IOSCO Good Sustainable Finance Practices Call for Action

On November 7, the International Organization of Securities Commissions (IOSCO) issued a Call for Action (CFA) to “counter the risk of greenwashing related to asset managers and Environmental, Social, and Governance (ESG) rating and data providers.”¹

As part of this CFA, IOSCO provided recommendations, or good practices, for asset managers and ESG rating and data providers to implement. These good practices promote improvements in ESG guidance and disclosures, and greenwashing prevention, and align with climate-related standards and regulations proposed or passed in recent months and years. For example, the US Securities and Exchange Commission proposed climate-related disclosure rules, noted greenwashing as an examination priority, and proposed an amendment to expand the scope to their existing Names Rule to include fund names that suggest an ESG-related investment focus. The UK Government² mandated climate-related financial disclosures, and the US Office of the Comptroller of the Currency proposed guidance on how climate-related financial risk should be managed.

The alignment to other industry standards and regulations should help IOSCO gain support for these good practices as they engage with voluntary standard-setters and industry associations as a means of promoting adoption and implementation.

The Good Practices

IOSCO’s good practices address two sectors of the marketplace and outline what action each should take to improve ESG guidance and disclosures and prevent greenwashing.

Asset Managers:

• Establish policies, procedures, and practices covering the classification of material risks and opportunities
• Include product-level disclosures that provide transparency of material sustainability-related risks and opportunities
• Standardize sustainable finance and ESG-related terms to provide consistency across the global asset management industry
• Promote related investor education
• Set clear expectations for due diligence of ESG ratings and data products used in internal processes

ESG Rating and Data Providers:

• Establish policies and procedures that ensure:
  - Ratings and data products are high-quality and use transparent and defined methodologies
  - Decisions are independent and free from undue interference, influence, or conflicts of interest
• Prioritize public disclosure and transparency of related methodologies and processes used to establish ESG ratings and data products
• Establish controls that protect the information-gathering process with covered entities
• Address issues raised by covered entities regarding ESG ratings and data products
  
  

What Does This Mean?

Certain key themes covered in IOSCO’s good practices span both sectors. These themes, if addressed, will put your organization on the path toward improving ESG guidance and disclosures, and setting standards that help prevent greenwashing.

Good Governance — Establish policies and procedures that address your role in the ESG marketplace and provide guidance and governance over this role.

Policies and procedures should cover materiality of sustainability-related risks and opportunities, methodologies, due diligence protocols, and controls and disclosure practices.

Prioritize Disclosures — Develop disclosures after establishing policies and procedures.

Disclosures are imperative to bringing greater credibility and transparency to the marketplace. Depending upon your role in the industry, disclosures should provide detail on methodologies used to make investment decisions, construction of ratings, or the design of data products. Where appropriate, disclosures should also address material risks and opportunities.

Risk Management — Establish controls that ensure safe and sound business practices and protect the business, its investors, or covered entities involved in business operations and outputs.

These controls should address key areas of your business, including data gathering, information standardization, and disclosure generation. Once developed, organizations should incorporate controls into related policies and procedures and review them annually for effectiveness.

How Guidehouse Can Help

IOSCO’s Call for Action follows numerous other standards and regulations issued in the industry to support the ESG mission, and confirms the understanding that financial institutions will need to start taking action. This action should include practicing good governance and risk management and enhancing transparency.

Drawing on years of experience helping financial institutions and service providers address their most important challenges with practical and innovative solutions, Guidehouse can provide key insights and solutions to your organization when answering IOSCO’s Call for Action, or a related requirement. Specifically, Guidehouse can assist your organizations in the following ways:

• Policy and Procedure Analysis — Define and document processes to identify risk and opportunities, capture methodologies, controls, and disclosure practices
• Policy and Procedure Creation — Draft policies, procedures, and processes needed to address gaps in governance and related documentation
• Controls Assessment — Draw on our deep risk management expertise to evaluate existing controls, identify gaps, and establish new controls that will strengthen your business practices
• Due Diligence — Leverage our broad due diligence capabilities to help your organization evaluate its practices of referencing ESG ratings and data products used in internal processes
• Transparency and Reporting — Draw on our corporate governance expertise, to help clients implement the reporting structures necessary to ensure their stakeholders have the information they need

Guidehouse is well-equipped to make an individualized assessment of your unique circumstances and offer innovative advice and solutions for response and remediation.

Co-authored by Eleanor Gass.