Green Finance Advisor of Friends of the Earth (HK)

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, 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 two-session webinar last week in English and Chinese, attended by representatives from listed companies, financial institutions and rating agencies, providing an overview of the report and putting 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 the 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 consideration of many regulators currently, 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 and 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 to build confidence, improve take-up, and protect investors

• Considering the level of overlap in processes for determining ESG ratings and data products with the processes for determining credit ratings and mitigate potential conflicts of interest

Recommendations for ESG ratings and data products providers

• Issuing high quality products using publicly disclosed data sources with transparent and defined methodologies

• Ensuring decisions are made independently and free of conflicts of interest

• Making high levels of public disclosure and transparency an objective

• Maintaining all private information pertaining to ESG ratings and data products in confidence

Recommendation for ESG Ratings and Data Products Users

• Conducting due diligence on ESG ratings and data products to gain an understanding of the assessment methodologies and their limitations

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

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