Regulators should consider tightening up requirements for product-level sustainability disclosures and setting expectations for asset managers on sustainability-related risks and disclosures to combat greenwashing, the International Organisation of Securities Commissions (IOSCO) has said.
Erik Thedéen, Head of Sweden’s Financial Supervisory Authority and Chair of IOSCO’s Sustainable Finance Taskforce, said that setting regulatory and supervisory expectations is “fundamental to addressing issues relating to risk mismanagement and greenwashing”.
In its final report on a consultation launched at the end of June, IOSCO – whose members are responsible for regulating more than 95% of global securities markets across 130 jurisdictions – also said that there was “a clear need” to address the lack of reliability and comparability both of corporate data disclosures and of third-party ESG data and ratings.
A report containing recommendations for ESG data and ratings providers will be published later this month, it said, following a separate consultation in which IOSCO has asked market participants whether there should be stricter transparency rules for providers on data sourcing, methodologies and management of conflicts of interest, as well as improved due diligence, verification and communication with companies.
But “improving underlying data is critical but not sufficient if asset managers do not properly integrate sustainability risks into their risk management procedures – or if they misrepresent the ESG features or performance of their funds to their investors”, said Thedéen, explaining why regulators and supervisors need to take action to combat greenwashing.
While the report highlights a range of examples of regulator and supervisory efforts to do so, it says a fact-finding exercise looking at pre-existing regulatory initiatives and practices found that around half of the regulators in the survey do not have sustainability-specific rules for asset managers or products. The majority of IOSCO members rely on existing supervisory and enforcement tools, even where sustainability-specific regulations are in place, it says.
In today’s report, IOSCO makes five recommendations to its members. Regulators and policymakers should consider setting expectations for asset managers on the “development and implementation of practices, policies and procedures” relating to sustainability-related risks and disclosures; they should expand or create new requirements on product-level disclosures, and they should have supervisory tools to monitor the compliance of asset managers and products with regulatory requirements. Recommendations four and five cover establishing consistent ESG terms and definitions, and improvement of education initiatives relating to sustainability.
All of the recommendations can help prevent greenwashing, IOSCO said, for example by enabling investors to better understand the risks associated with a product, and ensuring that the names of sustainability-related products accurately reflect their focus.
The 45 respondents to its consultation, which included BlackRock, Morningstar, the Principles for Responsible Investment and the Thai Securities and Exchange Commission, were “broadly in agreement” with the recommendations set out in the initial consultation and “overall […] supportive” of IOSCO’s work, it said.