A global approach to ESG data and disclosure

The International Organization of Securities Commissions (IOSCO) has published a wide-ranging consultation report on its "recommendations on sustainability-related practices, policies, procedures and disclosures in asset management".

IOSCO encourages asset managers to take sustainability-related risks into account in their investment decision-making and risk management. The consultation report provides examples of greenwashing both at the entity asset manager level and in respect of investment products.

These examples include: marketing materials that do not accurately reflect the asset managers’ consideration of sustainability-related risks; the failure to meet publicly made sustainability-related commitments; and the lack of alignment between a product’s sustainability-related name and its investment objectives and/or strategy.

The consultation report contains IOSCO’s proposals relating to the availability and use of ESG data along the investment pipeline, from issuing companies through to asset managers and end investors. Ultimately, the global standard-setter hopes to reduce the instances of greenwashing through greater transparency, comparability, and consistency in ESG disclosures.

IOSCO’s recommendations

IOSCO comprises the world’s securities regulators and the consultation report’s recommendations are primarily directed towards supervisory bodies and policymakers (which we refer to collectively as “regulators” below). The report contains five recommendations.

1. Asset manager practices, policies, procedures and disclosure. Regulators should consider setting regulatory and supervisory expectations for asset managers in respect of: (a) the development and implementation of practices, policies and procedures relating to sustainability-related risks and opportunities; and (b) disclosures related to those risks and opportunities.
2. Product disclosure. Regulators should consider clarifying and/or expanding existing regulatory requirements or guidance or, if necessary, creating new regulatory requirements or guidance, to improve product-level disclosure in order to help investors better understand: (a) sustainability-related products; and (b) material sustainability-related risks for all products.
3. Supervision and enforcement. Regulators should have supervisory tools to ensure that asset managers and sustainability-related products comply with regulatory requirements and enforcement tools to address any breaches of such requirements.
4. Terminology. Regulators should consider encouraging industry participants to develop common sustainable finance-related terms and definitions to ensure consistency throughout the global asset management industry.
5. Financial and investor education. Regulators should consider promoting financial and investor education initiatives relating to sustainability, or, where applicable, enhance existing sustainability-related financial and investor education initiatives.

Next steps

IOSCO’s board has invited comments from the public before 15 August 2021. IOSCO operates via unanimity and the adoption of standards requires agreement from all member regulators. Given the comprehensive nature of IOSCO’s proposals, it is possible that the details of the recommendations might change after consultation. However, we think that the recommendations give a good indication of the direction of ESG regulation across all jurisdictions.

We have previously written about the challenges around ESG data. For instance, many asset managers are required to disclose ESG information to their investors but are hampered by a lack of available and consistent data from investee companies, and the expense and opaqueness of third-party ESG scores and ratings. The FCA has also recently expressed its supervisory expectations with respect to the use of ESG data in its “Dear AFM chair” letter, expecting asset managers that rely on third-party data to take appropriate steps to monitor and assure the quality of such data inputs, and highlight any material data considerations/limitations to investors.  

To the extent that IOSCO’s work seeks to harmonise each of these elements on a global basis, and to ensure that the underlying ESG information is comparable and robust, this is a welcome initiative.