Iosco calls for oversight of ESG ratings and data product providers

Ashley Alder, Chairman of IOSCO and CEO of the Hong Kong SFC said: “ESG ratings and third-party data products have played an important role in the ESG ecosystem so far, especially in the absence of consistent and comparable issuer disclosures. Their significance and usefulness will only continue as capital markets intensify efforts to support the shift towards a net zero economy. This is why IOSCO has undertaken this work.”

The market for ESG ratings and data has grown over the past few years, in part due to a lack of consistent information disclosures at the entity level. As this market does not typically fall within the remit of securities regulators, IOSCO suggests that regulators could consider focusing greater attention on the use of ESG ratings and data products and the activities of ESG rating and data products providers in their jurisdictions. This could help to increase trust in ESG ratings and data going forward.

IOSCO has also set out specific recommendations on what regulators could consider when developing their framework. These recommendations are underpinned by more specific guidance to assist members when navigating this new market.

The recommendations include promoting more transparency regarding the methodologies that ESG ratings and data product providers use in developing their products; ensuring their procedures for managing conflicts of interest are appropriate and improving communication channels between providers and the entities covered by their ESG ratings or data products without undermining their impartiality.

Erik Thedéen, Chair of the IOSCO Sustainable Finance Task Force and Director General of Finansinspektionen of Sweden, said: “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.”