Infotech

Market authorities tackle the regulation of ESG data and ratings



Posted on Nov 23, 2021, 12:50 PMUpdated Nov 23, 2021, 12:52 PM

Financial market sheriffs want to bring order to the Wild West of sustainable finance. After its recommendations for enhanced monitoring of green funds and so-called sustainable asset management, the International Organization of Securities Commissions (IOSCO or Iosco) is tackling one of the roots of “greenwashing” practices: data and extra-financial ratings of companies and other issuers active on the financial markets (States, etc.).

The IOSCO, which brings together 34 national stock market supervisors, advocates more transparency in ESG methodologies (with environmental, social and governance criteria), better management of conflicts of interest and greater communication between companies and suppliers of extra-financial data. An urgent fight in the face of the explosion of sustainable finance, which concentrates a large part of capital raising flows. The ESG data market could more than double by 2025, according to UBS.

Get to the subject

If this subject “does not generally fall within the remit of securities regulators”, they must take it up to “increase the confidence of stakeholders” in the financial markets, judges IOSCO in its final report on the data. ESG released this Tuesday.

In Europe, where green regulations are the most advanced (taxonomy, regulation of green funds, etc.), the European Securities and Markets Authority (Esma) wishes to monitor the work of extra-financial rating agencies, as it already does for credit scoring specialists. “The European Commission will mandate Esma. It is very clear that this is a priority, ”said Iliana Lani, oversight manager at Esma, during the presentation of the IOSCO report.

“There are differences with the rating agencies that measure the solvency [des émetteurs de dette sur les marchés, NDLR], she said, but also similarities in the processes, with the same expectations in terms of transparency, reliability and independence. “

IOSCO highlights the heterogeneity of extra-financial analysis on a global scale. First of all on the side of data or rating providers, with 160 players identified by KPMG around the world, major financial service providers who have bought specialists (Trucost at S & P, Sustainalytics at Morningstar, etc.) from shops and NGO. There are also 30 to 40 regional players in the Old Continent, listed by the European Commission.

Heterogeneity also reigns with the data itself. “There is little clarity and alignment of definitions, including in what the ratings or data intend to measure”, points out IOSCO. The lobby highlights the “lack of transparency of methodologies”, the “great divergence” of ESG data and ratings and the uneven coverage of sectors and regions of the world. Finally, he points out the risks of conflicts of interest in companies that also offer consulting services.

These pitfalls require extra-financial players to review their procedures and methodologies. Consensual in nature, IOSCO also recommends that its members adopt “possible regulatory and supervisory approaches”, but without obligation.

New delay in sight for European green regulations

Already postponed from early 2022 to mid-2022, the publication of technical standards specifying the European regulation on green funds (SFDR) could be postponed to the end of 2022, advances Bloomberg. The authorities who oversee the process (EBA, Esma and Eiopa) see their work slowed down by the sheer complexity of the task. For example, higher reporting requirements are foreseen for investments that align with European taxonomy, compared to other sustainable investments. An “increased complexity” by the decision to account for sovereign debt holdings in two distinct ways.

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