Regulators should consider dedicating greater attention to the use of environment, social and governance ratings and data products and the activities of their providers to potentially boost trust, according to the final report from the International Organization of Securities Commissions (IOSCO).
The recommendation is one of many set out following a consultation in July on ESG ratings and data providers.
Although broadly in agreement with the draft guidance, the final report, which targets regulators, providers, user and corporates, providers further detail on how the lack of transparency, conflict of interests and reliability of data could be improved.
Ashley Alder, chair of IOSCO and chief executive officer of the Hong Kong Securities and Futures Commission., said the significance and usefulness of ESG ratings and third-party data products would only continue as capital markets intensified efforts to support the shift towards a net-zero economy.”
Erik Thedéen, chair of the IOSCO sustainable finance task force and director general of Sweden’s Finansinspektionen, added: “This report represents an important milestone in the development of ESG markets. Investors should be able to understand and trust the ESG ratings and data products they use; implementation of IOSCO’s recommendations will help achieve that outcome.”
For regulators specifically, IOSCO said they should consider “establishing regulatory expectations around good practices in corporate governance to help ensure appropriate independence and objectivity” which would turn into a greater level of confidence when using ESG ratings. However, over-reliance on ratings should be avoided.”
IOSCO noted they could require providers to identify and disclose conflicts of interest, question whether the data they rely upon on are publicly disclosed, or based on industry estimations, ask if they adhere to the provider’s written policies and procedures and also offer facilities to report complaints.
The watchdog also suggested regulators could consider encouraging industry participants to develop and follow voluntary common industry standards, and IOSCO could play a role in putting together such standards.
As for ESG ratings and data products providers, it said “they could consider adopting, implementing and providing transparency around methodologies for their ESG ratings and data products that are rigorous, systematic, applied continuously while maintaining a balance with respect to proprietary or confidential aspects of the methodologies.”
IOSCO also highlighted the need for providers to identify and mitigate or disclose potential conflicts of interest that “may compromise independence or objectivity of ESG ratings”.
It reiterated adopting written internal policies and procedures to disclose or mitigate anything that may “influence the opinions and analyses ESG ratings and data products providers make or the judgment and analyses of the individuals they employ who have an influence on their ESG ratings or data product decisions.”
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