ESG Ratings Agencies to be Scrutinised Globally

Growing consensus on the need to create regulated standards on ESG data has been given a boost with the publication of a set of recommendations by the international securities standards setting body for global regulators.

The International Organization of Securities (IOSCO) has issued a series of recommendations for regulators, including that they require ESG ratings agencies and data providers to identify, disclose and mitigate potential conflicts of interest. They should also consider whether ratings agencies and data provider have conflict of interest plans in place, whether their methodologies are public disclosed, and whether to create a mechanism to receive complaints or misconduct around issues of transparency, transparency and integrity.

The recommendations, which have persuasive effect on regulators around the world but are not compulsory, are the latest efforts to attempt to regulate the growing ESG ratings, data and information space. Last month the UK’s Financial Conduct Authority (FCA) issued a discussion paper to seek views on its proposed implementation of disclosure requirements for asset managers and certain FCA-regulated asset owners and sustainable investment labels.

It follows the coming into force of the EU’s Sustainable Finance Disclosure Regulation (SFDR) which will has applied in the EU since 10 March 2021. It lays down sustainability disclosure obligations for issuers of financial products and financial advisers towards investors and requires the assessment, taking into consideration and disclosure of sustainability risks by financial market participants. These include asset managers, institutional investors, insurers and any entity that offers financial products involving the management of client money. See separate story.

The IOSCO paper also makes a number of recommendations for ESG ratings agencies and ESG data providers. The recommendations are just that, and not obligatory, however with regulatory oversight intensifying, it is likely that ESG ratings agencies and ESG data providers will be subject to increased transparency requirements in respect to conflicts of interest, data collection and methodology. 

In conducting a detailed examination of the ESG ratings and data market, it found that not only is the market largely unregulated, with some isolated attempts at self-regulation through codes of conduct, but there is no consistency in the ESG standards used, making it difficult for investors to assess ESG performance and risk management based on standardised criteria. 

The recommendations targeted at ESG ratings and data products providers include disclosing and publishing their data sources, their defined methodologies, how they manage conflicts of interest, their transparency policies and how they handle confidential information.

The full report can be found here. The recommendations for global regulators are on page 35 and the recommendations for ESG ratings agencies and data service providers are on page 37.