Global watchdog to tackle greenwashing with ESG ratings guidance

A global securities watchdog plans to publish its first regulatory guidance for raters of corporate environmental, social and governance (ESG) performance in July to stem growing concern among asset managers about overstated green credentials.

The concern over so-called greenwashing has grown as more investments are channelled into climate-friendly funds, giving rise to a burgeoning market for ratings on how different companies deal with ESG challenges.

Ashley Alder, chair of the IOSCO body that groups securities regulators from the United States, Europe and Asia, says that many countries have no rules for ESG raters.

“Many on the buy-and-sell side have signalled very clearly how confusing the multiplicity of different ESG ratings choices can be, again raising serious questions about relevance, about reliability and about greenwashing,” Alder told City & Financial’s City Week event on Wednesday.

“We are now working on ways to ensure better transparency and clearer definitions. Our work is likely to involve guidance to service providers and ratings agencies, together with recommendations for regulators on how to deal with potential conflicts of interest.”

IOSCO – the International Organization of Securities Commissions – expects to publish a report mid-July.

The watchdog also wants asset managers to incorporate more meaningful climate-related considerations into their risk management as the companies in which they invest face more stringent ESG disclosure rules.

“It’s critical for providing quality information to end investors,” Alder said.

IOSCO is working with the International Financial Reporting Standards (IFRS) Foundation on setting up a new body by November to write mandatory global standards for company disclosures on climate change.

IOSCO members such as the United States and the European Union would continue working on their own disclosure rules, creating some differences, Alder said.

It is essential, therefore, that these domestic approaches become fully interoperable with the global baseline being developed by the IFRS to avoid conflicts and the creation of more “noise” in the system, Alder added.

“We can’t simply work in jurisdictional silos when the climate emergency does not respect national boundaries,” he said. “Global investors need global comparability.”