Can IOSCO Aid the ESG Rating Environment by Setting Standards for ESG Disclosure?


In today’s short post, news regarding the plans of the International Organisation of Securities Commissions to set global standards in relation to ESG disclosure will be considered, particularly in relation to the trajectory of ESG rating agencies and their inherent issues. Though IOSCO’s recommendations would not be binding, they are influential and, as we shall discuss, the fact that the EU is currently considering its approach in this sector may prove to be perfect timing for some coordination in this field. However, what will it mean for the ESG rating agencies who are coming under fire recently for a lack of timely and comparable analysis?

 

The Financial Times reported yesterday that the IOSCO is planning on taking action with regards to the disparate set of rules regarding ESG disclosure across the spectrum. Research has suggested that there are more than 10 standards that suggest frameworks for how ESG-related information should be disclosed. Even via the European Union’s leading regulatory approach of mandating disclosure in this field, there is still ample manoeuvre to select which framework a company chooses to use to disclosure non-financial information. My forthcoming article in the Business Law Review covers this (and is available, in a pre-published version here), and it questions how the EU will adapt to this obvious problem as they are currently considering how to tweak their non-financial disclosure regulation – Directive 2014/95/EU. To this end, IOSCO are hoping to provide assistance to the global issue by way of setting some standards in this field, although at this early stage this is just an aim and no particular details have been described. For now, they have created a new task force that will aim to translate the different standards into a more ‘cohesive, more transparent and more standardised’ form. On the issue of what this would look like, IOSCO said that the aim is to develop a set of guidelines that are diverse and principles-based, yet ‘granular enough to be meaningful’. The issue of whether IOSCO has the authority within the eyes of the sector to develop such standardised rules is yet to be seen, but onlookers are hopeful.

 

The FT also reports that the taskforce will be examining the role of credit rating agencies and ESG rating agencies, ‘examining their methodologies and supervisory practices’. The ESG rating agencies and credit rating agencies have different roles within this particular dynamic, but examinations of their methodologies and practices is very much needed. This is the topic of my forthcoming book entitled Sustainable Rating Agencies vs Credit Rating Agencies: The Battle to Serve the Mainstream Investor, and the recent criticism of sustainable rating agencies – namely that their methodologies are not transparent and too subjective at best, that they are too divergent as an industry to be compatible and therefore useful, and that they are too closely aligned to issuers – means that they are in a particularly vulnerable position. It is for this reason that the forthcoming amendments to the EU’s non-financial information disclosure regulations, and the injection of standard-setting by IOSCO, could turn the table in favour of the sustainable rating agencies (and, to a lesser extent, the credit rating agencies too, although they need much less assistance). The ESG rating agencies (the changeability of their industry terminology is acknowledged but is something that will be examined closely in the forthcoming book) are incredibly reliant on the disclosure of issuers, which has been widely identified as being too broad, subjective, without standard, and sometimes even ‘forced’. If IOSCO can influence some movement towards a recognised standard, and if this affects the EU legislation, then there is a potential that ESG rating agencies will become more useful. However, if IOSCO fails in its mission, and if the EU do not mandate a particular standard (which they have not done so far), and if the US continues its threat to move away from the consideration of ESG in its financial thinking as a culture, the ESG rating space will likely succumb to the severe threat that it faces. This is on top of the more established credit rating agencies sitting poised to complete their domination of the marketplace. It is likely to be an influential 18 months for the industry.

 

Keywords – ESG, rating agencies, disclosure, non-financial disclosure, financial regulation, IOSCO, @finregmatters

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