A recent report from CDP has illuminated the growing centrality of ESG ratings in the strategic frameworks of financial institutions (FIs).
Accoridng to ESG News, in 2023, an overwhelming 85% of FIs have harnessed these ratings to scout climate-related opportunities, managing over $4tn in assets collectively. These institutions credit enhanced ESG ratings for notable financial gains, underscoring the ratings’ pivotal role in their operational strategies.
Amidst this surge in ESG adoption, global regulators are stepping up to ensure the reliability and transparency of ESG data products. The International Organization of Securities Commissions (IOSCO) has laid out a framework advocating for improved oversight, management of conflicts of interest, and better transparency. Pietro Bertazzi, Director of Policy & External Affairs at CDP, stressed the necessity of robust regulatory mechanisms. “It’s absolutely pivotal that the right checks and balances are in place to address this risk wherever possible and ensure capital allocation is efficient and impactful to achieve the goals of global environmental agendas,” he noted.
Further scrutiny reveals significant advancements in regulatory practices across several major jurisdictions since IOSCO’s influential 2021 report. Notable among these are Japan, Hong Kong, Singapore, the UK, India, and the EU, each tailoring their regulatory frameworks to align with, yet distinctly implement, IOSCO’s guidelines. This includes divergent approaches in defining what constitutes an ESG rating or data product, suggesting a pressing need for standardized definitions to prevent market confusion and enhance policy alignment.
The report also touches on the challenges and developments in the regulatory landscape, highlighting the substantial increase in the use of ESG ratings—with 94% of investors applying these tools monthly to guide investment strategies and minimize environmental impacts. The European Union, in particular, has introduced stringent transparency requirements that surpass IOSCO’s suggestions, demanding disclosures related to scientific backing, artificial intelligence utilisation, and adherence to international agreements.
As the call for interoperability among regulations grows louder, the necessity for a unified regulatory framework becomes apparent. Such harmonisation would likely reduce compliance costs, boost transparency, and facilitate thorough due diligence processes. The evolving ESG landscape presents both challenges and opportunities for sustainable investment, with global alignment playing a crucial role in fostering a robust regulatory environment.
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