Regulatory guidance for ESG performance

The global financial securities watchdog will publish this summer its first regulatory guidance for “voluntary” raters of corporate environmental, social, and governance (ESG) performance. This is intended to stem growing concern among asset managers about overstated green credentials: there are simply far too many conflicting ways of measuring different responses, including improvements in company energy intensity.

Ashley Alder, chair of the International. Organisation of Securities Commissioners (IOSCO) that groups securities regulators from the US, Europe, and Asia, is concerned that countries simply have no agreed rules for ESG ratings. “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,” he said.

“We are now working on ways to ensure better transparency and clearer definitions,” he added. “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.” The watchdog also wants asset managers to incorporate more meaningful climate-related considerations like energy efficiency into their risk management, as the companies in which they invest face more stringent ESG disclosure rules.

The UK representative on IOSCO is the CEO of the Financial Conduct Authority, Nik Rathi.

• Meanwhile, the European Union’s banking watchdog is warning its banks they must have a ten-year plan spelling out how they will deal with ESG risks to their bottom line.

A new report from the European Banking Authority (EBA) set out recommendations for banks and their supervisors for approaching ESG risks, intended to help the EU meet its goals of cutting emissions by 2050. Banks should plan strategically over a period of at least 10 years to show their resilience to different scenarios, disclose strategic ESG objectives, and assess the need to develop sustainable products, EBA said. Climate risks can include “physical” or weather-related events like floods, and “transition” risks from sudden changes in asset values , including profligate usage of fuels.