Transparency of ESG investment ratings under regulatory review

A US dollar banknote is visible in this photo illustration taken on May 3, 2018. REUTERS / Dado Ruvic / Illustration / File Photo

LONDON, Nov. 23 (Reuters) – Market regulators on Tuesday set a global framework to monitor ratings of environmental, social and governance (ESG) investments and help tackle “greenwashing” in the rapidly growing sector of several billions of dollars.

Regulators are cracking down on many aspects of ESG investing with ground rules to help crack down on greenwashing, where the environmental credentials of an investment or activity are overestimated, in a cross-border industry where investment “is booming “.

The International Organization of Securities Commissions (IOSCO), which brings together securities regulators from the United States, Europe, Asia and Latin America, has published 10 recommendations for its members to implement in their daily work.

“What we’re trying to do now is put that foundation in place so that we have the opportunity to continue greenwashing and not just talk about it,” said Erik Thedeen, chairman of the development working group. Director of IOSCO and Managing Director of the Swedish Market Surveillance Body.

Asset managers use ratings from around 160 raters such as MSCI, S&P Global and Morningstar to select stocks and bonds for ‘green’ products now popular with ethical investors, but there is no regulatory oversight on how these ratings were established.

IOSCO said its recommendations would begin to shed light on how ratings are compiled and conflicts of interest managed in a largely unregulated company that is already worth around $ 1 billion and growing 20% ​​annually.

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, Great Britain and the European Union, having already expressed concerns about the lack of rules for ESG assessors.

The recommendations will raise the bar for entry into the ratings industry, said an executive at a leading ESG assessor.

Earlier this month, a new global body was set up to introduce rigor in the way companies publish ESG information. So far, asset managers have relied heavily on ratings in the absence of high-quality corporate disclosures. Read more

IOSCO has already defined a framework of controls on how asset managers sell green funds and will now focus on what independent controls on companies’ ESG information might look like.

Reporting by Huw Jones; Editing by Alexander Smith

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