ESG – IOSCO publishes its Sustainability-Related recommendations

On 2 November 2021, the International Organisation of Securities Commission (IOSCO) published a final report written by its Task Force on Sustainable Finance (STF).

The report addresses the challenges associated with growth in ESG investing and sustainability-related products including a greater need for consistent, comparable, and decision-useful information to reduce the risk of greenwashing.

It was published following the STF’s June 2021 Consultation Report and provides regulators and policymakers with guidance on how to develop sustainability-related rules and regulations.

It focuses on investor protection issues and covers five main areas:

• asset manager practices, policies, procedures and disclosure;
• product disclosure;
• supervision and enforcement;
• terminology; and
• financial and investor education.

making recommendations for each.

The report also contains the results from the STF’s fact-finding exercises conducted as part of the June 2021 Consultation Report.

The fact-finding exercises included:

• a survey of STF members about regulatory and supervisory approaches to sustainability-related practices and disclosures at both asset manager and product levels as well as regulatory and supervisory oversight in these areas;
• a review of cases of greenwashing and/or mis-selling in STF member jurisdictions and the measures used to tackle the greenwashing and/or mis-selling; and
• a survey of STF members and the IOSCO Committee on Retail Investors on current and planned financial and investor education initiatives in sustainability-related issues.

The IOSCO Recommendations

Recommendation 1: Asset Manager Practices, Policies, Procedure and Disclosure

Securities regulators and/or policymakers, should consider setting regulatory and supervisory expectation for asset managers in respect of the:

• development and implementation of practices, policies and procedures relating to material sustainability-related risks and opportunities; and
• related disclosure.

Recommendation 2: Product Disclosure

Securities regulators and/or policymakers, should consider clarifying and/or expanding on existing regulatory requirements or guidance or, if necessary, creating new regulatory requirements or guidance, to improve product-level disclosure in order to help investors better understand:

• sustainability-related products; and
• material sustainability-related risks for all products.

Recommendation 3: Supervision and Enforcement

Securities regulators and/or policymakers, should have supervisory tools to monitor and assess whether asset managers and sustainability-related products are in compliance with regulatory requirements and enforcement tools to address any breaches of such requirements.

Recommendation 4: Terminology

Securities regulators and/or policymakers, should consider encouraging industry participants to develop common sustainable finance related terms and definitions, including relating to ESG approaches, to ensure consistency throughout the global asset management industry.

Recommendation 5: Financial and Investor Education

Securities regulators and/or policymakers, should consider promoting financial and investor education initiatives relating to sustainability or enhance existing sustainability related initiatives.

Results from the SFT’s Fact-Finding Exercises

The Report found that the sustainability-related requirements concerning practices and disclosures by asset managers in the responding jurisdictions could be categorised into; Governance, Investment strategy, Risk management, Metrics and Targets with Governance requirements being the most common among jurisdictions. This categorisation is consistent with the Task Force on Climate-related Financial Disclosures Recommendations (TCFD Framework).

When it came to sustainability-related disclosure requirements at the product level, there were some commonalities in the areas of disclosure covered by the requirements, but there were differences in implementation and scope across jurisdictions.

About half of the responding jurisdictions did not have sustainability-specific rules and were instead using existing non-sustainability-specific rules to address sustainability-related risks and opportunities at the asset manager level and sustainability-related products. The justification for this included that (a) sustainability-related products comprised only a small portion of the local market, (b) and the existing rules adequately address sustainability-related risks and opportunities at the asset manager level and sustainability-related products.

The SFT reported that the majority of member jurisdictions currently rely on existing supervisory and enforcement tools to address sustainability-related misconduct, even in jurisdictions with sustainability-specific requirements.

Finally, the majority of SFT member jurisdictions were found to believe that financial and investor education could play a role in sustainable finance, including in building awareness among investors so that they can better identify greenwashing, misleading advertising and misinformation.

Will this impact me?

The recommendations will help asset managers and policy makers address the main issues concerning sustainability-related risks and opportunities, enabling them to integrate sustainability-related considerations into their decision-making processes.

In turn, this will allow investors to make informed decisions as it reduces the risk of misrepresenting an entity’s sustainability-related commitments or a product’s sustainable impact.

What’s next?

When publishing the Final Report, IOSCO indicated that it would publish a separate report in November 2021, this time covering recommendations for ESG data and ratings providers.