Transparency of ESG investment ratings faces regulatory scrutiny
By Huw Jones
LONDON (Reuters) – Market regulators set out a global framework on Tuesday to police environment, social and governance (ESG) investment ratings and help combat ‘greenwashing’ in the fast-growing, multi-trillion dollar sector.
Regulators are cracking down on many aspects of ESG investing with basic rules to make it easier to punish greenwashing, where the environmental credentials of an investment or activity are overstated, in a cross-border sector where investment is “exploding”.
The International Organization of Securities Commissions (IOSCO), which groups securities watchdogs from the United States, Europe, Asia and Latin America, published 10 recommendations for its members to apply in day-to-day work.
“What we are trying to do now is put this foundation in place so we have some possibility to go after greenwashing and not just talking about it,” Erik Thedeen, chair of IOSCO’s sustainable task force and director general of Sweden’s markets watchdog said.
Asset managers use ratings from about 160 raters such as MSCI, S&P Global and Morningstar to pick stocks and bonds for “green” products now popular with ethical investors, but there are no regulatory checks on how those ratings were put together.
IOSCO said its recommendations will begin shining a light on how ratings are compiled and conflicts of interest handled in a largely unregulated business which is already worth around $1 billion and growing at 20% a year.
It recommends that ESG ratings and data providers consider implementing written procedures to underpin high quality ratings, and make public disclosure a priority.
Some regulators are likely to go further, with IOSCO members Britain and the European Union having already expressed concerns over the lack of rules for ESG raters.
The recommendations will raise the bar to entry into the ratings sector, an official at a leading ESG rater said.
Earlier this month a new global body was set up to introduce rigour into how companies make ESG related disclosures. Until now, asset managers have relied heavily on ratings in the absence of high quality company disclosures.
IOSCO has already set out a framework for checks on how asset managers sell green funds and will now focus on what independent checks on company ESG disclosures could look like.
(Reporting by Huw Jones; Editing by Alexander Smith)