The association found that regulators could provide market participants with the much-needed additional confidence in ESG ratings and data.
On November 23, 2021, the International Organization of Securities Commissions (IOSCO) published a report and a set of recommendations (recommendations) regarding providers of environmental, social and governance ratings (ESG) and data products. The recommendations come because the market for ESG ratings and data products has grown rapidly in recent years, mainly due to the increasing demand from investors for reliable and comparable ESG-related data on companies. The recommendations follow a consultation launched by IOSCO in July 2021 (see this Latham blog post for more information) and are annexed with a summary of the feedback received in relation to the consultation.
IOSCO recognized that the area of ESG ratings and data product providers is not an area that securities regulators would normally be concerned with. However, given the rapidly growing role of these providers in global securities markets, IOSCO found that regulatory involvement could give market participants the much-needed additional confidence in ESG ratings and data.
The recommendations include a set of general recommendations for securities regulators, providers of ESG ratings and data products, and users of ESG ratings and data products. These are accompanied by more specific guidance that can help market participants navigate this growing market. Some of the key recommendations include the following:
- Regulators may consider paying more attention to the use of ESG ratings and data products, as well as ESG ratings and data product providers that may be under their jurisdiction.
- Providers of ESG ratings and data products could consider introducing and implementing written procedures to help ensure the issuance of high quality ESG ratings and data products, where possible on the basis of publicly disclosed data sources and, if necessary, on other information sources, using transparent and defined methods to ensure.
- ESG ratings and data product providers may consider identifying, avoiding, or appropriately managing, mitigating and disclosing potential conflicts of interest that could affect the independence and objectivity of the business of the ESG ratings and ESG data product provider.
- ESG ratings and data product providers may consider making an appropriate level of disclosure and transparency a priority for their ESG ratings and data products, including their methods and processes, so that users of a product understand what the product is and how it is made.
- Market participants may consider performing due diligence on the ESG ratings and data products they use in their internal processes, or gathering and reviewing information.
- ESG-rated companies and data product providers may consider streamlining their sustainability-related information disclosure procedures as much as possible, taking into account the applicable regulatory and other legal requirements of the legal systems.
IOSCO noted that the inclusion and implementation of the recommendations in different jurisdictions will depend on a number of factors including the priorities of local stakeholders, local market conditions, and the legal and regulatory frameworks of the jurisdictions. In particular, IOSCO urges regulators to review their existing regulatory frameworks to determine whether they are adequately equipped to address issues related to ESG ratings and data product providers, or whether additional clarifications or substantive regulation are needed. For its part, IOSCO is calling on ESG ratings regulators and data product providers to update their relevant internal guidelines to reflect the recommendations in order to establish themselves as good operators.
IOSCO’s involvement in this area is a clear indication that the growth of the ESG ratings and data products market has resulted in providers of these products influencing capital markets. In Great Britain, the FCA contributed to the work of IOSCO and asked for feedback in parallel in CP21 / 18 (“Enhancing Climate-related Disclosures by Standard Listing Companies and Looking Views on ESG Issues in Capital Markets”). In particular, the FCA examines the problems arising from the increasingly important role of ESG ratings and data product providers in financial markets. The FCA is expected to report by mid-2022 on whether it gives cause for regulatory intervention in this regard.
In addition, the UK Government’s recent Greening Finance paper (see this Latham blog post for more information) underscores the importance of ESG rating and data product providers who are transparent about ESG data and ratings and who have strong governance and strong conflict management demonstrate interest. The UK government is considering bringing these providers under the scope of FCA approval and regulation and is expected to provide further details over the next year.
The demand for ESG data is expected to continue to grow in the coming years. Whether this forecast will lead regulators to consider additional action in this area is an important observation point.
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