market and liquidity risk. Asset managers may also be exposed to reputation and business risks when they do not meet their investors sustainability expectations.
Metrics and targets — measuring and monitoring sustainability-related risks to help investors understand the risks and opportunities including the impact of sustainability-related investment decisions.
The report also includes a review of survey responses on financial and investor education and an overview of the challenges associated with the proliferation of sustainability-related products. Responses to the survey showed that financial and investor education can play a role in sustainable finance, including providing support to investors who want to consider social and environmental impacts in their investments.
Among the many challenges identified, are:
Data gaps at the corporate level and the lack of a consistent framework
Proliferation of data and ESG rating providers and the lack of reliability and consistency
Lack of consistency in terminology potentially leading to confusion over terms used to describe ESG strategies
Lack of consistency in labelling and classification, differing across jurisdictions both in terms of “scope and the degree of compulsion”
Different interpretations of materiality, including the concept that sustainability-related topics “may become more material over time in response to changes in companies’ operating environments and investor expectations”
Gaps in skills and expertise
Evolving regulatory approaches, potentially exacerbating the above challenges
Overall, the Report proposes five recommendations that securities regulators and/or policymakers, should consider to improve sustainability-related practices, policies, procedures and disclosure in the asset management industry:
Set expectations for asset manager practices, policies, procedures in respect of material sustainability-related risks and opportunities and their related disclosure
Improve product-level disclosure to help investors understand sustainability-related products and material sustainability-related risks
Supervise and enforce compliance with regulatory requirements and address breaches of requirements
Develop common sustainable finance related terms to ensure consistency throughout the industry
Promote financial and investor education relating to sustainability