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Friends of the Earth (HK) Listed Companies Under Further Scrutiny from International ESG Standards Poor ESG Performance will Jeopardize Corporate’s Borrowing Capacity

The Board of the International Organization of Securities Commissions (IOSCO) is hosting a consultation on regulations of Environmental, Social & Governance ("ESG”) rating and data providers. It is proposing a set of recommendations to mitigate risks around ESG ratings and data products providers and to address some of the risks, including encouraging financial market practitioners to take international ESG ratings into account in their investment decisions.

As a pioneer in promoting green finance development in the Asia-Pacific region, Friends of the earth (HK) organized a webinar today, attended by more than a hundred representatives from listed companies, financial institutions and rating agencies, providing an overview of the report and put forward suggestions to further advance and improve the quality and transparency of ESG ratings and data in order to meet the tightening regulatory requirements.

The key speaker of today’s webinar, Mr. Anthony Cheung, Board Governor and Green Finance Convenor of Friends of the Earth (HK), said, "This report is one of the most important consultation on ESG issues in recent years, with the objective to establish global sustainability disclosure standards that will be crucial for national jurisdictions to build upon as part of their mandatory reporting requirements. Enhancing the reliability, comparability and interpretability of ESG ratings and data products will help improve the quality and transparency of ESG disclosures.”

The Hong Kong Exchanges and Clearing Limited (HKEX) proposed the "ESG Reporting Guide”, requesting listed companies in Hong Kong to disclose ESG-related data on an annual basis, and subsequently tightened the disclosure requirements last year. These actions demonstrated the growing importance of ESG factors in the capital market. Even though listed companies have gradually started to disclose environmental data under regulatory requirements, the compliance level and quality for most of them are still far from satisfactory. We believe that with the increased adoption of international ESG ratings, the completeness and comparability of ESG data will be improved, and companies with better performance will have an advantage in their borrowing capacity.

Current ESG Data Could Lead to Potential Investment Risks

Over the past few years, as investors become increasingly focused on the potential financial risks posed by climate change and ESG considerations, ESG rating and data have become more significant in investment decision-making. The market for ESG ratings and data has grown exponentially and encouraged the development of new ESG ratings and data products.

Mr. Anthony Cheung said, "as these ratings and products are not within the current scope of many regulators, they may create potential risks to investor protection, market transparency and efficiency, risk pricing, as well as capital allocation. The IOSCO report revealed that there is a lack of clarity about the methodologies behind the ratings or data products and an uneven coverage of products across industries and countries. The lack of data and standards presents a risk on "greenwashing” or misallocation of assets and could lead to a lack of trust in ESG ratings or in the robustness of relevant data products.”

Enhancing the Reliability of ESG Data & ESG Rating is Imperative

In view of this, IOSCO proposed a series of recommendations in its report, highlights as follows:

Recommendation for IOSCO members
  • Regulating ESG ratings and data products providers could contribute to a greater level of confidence in the use of these products and lead to a greater take-up, while at the same time protecting investors
  • National regulators might consider the extent to which the processes for determining ESG ratings and data products overlap with the processes for determining credit ratings, and whether there is a potential conflict of interest
Recommendations for ESG ratings and data products providers
  • Issuing high quality products based on publicly disclosed data sources where possible, using transparent and defined methodologies
  • Ensuring their decisions are, to the best of their knowledge, independent and free from political or economic pressures and from conflicts of interest arising due to the providers’ organizational structure, business or financial activities, or the financial interests of the providers’ employees
  • Making high levels of public disclosure and transparency an objective in their products, including their methodologies and processes
  • Maintaining in confidence all non-public information communicated to them by any company, or its agents, related to their ESG ratings and data products
Recommendation for ESG Ratings and Data Products Users
  • Financial market participants could consider conducting due diligence on the ESG ratings and data products which could include an understanding of what is being rated or assessed by the product and how it is being rated or assessed, and limitations and the purposes for which the product is being used

Friends of the Earth (HK) encourages practitioners in the Asia-pacific region to submit their opinion to help regulators set policy directions for moving forward with a sustainable society and economy.

Photo source: cnyes

Interested Topic:
Climate Change
Green Economy

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