IOSCO may lead implementation of ESG disclosure and rating standards

Refinitiv’s Detlef Glow says international ESG standards are on the horizon


Detlef Glow, head of EMEA research, Refinitiv

The International Organization of Securities Commissions (IOSCO) supposedly plans to publish its first regulatory guidance for raters of corporate ESG performance in July.

It is doing this to stem growing concerns among asset managers about overstated green credentials. This announcement is in line with the IOSCO Board Priorities – Work Program 2021 – 2022, where IOSCO stated it will contribute to the goal of improving the completeness, consistency, and comparability of sustainability reporting by delivering respective reports on sustainability-related disclosures for asset managers (including greenwashing) and issuers, ESG ratings, and ESG data providers.

The IOSCO board has identified three priority areas for improvement in sustainability-related disclosures by companies and asset managers. These three areas are:

  1. Encouraging globally consistent standards for sustainability-related disclosure across jurisdictions, the coverage and breadth of sustainability topics and leveraging existing principles, frameworks, and guidance.
  2. Promoting comparable metrics and narratives on industry-specific, quantitative metrics in companies’ sustainability-related disclosures and standardisation of narrative information.
  3. Coordinating across approaches to drive international consistency of sustainability-related disclosures with a focus on enterprise value creation, including companies’ dependence on stakeholders and the external environment, while also supporting mechanisms to coordinate investors’ information needs on wider sustainability impacts and to promote closer integration of those two aspects with reporting under current accounting standards frameworks and facilitate independent assurance of companies’ disclosures.

As a result, IOSCO wants to identify ways to ensure better transparency and clearer definitions as it wants to give guidance to service providers and rating agencies, together with recommendations for regulators on how to deal with potential conflicts of interest.

With regard to this, IOSCO is working with the IFRS Foundation on setting up a new body, the Sustainable Standards Board (SSB), by November 2021, to write global standards for company disclosure on climate change, since it is necessary that the local disclosure rules in the different regions around the globe become fully interoperable based on global standards. That said, one of the aims of this initiative is to leverage the content of existing sustainability-related reporting frameworks.

These international standards may also impact the promoters of ESG ratings, as all kinds of investors are complaining that they are confused by the variety of ESG ratings for companies and funds. Within the current environment, the same company can achieve a high sustainability rating with one promoter while having a bad ESG rating at another.

Clear disclosure standards for ESG data and ratings are highly appreciated by all kind of investors, as they will help them to understand how companies are evaluated and rated by different promoters.

Don’t get me wrong, this standardisation should not lead to all rating promoters having the same rating for all companies. Instead, it should lead to a transparent disclosure of the rating purpose and the specific impacts of the respective rating methodology on the results. For example, the disclosure should contain a clear description of which ESG datapoints are taken into consideration and how they are impacting the rating.

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