IOSCO Guides on Oversight of ESG Ratings and Data Product Providers
The Board of the International Organization of Securities Commissions (IOSCO) published a report that sets out recommendations applicable to Environmental, Social and Governance (ESG) ratings and data product providers. As this market does not typically fall within the remit of securities regulators, IOSCO suggests that regulators could consider focusing greater attention on the use of ESG ratings and data products and the activities of ESG rating and data products providers in their jurisdictions. This could help to increase trust in ESG ratings and data going forward.
The report begins with an overview of the market for ESG ratings and data products. It then discusses the current practices of ESG ratings and data products providers and presents observations in relation to users of ESG ratings and ESG data products while elaborating on the interactions between companies that are the subject of ESG ratings or data products and ESG ratings and data products providers. Finally, the report discusses areas for improvement highlighted in the fact-finding exercise of IOSCO and sets out recommendations for securities markets regulators, ESG ratings and data products providers, users of these products and services, and companies subject to the review of these providers. The suggested improvement areas include reliability of raw ESG data, transparency around ESG ratings methodology and ESG data products, reliability of ESG ratings and data products and potential conflicts of interest, and communication between ESG ratings and data products providers and entities.
After considering the identified improvement areas, IOSCO has set out specific recommendations on what regulators could consider when developing their framework. These recommendations are underpinned by more specific guidance to assist members when navigating this new market. In its report, IOSCO provides recommendations on the possible regulatory and supervisory approaches, the internal processes of ESG ratings and data products providers, the use of ESG ratings and data products, and the interactions of ESG ratings and data products providers with entities subject to assessment by ESG ratings and data products providers. IOSCO specifies that ESG ratings and data products providers could consider a number of factors related to issuing high-quality ratings and data products, including publicly disclosed data sources, defined methodologies, management of conflicts of interest, high levels of transparency, and handling confidential information. The recommendations also suggest that users of ESG ratings and data products could consider conducting due diligence on the ESG ratings and data products that they use within their internal processes. Recommendations also cover suggestions that ESG ratings and data products providers, and entities subject to assessment by ESG ratings and data products providers, could consider to improve information gathering processes, disclosures and communication between providers and entities subject to assessment.
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Keywords: International, Banking, Insurance, Securities, ESG, ESG Ratings, ESG Data Product Providers, Guidance, IOSCO
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