IOSCO, the leading international policy forum and standards setter for securities regulators, is urging regulators to increase focus on overseeing the providers of ESG ratings and data. With the publication of ‘Environmental, Social and Governance (ESG) Ratings and Data Products Providers – Final Report,’ the organization sets out a broad range of recommendations for both regulators and for the ESG ratings and providers themselves, aiming to help increase trust and transparency in the rapidly growing market.

Demand for ESG data, service and ratings has surged as investors increasingly integrate ESG considerations into the investment process, yet the activities and businesses of the providers are generally not covered by markets and securities regulators.

Ashley Alder, Chairman of IOSCO, 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.”

Earlier this year, IOSCO launched a fact-finding exercise into the ESG ratings and data provider market. The study found several issues including a lack of clarity and alignment on definitions on what ratings or data products intend to measure, and little transparency regarding methodologies underlying the products. Additionally, the exercise raised concerns regarding potential conflicts of interest where the providers offer consulting services to the companies under coverage, among other issues.

The new report follows a consultation paper released by IOSCO based on the fact-finding study, including a series of proposed recommendations to address the key issues and highlighting areas for improvement. IOSCO stated that it received over 60 responses to the paper, broadly in agreement with the recommendations.

The recommendations begin with a proposal for regulators to consider focusing greater attention on the providers of ESG ratings and data providers, and on the use of their products and services. Recommendations included requiring providers to identify and disclose potential conflicts of interest, and to consider the data and methodologies used by the providers. IOSCO noted that most jurisdictions currently lack regulatory frameworks applicable to these providers, but highlighted actions in some areas to apply regulatory oversight, such as the European Commission’s Action Plan for Sustainable Finance, and the UK’s Roadmap to Sustainable Investing.

The report also includes a broad set of recommendations for the providers, including adopting written policies and procedures to ensure that ratings and data products are based on a thorough analysis of available data, providing transparency on the methodologies and data used to determine ratings and information products. The report also include recommendations for the providers to consider in order to manage and mitigate potential conflicts of interest, and to guide the communication between ESG ratings and data providers and the entities under their coverage.

Erik Thedéen, Chair of the IOSCO Sustainable Finance Task Force, 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.”

Click here to view the IOSCO report and recommendations.