Regulating the ESG Raters: IOSCO Eyes International Rulebook

ESG data and ratings providers require an explicit regulatory framework to ensure consistency, according to a new report by the International Organization of Securities Commissions (IOSCO).

The IOSCO consultation set out a list of recommendations to address the challenges and risks faced by ESG ratings and data providers, as well as challenges faced by users and the firms that are subject to ratings and data products.

Ashley Alder, IOSCO chair and CEO of the Securities and Futures Commission of Hong Kong, said: “The use of ESG rating and data products is on the rise but most jurisdictions do not have regulatory frameworks which explicitly cover the providers of these products.

“Users have signalled that having multiple ESG ratings and data products can cause confusion, raising serious questions about relevance, reliability, and greenwashing.”

The consultation highlights several key risks and challenges, including a lack of transparency about methodologies, and an uneven coverage of products offered across industries and geographical areas. IOSCO raised concerns that these risks could lead to gaps and inconsistencies when applied to investment strategies.

IOSCO’s consultation also includes potential improvements to the reliability, comparability, and interpretability of ESG ratings and data products, how to manage conflicts of interest, and providers’ interactions with companies subject to ESG ratings or data products.

Over the past few years, the market for ESG ratings and data has grown considerably as investor demand has driven asset flows into related products and legislation and regulation has focused on sustainability factors.

The consultation report is part of the overall framework for sustainability that IOSCO is developing with its members and other international organisations.

An indicative timeline published by the IOSCO suggests that the standard could be completed by June 2022.