Growth and Emerging Market Committee (GEMC) of IOSCO published a report that sets forth recommendations related to the development of sustainable finance in emerging markets and the role of securities regulators in this area. Among other things, the recommendations include requirements for reporting and disclosure of material Environmental, Social, and Governance (ESG) risks, aimed at enhancing transparency.
The report provides the background of the GEMC project on sustainable finance, includes an overview of the regulators’ initiatives in emerging markets, and describes market trends and initiatives. The report identifies the prerequisites for creating an ecosystem that facilitates sustainable finance, such as an appropriate regulatory framework and fit-for-purpose market infrastructure, reporting and disclosure requirements, governance and investor protection guidelines, and mechanisms to address needs and requirements of institutional investors. Finally, the report details the GEMC recommendations (a list of the recommendations can be found in the Appendix) on development of sustainable finance.
Given the global nature of sustainable instruments, GEMC believes that its recommendations will benefit both issuers and investors by improving the consistency of regulation of sustainable finance in emerging markets. It encourages its members to consider implementation of this guidance in the context of their legal and regulatory frameworks, given the significance of the associated risks and opportunities. The key recommendations include the following
- Integration by issuers and regulated entities of ESG-specific issues in their overall risk assessment and governance. Issuers and other regulated entities should integrate ESG-specific issues, where these are material, in the overall risk assessment and governance of these entities including at the Board level.
- Integration by the institutional investors of ESG-specific issues into their investment analysis, strategies, and overall governance. Consistent with their fiduciary duties, institutional investors, including asset managers and asset owners, are encouraged to incorporate ESG-specific issues into their investment analysis, strategies, and overall governance and to take into account material ESG disclosures of the entities in which they invest.
- ESG-specific disclosures, reporting, and data quality. Regulators should require disclosure with regard to material ESG-specific risks (including transition risks) and opportunities in relation to governance, strategy, and risk management of an issuer.
- Definition and taxonomy of sustainable instruments. Sustainable instruments should be clearly defined and should refer to the categories of eligible projects and activities that the funds raised through their issuance can be used for.
- Specific requirements regarding sustainable instruments. Regulators should establish ongoing disclosure requirements regarding the use of the funds raised through the issuance of sustainable instruments including the extent of unutilized funds, if any. Regulation should provide for measures to prevent, detect, and sanction the misuse of funds raised through the issuance of sustainable instruments.
- Building capacity and expertise for ESG issues. Regulators should analyze the gaps in capacity and expertise with regard to ESG-related issues mentioned in the recommendations and consider targeted capacity building to address these gaps.
Keywords: International, Securities, Banking, Insurance, Pension Funds, Sustainable Finance, ESG, Reporting, Disclosure, Recommendations, GEMC, IOSCO
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
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