Environmental, Social and Governance (ESG)
Ratings and Data Products Providers
Final Report

The Board
OF THE
INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS

FR09/21

NOVEMBER 2021

Copies of publications are available from:The International Organization of Securities Commissions website www.iosco.org© International Organization of Securities Commissions 2021. All rights reserved. Brief
excerpts may be reproduced or translated provided the source is stated.

ii

Contents
Executive Summary ................................................................................................................... 1
Introduction ................................................................................................................................ 3
Chapter 1: Product and Market Overview ................................................................................. 6
Chapter 2: ESG ratings and Data Products Providers.............................................................. 16
Chapter 3: Private and Public Users of ESG ratings and Data Products ................................. 24
Chapter 4: Companies and ESG Ratings and Data Products Providers................................... 28
Chapter 5: Final Recommendations ......................................................................................... 32
Annex 1: Glossary.................................................................................................................... 44
Annex 2: Final IOSCO Recommendations ............................................................................. 46
Annex 3: WS3 Consultation Report Feedback ........................................................................ 48

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Executive Summary
The use of environmental, social and governance (ESG) ratings and data products has grownconsiderably in response to investors’ mounting interest in investing in companies that takeaccount of sustainability in the way they are run. As a result, the role and influence of ESG
ratings and data products providers 1 in financial markets more generally, and in the sustainablefinance ecosystem more specifically, have grown significantly. This has led some securities
markets regulators to take a closer interest in the activities and business models of theseproviders.
Given that this part of the market does not currently fall within the typical remit of securities
regulators, IOSCO has sought to strengthen its knowledge by undertaking a fact-finding
exercise with ESG ratings and data products providers, users of ESG ratings and data products,
and the companies that are the subject of these ESG ratings or data products.
The fact-finding exercise revealed that:
•
•
•

•

•

there is little clarity and alignment on definitions, including on what ratings or data
products intend to measure;there is a lack of transparency about the methodologies underpinning these ratings ordata products;
while there is wide divergence within the ESG ratings and data products industry, there
is an uneven coverage of products offered, with certain industries or geographical areas
benefitting from more coverage than others, thereby leading to gaps for investors
seeking to follow certain investment strategies;
there may be concerns about the management of conflicts of interest where the ESG
ratings and data products provider or an entity closely associated with the provider
performs consulting services for companies that are the subject of these ESG ratingsor data products; andbetter communication with companies that are the subject of ESG ratings or data
products was identified as an area meriting further attention given the importance ofensuring the ESG ratings or other data products are based on sound information.

IOSCO issued a Consultation Report on 26 July 2021 which explored these developments andchallenges and sought to better understand the implications of the increasingly important roleof ESG ratings and data products for financial markets. 2 It did so by identifying potential
areas for improvement within this part of the sustainable finance ecosystem, which in turn form
the basis for a series of proposed recommendations for securities markets regulators as well as
ESG ratings and data products providers, users of ESG ratings and data products and thecompanies that are the subject of these ratings or data products. ESG ratings and data products
providers are broadly treated the same in this Report for efficiency. However, not everythingstated to apply to ESG ratings providers may apply to ESG data products providers, and viceversa.
1

The term ESG ratings and data products providers, as used in this report, covers providers who offer ESG
ratings and/or ESG data products. Where there is a need to single out ESG data products providers who
do not provide ESG ratings, the term ESG data products providers is used.

2

CR02/2021 Environmental, Social and Governance (ESG) Ratings and Data Products Providers,available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD681.pdf

1

We received a total of sixty-one (61) responses to the Consultation Report. A summary of the
responses is provided in Annex 2 of this Report. Overall, respondents were supportive of
IOSCO’s work and were broadly in agreement with the proposed recommendations set out in
the Consultation Report. The IOSCO Board is grateful for the responses received and tookthem into consideration when preparing this Report.
The Final Report (Report) is structured around five chapters. Chapter 1 provides an overview
of the market for ESG ratings and data products; Chapter 2 discusses the current practices of
ESG ratings and data products providers. Chapter 3 discusses observations in relation to usersof ESG ratings and ESG data products while Chapter 4 elaborates on the interactions between
companies that are the subject of ESG ratings or data products and ESG ratings and data
products providers. Finally, Chapter 5 discusses areas for improvement highlighted in thefact-finding exercise and sets out recommendations for securities markets regulators, ESG
ratings and data products providers, users of these products and services, and companies subject
to these providers’ review.
The recommendations start with a proposal that regulators could consider focusing greaterattention on the use of ESG ratings and data products and the activities of ESG rating and data
products providers in their jurisdictions. This is followed by a set of recommendations
addressed to ESG ratings and data products providers, setting out that they could consider anumber of factors related to issuing high quality ratings and data products, including publicly
disclosed data sources, defined methodologies, management of conflicts of interest, high levelsof transparency, and handling confidential information. The recommendations also suggestthat users of ESG ratings and data products could consider conducting due diligence on the
ESG ratings and data products that they use within their internal processes. The
recommendations close with suggestions that ESG ratings and data products providers, andentities subject to assessment by ESG ratings and data products providers could consider toimprove information gathering processes, disclosures and communication between providers
and entities subject to assessment.

2Introduction
Background
IOSCO has established a Board-level Sustainable Finance Task Force (STF), with the aim of:(i) improving sustainability–related disclosures made by issuers and asset managers; (ii)collaborating with other international organisations to avoid duplicative efforts and enhancecoordination of relevant regulatory and supervisory approaches; and (iii) preparing case studies
and analyses of transparency, investor protection and other relevant issues within sustainablefinance.
To achieve these objectives, the STF is carrying out work in three areas:•••

Workstream 1 (WS1): sustainability-related disclosures for issuers;
Workstream 2 (WS2): sustainability-related practices, policies, procedures anddisclosures for asset managers; andWorkstream 3 (WS3): ESG ratings and data products providers.

This Report focuses on questions related to ESG ratings and data products, with the aim ofunderstanding the implications of the activities of ESG ratings and data products providers onsustainable investing. Indeed, as investors become more sensitive to the potential financial risks
posed by climate change and the potential impact of other ESG considerations, suchconsiderations are becoming increasingly significant in investment decision making. Investor
demand, as well as regulatory developments, are encouraging the development of new ESG
ratings and data products. 3
These evolutions have led to a surge in demand, on a global basis, for ESG ratings and data
products by financial market participants, as they seek to assess the sustainability track recordof companies in which they invest. In that context, ESG ratings and data products providers,for example, offer investors a way to screen companies for ESG performance.
This rise in demand has led to the proliferation of participants in the ESG ratings and data
products industry, including established market participants such as credit rating agencies(directly or through their affiliates) or market infrastructure providers such as exchanges. This
trend, which is accompanied by a growing concentration in the industry, is expected tocontinue, with some predicting the market for ESG data products could reach USD 1 billion
by 2021, with an expected annual growth of 20%, while ESG indexes could grow by 35%. 4
The increasing reliance on ESG ratings and data products from private providers may have been
compounded, in part, by the fact that ESG reporting by companies is a relatively new3

For example, asset managers in the EU will be required to integrate ESG considerations into theirfiduciary duties from January 2022: more information available at Sustainability-related disclosure in thefinancial services sector | European Commission (europa.eu)

4Anne-Laure Foubert, 2020-03-09, ESG Data Market: No Stopping Its Rise Now,
http://www.opimas.com/research/547/detail/3

development in contrast to financial reporting. 5 This currently makes it difficult for investors
to assess ESG performance and risk management based on standardised criteria; hence their
inclination to use ESG ratings and data products from private providers. Transparency in ESG
ratings and data methodologies is paramount, particularly as these methodologies varysignificantly in terms of the ESG topics they cover, how these topics are weighted, and themetrics used to measure ESG performance.
Given that the activities of ESG ratings and data products providers are not generally subject toregulatory oversight at the moment, increasing reliance on these services raises concerns about
the potential risks they pose to investor protection, the transparency and efficiency of markets,risk pricing, and capital allocation. In addition, the lack of standards in this area may present
the risk of greenwashing or misallocation of assets and could lead to a lack of trust in ESG
ratings or in the data products’ robustness or relevance.
To better understand this part of the sustainable finance ecosystem, IOSCO conducted a factfinding exercise, consisting of (i) a series of roundtables with market participants organised in
December 2020 and (ii) a survey questionnaire for market participants in January 2021. The
questionnaire was sent to more than 65 participants including ESG ratings and data products
providers, users of such products, and companies that are assessed by these providers. Some of
the feedback received by specific participants has been highlighted within the Report, as thesestatements provided salient examples of the broader topics discussed within sections of theReport. Finally, IOSCO members contributing to this project have conducted desktop researchin collaboration with the IOSCO Secretariat.
Here, and elsewhere in the Report where relevant, “snapshots” of stakeholder feedback havebeen provided, where the statements made were salient examples of the broader topics
discussed within sections of the Report. The “snapshot” boxes include selected statements ofparticular fact-finding participants and are not representative or summary statements of all
stakeholder feedback. They are also not intended to reflect IOSCO’s views.
Synergies with the other STF workstreams
IOSCO, through WS1, has engaged with the International Financial Reporting Standards(IFRS) Foundation as the IFRS Foundation has worked towards the establishment of anInternational Sustainability Standards Board (ISSB). The IFRS Foundation launched the newboard at the United Nations (UN) Climate Summit (COP 26) in November 2021.
IOSCO has strongly supported the IFRS Foundation in its work towards delivering a global
baseline for investor-oriented sustainability-related disclosure standards focussed on enterprisevalue creation, which jurisdictions could consider incorporating or building upon as part oftheir mandatory reporting requirements as appropriate and consistent with their domestic legal
frameworks. This could promote international consistency and comparability in sustainabilityrelated information and also form the basis for the development of an audit and assurance
framework.

5

IOSCO is working in close collaboration with the IFRS Foundation in establishing the International
Sustainability Standards Board aimed at providing a global baseline of sustainability reporting standards
to meet investor needs and set the basis for a globally comprehensive corporate reporting system.

4

IOSCO recognises that individual jurisdictions have different domestic arrangements for
adopting, applying or otherwise availing themselves of international standards. It will be
important for individual jurisdictions to consider how the common global baseline of standards
can be adopted, applied or utilised within the context of these arrangements and wider legal
and regulatory frameworks in a way that promotes consistent and comparable sustainability
disclosures across jurisdictions.
IOSCO has strongly encouraged the ISSB to leverage existing sustainability-related reporting
principles, frameworks and guidance, including the Task Force on Climate-related Financial
Disclosures Framework (TCFD Framework), as it develops investor-oriented standards
focused on enterprise value, beginning with climate change. Prior to launching the ISSB, the
IFRS Foundation trustees convened a working group to develop recommendations to give thenew board a ‘running start’. Consistent with IOSCO’s vision, this technical readiness work
leveraged the TCFD Framework and other content from existing sustainability reportingorganisations.
IOSCO has encouraged a ‘building blocks’ approach to establishing a globally comprehensive
corporate reporting system. This could provide a consistent and comparable global baseline ofsustainability-related information that is investor-focused and material to enterprise value
creation, while also providing flexibility for interoperability with reporting requirements that
capture wider sustainability impacts. These important elements of an ISSB under the IFRSFoundation are covered in the WS1 report. 6
These efforts by WS1 are intended to drive much-needed international consistency andcomparability in sustainability-related information and form the basis for the development of
an audit and assurance framework to enhance reliability of disclosures. In turn, this information
could become an essential part of any methodology underpinning the development of ESG
ratings or data products. In that way, these efforts could have the additional benefit ofincreasing users’ trust in the ratings and data products developed by ESG ratings and data
products providers.
Nevertheless, given the current lack of consistent information at the level of corporate
disclosures, ESG-focussed investors may need to place greater reliance on the ESG ratings anddata products developed by ESG ratings and data products providers. The WS2, which focusses
on the activities of asset managers as an important agency-model business which channels
investor capital into sustainable finance, notes the importance of ESG ratings and data productsin the decisions made by these asset managers. 7
Some institutional asset owners have indicated they use ESG ratings as a basis for reviewing
the activities of their asset managers and to assess the implementation of investment mandates
or identify where further engagement is necessary. As such, the activities of ESG ratings anddata products providers feature prominently across all three IOSCO STF workstreams due tothe central role ESG ratings and data products play in the broader ecosystem of sustainablefinance.
6

The STF Workstream 1 report can be accessed at the following link:
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD678.pdf

7

The STF Workstream 2 report can be accessed at the following link:
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD688.pdf

5Chapter 1: Product and Market Overview
Introduction
This chapter provides an overview of the market for ESG ratings and data products. It outlines
the types of firms that act as ESG ratings and data products providers before providing an
overview of some of the current products available to financial market participants.
Scoping of industry
In a rapidly moving and diversified market, and in the absence of global standards for thisindustry, developing an overview of the market for ESG ratings and data products providers ischallenging. While steps have been carried out to map existing providers and products in somejurisdictions, the mapping is only partial. 8 Nonetheless, KPMG estimates that there are 160
ESG ratings and data products providers worldwide. 9 These include both for-profit and nonprofit companies that offer large or specialised ESG-related products. At a regional level, areport recently prepared for the European Commission (EC) identified 30 to 40 other smaller
providers of ESG ratings, data and research products and services domiciled in the European
Union (EU), although such data is harder to find in other jurisdictions. 10 From a revenue
perspective, according to a recent study by UBS, global revenues generated by ESG data andservices could more than double by 2025. 11
Products and market overview
The market for ESG ratings and data products is currently in a phase of rapid growth and is
expected to continue growing at pace over the coming years. The reasons behind this growth
are two-fold. First, there is increasing legislative and regulatory focus on financial market
participants’ consideration of the ESG characteristics of potential investments, with somejurisdictions imposing or considering imposing new regulatory obligations. Second, there isincreasing demand from investors for products that will push society towards a greener
economy and mitigate the risks stemming from climate change. These two drivers are only
likely to increase in intensity over the coming years, leading to ESG ratings and data products
taking on a more important role in the financial sector.

Providers and consolidation
8

December 2020: AMF Report on Provision of Non-Financial data: Mapping of stakeholders, products
and services available at https://www.amf-france.org/en/news-publications/publications/reportsresearch-and-analysis/provision-non-financial-data-mapping-stakeholders-products-and-services.
January 2021 Study by European Commission on Sustainability-related ratings, data and researchavailable at Sustainability-related disclosure in the financial services sector | European Commission(europa.eu).

9

KPMG, Sustainable Investing: Fast-Forwarding Its Evolution, February 2020 available athttps://assets.kpmg/content/dam/kpmg/xx/pdf/2020/02/sustainable-investing.pdf.

10European Commission, Study on Sustainability-Related Ratings, Data and Research, Report prepared byhttps://op.europa.eu/en/publication-detail/Sustainability,
January2021
availableat/publication/d7d85036-509c-11eb-b59f-01aa75ed71a1/language-en/format-PDF/source-183474104.

11

https://www.ubs.com/global/en/investment-bank/in-focus/covid-19/2020/esg-data-and-services.html

6

The global market for ESG ratings and data products is concentrated around a small number ofproviders with a global presence, alongside a larger number of providers with a more regional
focus or offering more specialized services.
Following consolidation moves in recent years, some of these larger, more established market
participants – notably credit rating agencies, exchanges, data and index providers – have begun
to acquire smaller and more specialised ESG providers (see Table 1) and/or have invested
significant resources to develop their own ESG expertise/capacities. However, whereconsolidations have occurred, only a few companies appear to have been fully integrated into
the acquiring company, with the vast majority of acquired companies retaining their legal status
by becoming a subsidiary of the acquiring entity.
Table 1: Examples of recent mergers and acquisitions in the ESG ratings and data provision market.
Year
2016

TargetTrucost (UK)

Acquirer
S&P Global (US)2017

Sustainalytics (Netherlands) – acquisition of a 40% stake

Morningstar (US)South Pole (Switzerland) (Investment Climate Data Division)

ISS (US)

Solaron (India)

Sustainalytics (Netherlands)

Oekom (Germany)

ISS (US) (acquired in 2020 by

2018

Deutsche Börse Group)
2019

2020

Vigeo-Eiris (France)

Moody’s Corp (US)Beyond Ratings (France)

London Stock Exchange (UK)

Four Twenty Seven (US)Moody’s Corp (US)GES International (Sweden)

Sustainalytics (Netherlands)

Carbon Delta (Switzerland)

MSCI (US)

SynTao Green Finance (China) - minority stake

Moody’s Corp (US)

Ethical Corp (US)Thomson Reuters (US)Robecosam AG-ESG ratings Business (Switzerland)

S&P Global (US)

Sustainalytics (Netherlands) – 100% stake

Morningstar (US)Ecovadis (France) - Non-controlling interest

CVC Growth Partners (US)TrueValueLab (US)Factset (US)

Source: Company releases

Smaller companies operate in the ESG ratings and data products market alongside those large,
international providers. These smaller actors generally tend to have a specific regional presence
and/or specialisation in specific data sets (e.g., climate, controversies), coverage (e.g., small
and medium enterprises (SMEs), sovereign issuers) or services (e.g., certification, second party
opinions and consulting services). There are also a number of start-ups and fintech companies
entering the market and offering new products, which usually focus on using and leveraging
big data and artificial intelligence in their product offerings.
A variety of ESG ratings and data products provided and growth of new offerings
A wide variety of ESG ratings and data products have emerged in response to investor needs,
reflecting the importance of the availability of these products for investment decision processes
and other uses. ESG ratings and data product offerings are constantly evolving to respond to7

new topics of interest (e.g., share of green activities, contribution to the UN Sustainable
Development Goals) and emerging areas of attention (e.g., environmental, diversity andinclusion, and biodiversity). Some of these products are set out for illustrative purposes within
Table 2 alongside a reminder of how these terms are to be understood within this Report. 12 Itshould however be noted that product names, objectives and methodological practices can varysignificantly across ESG ratings and data products providers, even for comparable products.
Table2: Overview of ESG ratings and Data Products - Sample Provider 1
1

Controversy Activity Screening: Assessment of a company’s level of involvement in 17 controversial activities

2

Controversial Weapons Screenings: Assessment of a company’s involvement in 10 types of weapons

3

Controversy Risk Assessments: Aggregate view of a company’s exposure to and management of ESG and Climate
related controversies

4

Sustainable Goods and Services Assessments: Assessment of a company’s level of involvement in 90+ sustainable
goods and services. Covers a broad range of ESG and Sustainability factors including contribution to climate change
mitigation and adaptation.

5

Sustainable Development Goals (SDG) Assessments: Measures a company’s level of contribution across the SDGs
through their products & services and business behaviour

6

UN Global Compact Assessment: Normative framework assessment of a company’s capacity to manage ESG
responsibilities outlined by the UN Global Compact

7

Corporate ESG Assessments and Scores: Scores a company’s capacity to manage ESG factors as defined byinternational standards. Scores include scores for 28 ESG drivers, an E, S, G and a composite ESG score, derived
from public information

8

Sovereign ESG Assessments and Scores: Scores a Sovereign entity’s performance on 172 ESG risk and performanceindicators

9

Sustainability Ratings: Analysis of a company’s multi-stakeholder impact taking into account performance underdual materiality considerations. The sustainability rating includes a company’s risk exposure to ESG factors, their
management of ESG factors and their ESG impact (positive)

10

ESG Benchmark Analysis: Customised peer benchmarking for a company including ESG assessment ranking andbest practice insights

11

Corporate Physical Climate Risk Scores: Asset-level data on exposure to floods, heat stress, hurricanes andtyphoons, sea level rise, water stress and wildfires

12

Sovereign Physical Climate Risk Scores: Aggregate physical climate risk scores for each jurisdiction based on the
total and percentage of agriculture, population and GDP (purchasing power parity) exposed.

13

Corporate Transition Risk Scores:•

Brown share data to assess exposure to fossil fuels, including a company’s revenue, reserves, potential
emission and power fossil fuels•

Carbon footprint measuring a company’s carbon emissions•

Temperature alignment assessing how a company’s emissions reduction targets align with different
temperature pathways.

14

12

Energy Transition Score: Measures a company’s preparedness for the transition to a low-carbon economy.

A more detailed overview is available in European Commission Report (2021), available at:https://op.europa.eu/en/publication-detail/-/publication/d7d85036-509c-11eb-b59f01aa75ed71a1/language-en/format-PDF/source-183474104

8

Table2: Overview of ESG ratings and Data Products - Sample Provider 1
15

Physical Risk Management: Demonstrates how a company anticipates, prevents and manages physical risks.

16

TCFD climate strategy: Analyses how a company’s disclosures align with the TCFD’s recommendations.

17

Sovereign Transition Risk: Measures emission by jurisdiction covering its whole production-based emissions andcarbon intensity (emission per unit of GDP).

18

Daily Monitoring and Alerts: Daily monitoring of ESG related events covering 38 ESG Criteria and 160+
underlying topics on ~8,000 companies.

Source IOSCO WS3 Questionnaire

The ESG ratings and data products offered by another provider are illustrated below:
Table 3: Overview of ESG ratings and Data Product Offerings: Sample Provider 2
1

Carbon Risk Rating Evaluates to what extent a company copes with future challenges related to climate change andseizes opportunities arising from a transition to a low-carbon economy using 100+ carbon performance indicators,
most of which are industry-specific.

2

Climate Solutions Supports financial market participants in understanding, measuring, and acting on climate-relatedrisks and their impact on investments across asset classes. ESG’s analysis is based on a proprietary database ofcompany greenhouse gas (“GHG”) information.

3

Controversial Weapons Screening Helps investors make decisions regarding companies directly or indirectly
involved in the development, production, maintenance or sale of controversial weapons including, but not limited to,biological and chemical weapons, nuclear weapons, anti-personnel mines, and cluster munitions.

4

Energy & Extractives Screening Assesses companies’ involvement in the extraction of fossil fuels and thegeneration of power from fossil fuel, nuclear and renewable sources.

5

E&S Disclosure Quality Score Measures and identifies companies’ environmental, social and governance disclosure
practices with data-driven scoring and screening solutions.

6

Global Sanctions Screening Assesses companies with ties to jurisdictions of concern and/or jurisdictions under UN
United States (US) or EU sanctions.

7

Norm-Based Research Assesses companies’ adherence to international norms on human rights, labour standards,
environmental protection and anti-corruption as set out in the UN Global Compact and the Organisation for Economic
Cooperation and Development (OECD) Guidelines.

8

Pooled Engagement A dialogue and engagement service carried out with companies identified through its NormBased Research as facing credible allegations of corporate misconduct according to the four norm pillars noted in the
UN Global Compact: human rights, labour standards, environment, and anti-corruption. Pooled Engagement serves
as a continuation and escalation of company and stakeholder dialogue.

9

Sector-Based Screening Assesses companies’ involvement in sectors and products such as alcohol, animal welfare,cannabis, for-profit correctional facilities, gambling, pornography, and tobacco.

10

SDG Solutions Assessment Determines the positive or negative impact of companies’ product and service portfolios
on the UN Sustainable Development Goals.

11

ESG Index Solutions Enables investors to identify, benchmark, and track portfolio companies with superior
environmental, social, and governance performance and to successfully realize their own indexing strategies. The
ESG Index Solutions offering consists of Turnkey Index Solutions and Custom Index Solutions.

12

Cyber Risk Helps investors, insurers and companies to accurately assess, continually monitor, and judiciously
benchmark enterprise cyber risk management programs

9

Table 3: Overview of ESG ratings and Data Product Offerings: Sample Provider 2
13

EU Taxonomy Alignment Solution Enables asset managers, pension funds, insurers, banks and other investors to
identify the level of alignment of their investments and financial products with defined taxonomy activities andquantify respective revenues in order to comply with the upcoming disclosure obligations.

14

Jurisdiction Ratings Provides detailed information on the sustainability performance of all EU, OECD and BRICS
jurisdictions, as well as key sovereign issuers in Asia and South America.

15

ESG Corporate Rating Assesses to what extent companies – now and in the future - are positioned to, on the one
hand, adequately manage the specific ESG risks associated with their individual business model and exposure, and,on the other hand, capitalize on opportunities offered by transformations towards sustainable development.

16

SDG Impact Rating Determines a company’s positive or negative impact on the UN Sustainable Development Goals
across three key pillars: products and services, operations management and controversies.

ESG ratings products
The term “ESG ratings” can refer to the broad spectrum of rating products in sustainable financeand include ESG scorings and ESG rankings. 13 ESG ratings, rankings and scorings serve thesame objective, namely the assessment of an entity, an instrument or an issuer exposure to ESG
risks and/or opportunities. However, they differ in the resources and methodologies used. ESG
scores usually result from quantitative analysis whereas ESG ratings are produced using bothquantitative models and qualitative analysis and are accompanied by analyst reports to explain
the ratings. On that basis, ratings may therefore incorporate an element of analytical judgement
or opinion. Ratings providers select key issues for each ESG component and assess the
exposure to these sustainability risks and the way in which they are managed. ESG ratings,
scorings, and rankings are usually not defined in absolute terms (although some are 14) but are
generally assessments relative to a peer group.
ESG data products
ESG data products providers have developed a wide range of products and services in order tomeet investors’ growing demand for ESG-related information. Feedback from providers
suggests the potential for innovation remains high. . Common ESG data products are explained
below:•

Raw data is gathered by ESG data products providers from companies’ public
disclosures or from other publicly available information or collected throughquestionnaires; if raw data is not available, corresponding data points can beapproximated. Feedback suggests that all data products derive from either collected or
estimated raw data.

•

Screening tools assess the exposure of companies, jurisdictions and bonds to ESG risks
in order to define a portfolio based on ESG criteria.

13

ESG rankings are included here on the basis that the underlying analytical process can be understood asa scoring process for multiple entities or issuers that results in a ranking of entities or issuers in a given
sector.

14

https://www.sustainalytics.com/esg-data

10

•Controversies alerts enable investors to track and monitor behaviours and practices
that could lead to reputational risks and affect the company and more broadly its
stakeholders. Controversies can also be taken into account in ESG ratings.

Other ESG products and services
In addition to the increasing range of ESG ratings and data products, some ESG ratings anddata products providers also offer other ESG products and services. These include inter alia:
•
•
•
•
•

ESG indices;
consulting services such as portfolio analysis, advisory services to companies for
ESG strategy development;
provision of certification and second-party opinions;
regulatory reporting assistance for companies and financial market participants’compliance with new sustainability regulations; andadvisory services to companies on ESG ratingss improvement techniques.

Coverage of ESG ratings and data products
Another important issue is the scope of coverage of the ESG ratings and data products – thatis, which companies or instruments do ESG ratings and data products cover, and what is thebreadth and depth of ESG ratings and data coverage available from providers. Here, IOSCO
provides an initial analysis of the issue broken down into the categories of ESG ratings and
ESG data products.
ESG ratings products
For ratings coverage, the fact-finding exercise showed that while some providers do coverprivate companies, there is a heavier weighting of ratings coverage for publicly listedcompanies. There is also more coverage of larger companies over SMEs. This is perhaps
unsurprising given that ratings providers rely on public disclosures (and other information) for
their analysis. In addition, from a demand perspective, the clients of ESG ratings and data
products providers are more likely to invest in publicly listed companies.
Table 4: Example Statements Provided by Stakeholders During IOSCO Fact-Finding Exercise
ESG ratings/data coverage can depend on sophistication of financial market
The individual ESG scores are geographically diverse across developed markets with higher coverage inwell-developed markets as data disclosure increases.
Coverage of private unlisted companies less systematic than publicly listed companies
There is [thus] no systematic coverage of private unlisted companies, as there is with publicly listedcompanies. Two main reasons for this difference appear:•
ESG demand in these asset classes is relatively new and there is yet to be sufficient demand for asystematic coverage,•
Unlisted private companies face fewer obligations in regard to ESG disclosure: direct dialogue
appears necessary to gather (de facto internal) information and as such implies a mandate from an
investor or lender.

From a geographic basis, coverage can be considered from two perspectives. On the one hand,coverage delivered by providers is generally weighted towards the “home” financial marketsof the providers. But even allowing for this, there is still a weighting in favour of jurisdictions
11

with either sophisticated or developed financial markets, disclosure requirements or both.
Meanwhile, mainstream rating methodologies and assessments are generally set against thedevelopmental stage and regulatory regimes of developed markets, and may not consider
appropriately differences when assessing issuers from growth and emerging markets. An
overview of one provider’s level of coverage illustrating these aspects is provided in Table 6
below.
Table 5: Sample level of ESG ratings Coverage of publicly listed companies by major geographic region
from US Headquartered ESG ratings and data provider.

Products

Coverage by Region

Carbon Risk Ratings

ESG Corporate Ratings

SDG Impact Ratings and SDG Solutions
Assessment

ESG data products
Given their reliance on the same raw data inputs, the findings relating to the coverage of ESG
ratings products are, to a large degree, replicated for ESG data products. However, given thediversity of products available under this heading, an additional area of interest is which ESG
data products are considered by data products providers to be most commonly used, andwhether there are regional variations for the popularity of these products.
Most popular data product offerings
A selection of the most commonly offered products from two ESG ratings and data products
providers is set out below. Notwithstanding differences in labelling and some commonalities
in preferences or screening and ESG related scoring, it is notable that there is some degree ofvariance between the most popular data product offerings from these two providers. It is
12possible that these providers are catering to different segments of the market, different regions
or to different needs in terms of focus and purpose. It is also possible that the differences may
be indicative of the developing market for ESG data, where the balance between the productsthat clients need and the products that can be provided has yet to be found.
Table 6: Comments Provided by Stakeholders During IOSCO Fact-Finding Exercise
Comparison of the most common ESG data products used by clients of two ESG [ratings and] data
products providers• ESG Scores• Sector-Based Screening• Daily Monitoring and Alerts• Norm-Based Research (NBR) andSovereign NBR• Corporate Physical Climate Risk
Scores• Controversial Weapons Research• Corporate Transition Risk Scores• Climate Solutions• Controversial Activity Screening

Variations in geographic preferences
Across providers, the popularity of ESG ratings and data products can vary by geographic
region, and in some cases, vary within individual jurisdictions. For example, a number of ESG
data products providers highlighted that demand for their data products was higher injurisdictions with a higher level of legislative and regulatory or client focus on ESG investing,namely Europe and the US. Furthermore, within Europe, there was a noted preference forcertain products in particular countries. To some extent, these preferences can be seen as a
combination of investor demand and regulatory requirements, where all jurisdictions have ageneral level of demand for ESG data arising from client preferences, but certain jurisdictions
have more specific demands on the basis of legal requirements.
Smaller versus larger institutions
Outside of Europe and the US, respondents highlighted that demand for ESG data products
was related to the size of the client, with differences also apparent in the types of ESG data
products demanded. Smaller institutions were more likely to subscribe to platforms withscoring information, while larger clients subscribed to databases of raw ESG data.
Table 7: Example Statements Provided by Stakeholders During IOSCO Fact-Finding Exercise

Greater use of ESG data products prevalent in certain jurisdictions
All products are most commonly used in Europe. Norm-Based Research and ESG Corporate Ratings are mostpopular in this region as it is historically a more European approach to ESG investing. Controversial Weapons
Research is particularly demanded in certain European markets with regulations for controversial weapons
exclusions. Newcomer markets like Asia are for the time being very focussed on climate. In the US, there is astrong demand for raw data, but Sector-Based Screening, Controversial Weapons Research and Climate
Solutions are also relatively popular.
Preferences for certain products also exist within jurisdictions
There are regional variations, which link to historical differences in terms of approach to socially responsible
investment. For example, for Europe screening approaches are more prominent in the Nordics, The Netherlands
and Germany. Meanwhile, the most advanced market is France. We are also seeing broad interest in Europe
and the US for our Corporate Physical and Transition Risk scores.

Public disclosure of ESG ratings and data products
Practices regarding the public disclosure of ESG ratings and data products can varysignificantly, this being dependent to some degree on the providers’ remuneration models. In
13this regard, the public disclosure of fund level aggregate ESG ratings appears more systematicthan for company ratings, while non-profit companies tend to make their ratings public. In
addition, some ESG ratings providers, when contributing their rating as an input to the design
and production of ESG indices, also publish the ratings of the companies included in the indices,
although this is not systematic. In the last few years, several ESG ratings providers havepublished high level ESG ratings of companies on their websites without any paywall. 15
A market which is largely unregulated
ESG ratings and data products are at an early stage of adoption by financial market participants,
although their usage and role are growing rapidly. Consequently, the market remains largely
unregulated, with some isolated attempts at self-regulation through codes of conduct. A numberof voices (national regulators, 16 industry associations, 17 as well as providers themselves) havecalled for a regulation of the market.
IOSCO considered the existence of regulatory requirements or voluntary standards in members’jurisdictions. These could provide a real-world example of regulatory or standard setting
requirements for these activities or indicate where there may be potential for overlap or conflictwith any of IOSCO’s proposed recommendations. IOSCO took a bottom-up approach to thisscoping exercise, asking the ESG ratings and data products providers whether they were subject
to any supervisory or regulatory frameworks. The feedback received identified only a limited
number of national regulatory frameworks applicable to providers of these or similar products.
For example, the legal and regulatory framework in the EU for benchmarks 18 and United
Kingdom 19 may be relevant for certain providers of benchmarks with an ESG or climate
dimension.
However, this framework is not directly relevant for the broad scope of ESG ratings and data
products as described and foreseen in this report. As a result, the current situation would appear
to be one in which there are few examples of legal and regulatory frameworks of direct
relevance for ESG ratings and data products, and no voluntary frameworks of direct relevance,outside of those being applied more generally by providers of Financial Benchmarks.

15

A non-exhaustive list of these firms being: MSCI, Sustainalytics, Vigeo Eiris, Arabesque16

AFM/AMF, French and Dutch financial market authorities call for a European regulation of ESG data,
ratings, and related services; ESMA, ESMA calls for legislative action for ESG ratings and assessment
tools.

17

AFEP-MEDEF: French Initiative on the relations between Companies and Non-Financial Rating
Agencies

18

Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indicesused as benchmarks in financial instruments and financial contracts or to measure the performance ofinvestment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation EU (No596/2014)

19

https://www.legislation.gov.uk/uksi/2019/657/contents/made?view=plain

14

Table 8: Example Statements Provided by Stakeholders During IOSCO Fact-Finding Exercise
Voluntary Frameworks for certain aspects appear to be the norm
We strive to avoid any potential conflict of interest or appearance of conflict. Our scores products rely 100%on disclosed data. We consider third party frameworks from NGOs (TCFD, SASB, GRI, CDP), industry
associations (IPIECA, American Petroleum Institute, etc.), regulators and standard setting organisations thatprovide disclosure recommendations, and reconcile with existing disclosure approaches, existing company
reported fields and new fields needed for scoring.
For actual scores design guidance, we built on the OECD Handbook on Constructing Composite Indicators,
among other scoring and evaluation approaches, to (1) attempt to reduce the dimensions represented inscores and therefore noise/risk of distortion (2) incorporate the multidimensional nature of evaluating
sustainability performance without losing ability to identify red flags (3) give users transparent access tomore complex, granular information and scoring decisions while still aggregating in a way that advances
our core principles (e.g., to reward good relative and absolute performance, good disclosure, quantitative
reporting and consistent performance across dimensions).

Some jurisdictions are currently developing frameworks for regulating ESG ratings and data
products providers. For example, the EC announced it is investigating the market forsustainability ratings and research as part of its 2018 Action plan for sustainable finance.
Subsequently, the EC published its Strategy for Financing the Transition to a Sustainable
Economy in which it outlined that it would take action to improve the reliability andcomparability of ESG ratings and further assess certain aspects of ESG research, to decide onwhether an intervention is necessary. 20
In the UK, in 2021 the Financial Conduct Authority (“FCA”) published a discussion chapter
seeking feedback on certain ESG issues in capital markets, including the currently unregulated
field of ESG data and ratings. The consultation set out governance, transparency and conflicts 21
issues in this area and asked stakeholders whether there is a case for regulatory intervention inthis market. More recently, the UK HM Treasury published a roadmap 22 to sustainable
investing in which it confirmed that the government is considering bringing relevant firms into
the scope of FCA authorisation and regulation.

20

Action 4 of the European Commission’s Strategy for Financing the Transition to a Sustainable Economy

21

https://www.fca.org.uk/publication/consultation/cp21-18.pdf

22https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1031
805/CCS0821102722-006_Green_Finance_Paper_2021_v6_Web_Accessible.pdf

15Chapter 2: ESG ratings and Data Products Providers
Introduction
Whereas Chapter 1 of this Report covered the market for ESG ratings and data products
providers, this chapter discusses the practices and experiences of these providers. In particular,
this chapter considers how ESG ratings and data products providers source their ESG data andthe methods used in the industry. In doing so, it will identify some of the principal challenges
in this space. It will also provide an overview of the business models used in the industry.
Reliability and availability of Inputs – Raw ESG data
ESG ratings and data products providers rely on data inputs to support their analysis for ESG
ratings and data products. The availability of reliable and high-quality data inputs is a criticalcomponent of ESG ratings and data products. Depending on a product’s focus, the information
relied upon by an ESG ratings and data products provider to assess an entity can be broad. The
number of data points used differs from one provider to another, some using thousands of data
points. This can include information relating to an entity’s governance framework, financial
strategy and management expertise, as well as information on physical and transition climate
risks.
While ESG-related disclosure requirements are being introduced across some jurisdictions,
there remains limited consistency in the disclosures required and their implementation is still
at a fairly early stage in most jurisdictions. The WS1 is looking to improve both the consistency
and comparability of disclosures as well as introducing a common international baseline
through the creation of an ISSB under the IFRS Foundation. As such, in some cases, theinformation on which ESG ratings and data products are based will be sourced from external
entities and third parties, or approximated using internal metrics. Irrespective of how the
information is sourced, the quality, reliability, and consistency of this information is an
important consideration.
Table 9: Measurement Objectives of Selected ESG ratings
Example statements Provided by Stakeholders During IOSCO Fact-Finding Exercise
Differences in ESG ratings Measurement Objectives
ESG ratings Provider 1
ESG ratings Provider 2
Our Sustainability Ratings consider issuers’ multi- [ESG ratings Provider 2]’s Ratings aim to measure astakeholder impact, considering the identification and company’s resilience to long-term financially relevant
management of material ESG risks and opportunities ESG risks on following aspects:
and the ability to create long-term value.
• Of the negative externalities that companies
in an industry generate, which issues may
ESG ratings can be based on publicly available
turn into unanticipated costs for companies
information
only,
proprietary
information,in the medium to long term.
subscription-based services and information provided• Conversely, which ESG issues affecting an
by issuers and their management. ESG ratingsindustry may turn into opportunities forproviders may also offer related and unrelatedcompanies in the medium- to long- term.
products and services, including through affiliates.

Difficulties with entities’ disclosure practices
Given the importance of reliable data inputs as a starting point to developing reliable products,
IOSCO considered the principal difficulties that ESG ratings and data products providers
16encounter in sourcing this information. In this regard, the feedback IOSCO received pointed toproblems of:•availability (varying levels of ESG disclosures). More specifically, ESG ratingss anddata products providers highlighted the low volumes of ESG information in certain
regions as a particular issue that can negatively affect the levels of quality and coverageof their products. One provider highlighted the relatively lower volumes of ESG
disclosures in emerging markets and the Asia-Pacific region as an example of this issue.

•

inconsistency (format, content and location of disclosures). Specifically, disclosed
ESG data may be spread across multiple reports of the company, for example, theannual report, corporate sustainability report and individual webpages. While this
scenario is preferable to one in which no public disclosures are made, it does create therisk that not all relevant information will be gathered by all providers.

The lack of standardisation of corporate disclosures therefore impacts the quality andavailability of information that can be used by ESG ratings and data products providers. Thesefindings are largely consistent with IOSCO’s observations from the investor standpoint, namelythat sustainability-related information needs are currently not being met, and there is an urgent
need to improve the consistency, comparability, and reliability of sustainability reporting.
ESG ratings and data products providers can request or procure ESG information from entities
that are the subject of these ratings or data products on a bilateral basis, and in this case,minimise the impact of a number of the above issues. However, where this occurs, there may
be risks around transparency, verifiability and ensuring a level playing field for both providers
and entities that are the subject of these ratings or data products.
Table 10: Example Statements Provided by Stakeholders During IOSCO Fact-Finding Exercise
Collection of ESG data hampered by multiple factors
Low Volume of ESG Information
In certain regions and asset classes the total volume of ESG and Climate information (qualitative andquantitative) that is disclosed remains low. Specifically, we see lower volumes of disclosures in Emerging
Markets and in the Asia Pacific region.
ESG Reporting Fragmentation
It is not uncommon to see ESG data and climate information spread across multiple reports (Annual Report,
CSR Report, specific website pages or ‘deep dives’ etc.). That is not negative per se, as we recognize that thisinformation is of interest to multiple parties. However, consolidation within one primary document, a main
section of a report, or a main section of a website would reduce the risk of lost information indicators on
whether or how progress is being made against the policies.
Issues with Supporting Information for Targets
Where targets are set on ESG or Climate issues, we observe that baselines are not always made clear, and that
progress on these targets (on track/off track information) is rarely provided.
Lack of Key Performance Indicator (KPI) Consistency
We also observe that where metrics or KPIs are provided by entities, restatements of prior figures are notalways made clear; time series data is not always made available; and that the scope of the data is not always
made clear.

17

IOSCO has worked with the IFRS Foundation to support the establishment of an ISSB which
will develop a common set of international standards for sustainability-related disclosure acrossjurisdictions and form the basis for the development of an audit and assurance framework. 23
Over time, this type of standardisation will also likely mitigate the other issues identified
through IOSCO’s fact-finding exercise.
Remuneration: “Issuer Pays” versus “Subscriber Pays” model
Feedback from respondents to the fact-finding exercise indicates that the fee model for ESG
ratings and data products is largely, although not exclusively, based on a “subscriber pays”
basis. While there are some examples of the “issuer pays” model from certain providers, theseare mostly focused on ESG ratings. Where figures in terms of ratio of revenues from“subscriber pays” versus “issuer pays” were provided, these put the split at between 85% and100% of revenues being derived from “subscriber pays.”This mix has been described as being relatively stable over a number of years and no
respondents to the fact-finding questionnaire noted a shift in recent years. Nevertheless, a shift
towards greater use of an “issuer pays” model could occur in the ESG ratings, as a result ofmany potential factors, such as upcoming regulation and evolving market practices. For
example, if the incentive or financial benefit for an issuer to be the subject of an ESG ratingsor data product were to increase, this would increase the financial benefit or incentive for anissuer to pay for the ESG ratings or data product.
Depending on the remuneration model put in place, the potential risks of conflicts of interest
will differ. If ESG ratings and data products are provided on a “subscriber pays” basis, smaller
investors may be at a disadvantage, as their ability to subscribe to multiple product packages
will likely be constrained by cost. Even if an investor were to have the ability to subscribe to asingle product package, without the ability to understand the underlying data inputs andmethodological approach, the investor may not be able to make an informed choice between
product offerings.
It is useful to note that ESG ratings providers are increasingly providing their high level ESG
scores on their websites for public access. On that basis, smaller investors would still haveaccess to some ESG ratings as well as to the sustainability-related disclosures of listedcompanies.
Finally, the “subscriber pays” model potentially creates pressure for the provider to prioritisequantity of information over quality of information. Indeed, users of ESG ratings and data
products will seek access to broad coverage across geographies and sectors, possibly puttingpressure on the provider to deliver this coverage even where availability and robustness ofunderlying data are not sufficient or lead to declining overall quality of analysis.

23

IOSCO press release dated 24 February 2021, available at:https://www.iosco.org/news/pdf/IOSCONEWS594.pdf

18

Table 11: Example Statements Provided by Stakeholders During IOSCO Fact-Finding Exercise
ESG data fee’s model is predominantly “subscriber pays”[ESG ratings and Data Provider] ESG Research business model is not an issuer pays business model andissuers do not pay for their ratings. However, issuers can subscribe to [ESG ratings and Data Products
Providers] ESG ratings, our flagship offering, in order to benchmark their ESG practices against industry
peers.
But market could shift in coming years
The subscriber pays vs. issuer pays revenue mix has been stable for several years. We are cognizant of the factthat many factors could lead to a tilt at some point (upcoming regulation and market practice, as evidenced by
the way Credit Rating Agencies have seen their business model evolve over the last decades).

Methods used in the industry
Interactions with companies
While ESG ratings and data products providers rely on a broad range of sources for gathering
information, one of the most significant sources for a number of providers is the information
gained from entities that are the subject of these ratings or data products. There is no “standard”
market practice for the manner in which ESG ratings and data products providers gather
information from entities that are the subject of these ratings or data products.
The nature and frequency of these interactions can differ depending on the business model
or/and proprietary methodologies of ESG ratings and data products providers. For example,
some ESG ratings and data products providers only engage with the entities that are the subjectof these ratings or data products at a late stage of the rating process. In this case, the ESG ratingsand data products provider would refer to publicly available data for its analysis and thereafter
engage with the entity subject to assessment to check the accuracy of the data or/and to receive
feedback on the assessment performed. However, this is not the only approach and some
respondents to the fact-finding exercise noted that they prefer to engage in a more continuous
relationship with the entities they assess. Some, for example, employ questionnaires to gather
information from entities. Even then, the frequency and depth of these interactions differ widely
according to the methodologies, policies and procedures in place at the ESG ratings and data
products providers.
Methodological approaches and transparency
The methodological approaches underlying ESG ratings and data products are very diverse,
which, when combined with issues regarding the availability, quality and comparability of ESG
data, can result in low correlation and high divergence in ESG ratings and data products
between providers even where products are aiming to address the same objective. 24

24Berg, F., J. F. Koelbel, and R. Rigobon (2020): “Aggregate Confusion: The Divergence of ESG ratings”,
MIT Sloan School Working Paper; Christensen D., G. Serafeim and A. Sikochi (2019): “Why is corporate
virtue in the eye of the beholder? The case of ESG ratings,” Harvard Business School Working Paper;
Chatterji K., R. Durand, D. I. Levine, and S. Touboul (2016): “Do ratings of firms converge? Implications
for managers, investors and strategy researchers”, Strategic Management Journal; Kotsantonis S. and G.
Serafeim (2019): “Four Things No One Will Tell You About ESG Data”, Journal of Applied Corporate
Finance.

19

A recent report by the OECD describes some of these differences in methodologies amongproviders: 25•

Data may be collected according to methods specific to each provider and can result in the
combination of information from a variety of sources:o Information publicly reported by companies or published by third parties such aspress agencies, non-governmental organisations, or other sources of information.
o Questionnaires sent directly to assessed companies.
o Data produced or gathered by third party suppliers through subscriptions orpartnerships.

•

Data used may be presented as collected (raw), aggregated, processed in order to be usable(cleaned) or even estimated.

•

Processes for verification and update of data may vary among providers. In some cases, theinformation collected may be supplemented, specified or corrected through discussions withthe assessed companies.

•

In other cases, a lack of reporting can either lead providers to use industry averages, thereby
possibly creating an incentive for poor performers not to report their information, or leadthe provider to negatively assess the company.

•

The weight given to quantitative and qualitative analysis varies from one ESG ratings anddata products provider to another. Some give particular importance to qualitative
information, while others base their analysis mainly on figures and quantitative models. The
number and role of analysts can vary, depending on the business models and products andservices offered.

•

Methodologies may vary in the number of data points, indicators or KPIs used to measure
an issue (which can amount to hundreds, or, in some cases, thousands) and, in the case ofscorings and ratings, the weighting applied, between different pillars (environmental, socialand governance) and different sub-categories and indicators; methodologies are generally
reviewed on an annual basis.

•

Ratings may vary in their finality, with a focus on performance or risks, or have different
approaches to materiality. For example, some ESG ratings measure a company’s exposure
to ESG risks and others measure the impact of ESG factors on an entity.

This challenge can be further exacerbated where little transparency exists about methodologies
for users of these products, noting in addition that the differences observed for corporates arelikely to be observed for other entities that are the subject of these ratings or data products, suchas sovereign issuers, or products, such as investment funds, although information is still scarceon these segments.

25

See, OECD (2020), ESG Investing: Practices, Progress and Challenges, OECD, Paris.

20

Use of sector-specific methodologies
ESG ratings and data products providers predominantly use sector-specific methodologies andrisk assessments, rather than one single methodology that is applied to all entities that are thesubject of these ratings or data products. A large majority of fact-finding respondents indicatedthat they use both general and sectoral metrics in their assessments, weighting them in different
ways depending on the final product. For example, the vast majority of ESG ratings and data
products providers use a standard set of “universal ESG metrics/measurements” from a crosssectoral approach, complemented by more ad-hoc metrics, depending on either the industry inwhich the assessed entity is active, its geographic location, or its size.
In addition, the nature of the indicators or criteria used might depend on which ESG criteria is
applied. For example, there seems to be a general level of consensus with respect to governance(G) criteria, which tend to include a more limited set of metrics that are considered relevant
regardless of the size or sector of the entity subject to assessment. In contrast, the social (S)and environmental (E) criteria appear to be applied in a less universal way, allowing for moreindustry or size-specific metrics to reflect the diverse nature of material issues to be dealt within these two aspects of ESG ratings and data products.
Table 12: Example Statements Provided by Stakeholders During IOSCO Fact-Finding Exercise
Use of Sector- Specific Methodologies for ESG ratings and data products
The ESG methodology blends components which can be applied across all sectors with sector- specificsustainability factors. The need for sector- specific factors reflects the very different ESG risks and opportunities
profile depending on the sector. The relevance of sub-factors can vary considerably by industry as well as the
key performance indicators we use. Having sector specific indicators does not prevent the ESG Evaluation fromhaving a globally and cross sector consistent approach. The way we achieve cross sector comparability is byusing different starting points depending on the sector and jurisdiction in which the entity operates in andcomplementing this information with a relative analysis of the entity ESG performance compared to its sector.

Use of data collection tools
IOSCO also looked at the state of play with regard to ESG ratings and data products providers’
use of machine learning (ML) and artificial intelligence (AI) techniques. Feedback from the
ESG ratings and data products providers indicates heterogeneous practices in this area, both inregard to the state of progress and the present or future uses of AI and ML.
For example, while some providers have based their business practices around the applicationof AI and ML techniques to improve their data collecting, research, or/and indexing processes,
other providers are still assessing how AI and ML can supplement existing practices. The
feedback received by IOSCO indicated significant differences in the projected implementationof these capabilities, with the majority of respondents emphasising that they were still at the
prototyping/pilot stage of deploying these capabilities.
Uses (whether actual or intended) of AI and ML were almost unanimously flagged as mainly
for the support of human analysis and would in no case act as a substitution to the work currently
being performed by human analysts. Such AI/ML help would allow for more frequent updatesof the data or for more convenient data collection processes, therefore freeing human resources
for more valuable tasks such as analysis, making recommendations and determining outcomes.

21

While AI and ML have a role in simplifying the data compilation process, other uses have also
been observed. These include using AI and ML techniques for the purpose of assessing
sentiment and behaviour of the market towards key ESG issues, or to provide estimates ofhistorical carbon emissions.
Table 13: Example Statements Provided by Stakeholders During IOSCO Fact-Finding Exercise
Use of artificial intelligence and machine learning techniques evidenced but still at early stage
In recent years, we have been utilizing Natural Language Processing to a greater degree, which improves
efficiency in data extraction and enables us to cast a wider net when processing news and media data sources.
With the increase in ESG data requirements and with more companies and third parties reporting relevant
data, we are collecting more data points for more companies now than 2 years ago. Machine Learning andNatural Language Processing capability helps us tackle increased volume and scope of publicly available data.
Please note that the technology is used to assist research process, but not substitute it.

Conduct of information gathering exercises by ESG ratings and data products providers
The fact-finding exercise revealed a wide range of information gathering practices performedby ESG ratings and data products providers. The practices for information gathering tended todiffer depending on the nature of the ESG-related information and the channel through which
it has been obtained.
For example, information that is gathered through publicly available sources would first becompiled in bulk for an entity before being reviewed by the ESG ratings and data products
providers. This “quality-check” stage would then assess the information according to theproviders’ methodology. These checks can include, depending on the process: scrutinising forplausibility, screening for potential incoherencies, statistical and logical checks (looking forabnormal spikes and outliers, either at the company or/and at the industry level), checks against
other sources such as governmental databases, and deviations against a peer group or against
previous years.
When potential incoherencies are flagged during the information gathering and review process,
ESG ratings and data products providers generally favoured dialogue with the assessed entities
to confirm or inform the KPIs/metrics.
Table 14: Example Statements Provided by Stakeholders During IOSCO Fact-Finding Exercise
Information gathering by ESG ratings and data products providers
Information disclosed by companies is generally scrutinised for plausibility by analysts. In case of wellfounded reasons to doubt the veracity or accuracy of data based on contextual information, it will not be
considered for performance assessments, or only after verifying the credibility of the content in dialogue withthe company.
Similarly, inconsistencies in reporting are thoroughly screened for the reason of apparent inconsistent
information (e.g., different scope of reporting period of various company publications). If it cannot without
doubt be determined which information is correct or the most comprehensive, it will not be considered
performance assessment, unless all doubt can be eliminated through company dialogue.
Additionally, the quality and scope of external assurance of a company’s sustainability/ESG reporting isassessed in a dedicated data point, as is the case for GHG emissions inventories.
For climate data (emission reported) used in our climate offerings there is also a plausibility check. If
data is not deemed plausible, it is estimated instead.

22

Benchmarking against other providers
A final methodology question was the extent to which ESG ratings and data products providers
benchmark the performance of their products against those of other ESG ratings and data
products providers. Here, respondents were unanimous in stating that they did not compare
their own analyses with those of their competitors. In some respects, this is a positive aspectof market behaviour and indicates that providers’ assessments are not influenced by a desire tocoalesce around a common market view. However, there is also likely a practical reason for
this, in so far as if their methodologies and products are inherently different, are not disclosed,or have different measurement objectives, then benchmarking is not feasible.
Table 15: Example Statements Provided by Stakeholders During IOSCO Fact-Finding Exercise
Use of benchmarking against other providers[ESG ratings and data products provider] does not directly compare its ESG ratings to that of other ESG
ratings providers. As discussed previously, the methodologies used can be different in scope and content, anddo not necessarily aim at measuring the same elements.

23

Chapter 3: Private and Public Users of ESG ratings and Data Products
Introduction
The purpose of this chapter is to focus on private (asset or fund managers and corporate users)
and public (public pension funds, central banks, and government-owned financial institutions)sector users of ESG ratings and data products. This chapter summarises some of the views
provided mainly by large private and public users. These views include the mandate underwhich ESG ratings and data products are used, how this information is consumed by these users,
whether and how they conduct due diligence on this information, and whether they identify
any issues regarding governance and management of conflicts of interest.
During the fact-finding exercise, IOSCO received feedback from 19 user organisations (13private users and 6 public users). In terms of regional representation, 37% of participants werefrom the European region, 32% from the Inter-American region, 26% from the Asia Pacificregion. The rest of the responses (5%) came from global trade associations, as illustrated below.
5%

32%

26%

37%

68%
32%

private users

public users

EuropeAsia PacificInter-America
Global trade association

Given the growing role of ESG ratings and data products in the investment decision process orinvestment ecosystem, IOSCO predominantly collected views from users in light of theirinvestment purposes.
Overview of findings
Variation of objectives for using ESG ratings and ESG data products
The fact-finding exercise indicated that most respondents use ESG ratings, albeit for diverse
objectives. Some asset managers mentioned that they use ESG ratings to integrate ESG factors
in their investment process, manage sustainability exposure and/or opportunities of theirinvestment portfolio, or develop and oversee sustainable products. One asset manager uses
ratings to guide its stakeholder engagement strategy with invested companies or produce ESG
reports for clients. One asset owner uses ESG ratings to monitor external asset managers as atrustee by assessing their exposure to ESG, and more specifically, climate risks.
Participants were asked about how ESG ratings are incorporated into their investment decisions
or other perspectives. Most respondents indicated that ESG ratings are generally incorporated
into investment decisions but did not describe how ESG ratings are used in investment
decision-making processes. Some institutions noted that ESG ratings are not systematically24

included in all investment decisions, but rather that ESG ratings are used to reinforce internal
analyses and investment decisions by helping to identify risks and opportunities.
As for ESG data products, views provided during the fact-finding exercise were to some extent
different from those on ESG ratings. The responses highlighted that slightly more participants
use ESG data products than ESG ratings. Managing sustainability risks or opportunities was acommon objective, however, broader objectives including negative screening, the developmentof sustainable product offerings and regulatory reporting were mentioned. Some asset
management firms indicated that they mainly use ESG data for environmental analysis such as
monitoring the alignment of investment portfolios to the Paris Agreement.
Most respondents use both ESG ratings and ESG data products and have contracts with avariety of large providers. This is because the scope, coverage or areas of specialisation of ESG
data products and expertise of ESG ratings or data products providers are different. In thisregard, one asset management firm noted that by using more than one ESG ratings or data
products provider they are able to gain a more comprehensive ESG perspective. A few asset
managers are using ESG data but not external ESG ratings, which they view as not fit for their
purpose. This may result in the development of in-house ESG ratings rather than relying on
external ESG ratings.
Table 16: Objectives of using ESG ratings and ESG data products

•
•
•
•
•
•

ESG ratings
Manage sustainability-related risks oropportunities
Design and oversee sustainableproducts
Guide engagement strategies that drive
positive change in the invested
companies
Guide corporate sustainability
initiatives
Report to clients
Monitor external asset managers astrustee by assessing the exposure of
ESG and climate risks

ESG data productsManage sustainability-related risks oropportunities
Meet compliance with CSR policy
Negative screening (e.g. products that provide
names of companies producing weapons)
Offer sustainable investing products
Meet regulatory reporting requirements
Analyse environmental impacts (e.g. GHG
emissions, carbon intensity, monitoring thealignment of the financial portfolio to the Paris
Agreement)

•
•
•
•
•
•

Reliability of ESG ratings and data products
Reliable ESG ratings and data products are important, particularly for users such as institutional
investors to inform their investment decisions. Given the practice that ESG ratings or ESG
data are generally provided to users in accordance with the contract terms on a “subscriberpaid” basis (Please see Chapter 2), users have a vested interest in the quality of ESG ratingsand data products. Further to this, IOSCO sought views on whether and how private and public
users conduct due diligence or verification of ESG ratings, data products and these providers.
Responses to the questionnaire revealed that users generally do not conduct any formal
verification of the ESG ratings and ESG data products. Some asset managers noted that they
may engage with ESG ratings or ESG data products providers on an ad-hoc basis when theyobserve an inconsistency between the ESG ratings or ESG data products and their own analysis.
However, it is noted that all public users, and some private users, responded that they do not25implement verification processes on raw ESG data underlying ESG ratings or ESG data
products because such processes are resource intensive and may not be possible with available
information.
The fact-finding exercise indicated that there are generally similar factors impacting reliabilityof ESG ratings and ESG data products. Most organisations pointed out the lack of transparencyof methodologies including aspects such as the scope of the underlying data, definitions ofmateriality, the timing of data collection and the frequency of review or update of the ESG
ratings or ESG data products. Of note, one respondent mentioned that the evaluation criteria of
ESG ratings and data products are a “black box” and whilst it should be transparent, the models
used could be confidential to the extent that they are considered to be intellectual property
developed by ESG ratings and data products providers.
With regard to the underlying ESG data, the more fundamental issue raised concerned the needfor improvements to corporate disclosures. Some respondents pointed out that standardisationof corporate-level ESG disclosure would increase availability of raw ESG data used fordevelopment of ESG ratings or data products. In addition, these respondents encouraged thirdparty assurance which would increase the reliability of the data. These views are consistent
with the observations and priorities of IOSCO’s work on sustainability related issuer disclosure,as already noted in the Introduction and Chapter 2 of this Report.
Furthermore, most respondents outlined that they tend to conduct an assessment on the ESG
ratings or ESG data products providers rather than on the ESG ratings and data products. Some
asset managers carry out due diligence of new ratings or data products providers at the initial
on-boarding stage by reviewing how these providers manage the ratings or data gathering andquality control process. The Table below shows the summary of approaches to due diligenceby users.
Table 17: Examples of approaches to due diligence•••

Before the agreement with providers
Check quality control processes
Check governance and transparency ofproviders by visiting providers’ offices andconducting Q&A session (e.g. to check
whether internal processes to build
methodologies are well governed).
Verify wether criteria used in assessment
process are science based, quantitative,
verifiable and aligned with existing
standards and taxonomies.

•••

After the agreement with providers
Go back to data sources (e.g. annual
reports) when identifying data discrepancy
or abnormal data.
Engage with providers when identifying
defective data to check to what extent data
products reflect the current practices ofentities
Ask providers for clarification/further
information about the result of ESG ratings.

It was also highlighted that regardless of the sequencing of the due diligence exercise, users of
ESG ratings and data products could benefit from evaluating whether the criteria utilised in theassessment process are science based, quantitative, verifiable and aligned with existing
reputable standards and taxonomies. These due diligence processes could be expanded toinclude an evaluation of the relative weighting of these criteria in the process as well as theextent of the qualitative judgement exercised by the ESG ratings or data provider.
26

External ESG ratings vs internal ESG ratings
One key takeaway from the roundtable is that the lack of transparency around external ESG
rating methodologies is a key factor in encouraging users to build proprietary rating
methodologies. IOSCO’s questionnaire revealed that almost all large asset managers are using
or currently developing their own ESG ratings to supplement, or form part of their investment
processes. Most respondents argued that the wholesale adoption of third party ESG ratings andtheir methodologies might not align with their investment strategies, although a minority of
respondents indicated that using external ESG ratings could save them time with regards totheir own analyses.
Most asset managers tend to develop internal ESG rating systems customised to their specificinvestment strategies and philosophies. One example of developing internal ESG ratings is to
identify ESG criteria that are relevant for the sector(s) in which the asset manager is seeking toinvest, before constructing a methodology underpinned by these criteria. Another example isto select a limited set of KPIs to be considered by the asset manager as part of its review of theperformance of underlying portfolio companies. Conversely, none of the public users indicatedthat they are using, or have plans to develop, proprietary ESG rating methodologies.
In addition, participants in the fact-finding exercise were asked whether they benchmark theirinternally developed ESG ratings against external ESG ratings. Most of them responded thatthey did not assess external ESG ratings against their own in-house ESG ratings because of thedifferent methodologies used.
Furthermore, users noted a tendency to reduce their reliance on externally provided ESG
ratings. Some respondents are generally working towards building capacity and upskilling todevelop in-house capabilities. They also indicated a preference to rely on externally provided
ESG data from providers rather than externally provided ESG ratings while they are in earlystages of developing proprietary capabilities. One organisation raised the view that using ESG
data products from a recognised provider was beneficial because ESG information is notdisclosed consistently.
On the other hand, producing proprietary internal ESG ratings may not be feasible or costeffective for small or medium sized asset managers. These managers often have limited
capabilities and resources available for analysing external ESG ratings or developing in-house
ESG ratings. Moreover, as described in the section above, large asset managers tend to havecontracts with several ESG ratings or data products providers to gather different perspectivesof entities’ ESG profiles for their internal processes, however, small or medium sized firms areunable to do so largely due to budget constraints.

27

Chapter 4: Companies and ESG Ratings and Data Products Providers
Introduction
This chapter explores how ESG ratings and data products providers engage with companies andthe challenges these companies may face when providers seek more specific data and in theirgeneral communications with these providers. 26
Overview of key findings
The level of interactions between companies and ESG ratings and data products providers
Generally, there are three phases during which companies can interact with ESG ratings anddata products providers: (1) data collection, at which point the ESG ratings or data products
providers will typically reach out to a company to request information that will assist with its
ESG ratings or data product, (2) data assessment, during which the ESG ratings or data products
providers use all the information they gather pursuant to their methodology to determine their
ESG ratings or data product, and (3) pre-publication of the final ESG ratings or data products,
where the ESG ratings or data products provider may inform the company of the outcome of
its assessments, and in some circumstances, provide the company with the opportunity to offer
additional information which may alter the assessment.
The following sections explore the challenges faced by companies in more detail. However, it
is worth highlighting that, in many cases, most of the engagement between ESG ratings anddata products providers and companies occurs during the data collection and the dataassessment phases. Based on the feedback received during the fact-finding exercise, theengagement tends to be more limited during the pre-publication phase, and where it takes place,
it often happens at the request of the companies in order to address any errors or omissions
related to the use of the companies’ information.
i.

Phase 1: Data collection – time consuming for companies

The fact-finding exercise showed that the majority of respondents had concerns that data
requests from ESG ratings and data products providers are time-consuming because of thenumber and frequency of the questions set out in the questionnaires. For example, where acompany receives multiple requests for information with limited or no ability for forward
planning, this creates a risk that there will be a poorer quality of response. This is an unwanted
outcome for both companies and ESG ratings and data products providers as it may require
allocation of additional resources to deal with any follow-up questions to address errors oromissions.
Another challenge highlighted by companies was the timing of the questionnaires. For
example, each ESG ratings and data products provider may decide the timing of data requests
to companies that are the subject of these ratings or data products according to their own
internal timeline. This could cause requests to companies with different timings from different
26

IOSCO’s fact-finding exercise mainly covered the interaction of companies with ESG ratings providers
but also collected views on the interaction with ESG data products providers. Issues identified in termsof interaction with ESG ratings providers exist in the context of interaction with ESG data products
providers.

28

providers. Respondents suggested that ESG ratings and data products providers could consider
whether it would be feasible, without affecting the timeliness, accuracy and independence of
their reviews and subsequent ratings or data products, to communicate to companies when their
ESG ratings and data products will be subject to review. Respondents suggested that this could
enable companies subject to assessment to allocate resources in advance of when they areneeded. Respondents also noted that, if all providers published the expected timelines for theirrequests, again if possible and without diminishing quality, timeliness and independence, thisapproach could provide more predictability than currently appears to be the case.
Finally, the context for some of the questions to which companies are asked to respond within
the questionnaires can sometimes be unclear to companies, who are left confused as to how thedata they provide will be used by ESG ratings and data products providers in making theirassessments, or by investors in their decision-making process. One company noted that there
are cases in which additional questions are asked without sufficient explanations or reasons
from providers. In terms of providers’ resources, another company pointed out that the highturnover of analysts and the need to bring them up to speed each time is a significant resource
strain for companies.
Table 18: Views of Companies: Data Collection

•
•
•

ii.

Time consuming to respond to questionnaires of differing frequency and focus.
Limited forward visibility on receipt of requests for information from providers.
Lack of explanation for questions being addressed to covered entity

Phase 2: Data assessment – lack of transparency of evaluation methodology

Respondents to IOSCO’s fact-finding exercise highlighted the lack of engagement andtransparency from ESG ratings and data products providers with the companies throughout thedata assessment and evaluation process. For example, as mentioned in Chapter 3, one
respondent categorized the whole evaluation phase by the ESG ratings and data products
providers as a “black-box” even if some aspects of the methodology are disclosed.
This can create challenges for the companies as they may not always understand how the ESG
ratings and data products providers have reached their outcome, making it difficult for them toamend their business models and practices in order to receive better ESG scores, ratings orother product outcomes.
As such, many respondents called for increased transparency and explanations/disclosures ofthe methodologies used by ESG rating and data products providers, including the ESG factors
used, the weight of each factor, absolute or relative scoring, materiality, and industry ranking
considerations.
Moreover, even where methodologies may be more transparent, companies pointed out thatsome ESG ratings and data products providers change their methodologies relatively often
without prior notification to either companies or market participants. This can increasedifficulties in comparing how a company has performed over time and result in confusion forboth market participants and companies, particularly where the methodologies are notpublished.

29

Finally, some companies believe that ESG ratings and data products providers sometimes givea ‘failing grade’ or a negative result for not providing the data which they requested, without
having disclosed the fact that not providing a particular data set can influence the rating or
outcome that will be given to the company. Some companies suggested that questionnaires
should provide space to describe why the data was not provided or simply show that a specificdata set was not available. This could prevent ESG ratings and data products providers from givinga ‘failing grade’ or negative outcome without any explanation.
Table 19: Views of companies regarding interaction phase 2: Data assessment

•
•
•
•
•

•
iii.

Lack of transparency of the rating or data product methodology and criteria (the “black-box”;
ESG factors, weight, absolute and relative scoring)
Limited explanation of the outcome
Interpretation of the ranking or outcome
Ranking or assessment criteria
Limited explanation of the final assessment
Change of rating or data product methodologies without publication or notification

Phase 3: Pre-publication – lack of opportunity of review prior to publication

A majority of respondents highlighted the lack of interaction between companies and ESG
ratings and data products providers ahead of the publication of the final ESG ratings or data
product report, suggesting this interaction often only took place at the request of the company
themselves.
Where interaction takes place, companies noted that they were sometimes asked to pay to gain
access to the report. This is also seen at the post publication phase. Given the current“subscriber-pay” model, in general there is no specific incentive for the ESG ratings or data
products providers to interact meaningfully with the companies.
This lack of interaction leaves companies with limited opportunity to check the accuracy of thecontent of the final report, meaning they are unable to indicate factually incorrect or insufficient
information in a timely manner. This is particularly the case where, as usually happens,investors receive the final report on the ESG ratings or data product ahead of the companies.
This creates potential reputational risks for the companies, and could possibly lead to poor
investment decisions on the part of the investor paying for and using ESG ratings or data
products that are based on erroneous or limited information.
Table 20: Views of companies regarding interaction phase 3: Pre-publication

•
•
•
•

•

Lack of possibility to get the final report for free making it difficult for the company to provide
comments or corrections in a timely manner
Lack of opportunity to amend incorrect information
Tight deadline for review
Ineffective amendment after publication of final report
Risk of investment decision based on inaccurate information without review in advance of
publication30

Potential conflicts of interest
ESG ratings and data products providers sometimes require companies to pay for something
related to rating or assessment processes, especially for the access to the final rating or data
products report at the pre-publication phase.
In addition, as described in Chapter 1, ESG ratings and data products providers may offer othertypes of services, notably to companies with regard to their ESG performance. These services
can, for example, include consulting services such as portfolio analysis, the provision ofcertification and second-party opinions as well as advisory services on corporate ESG strategy.
In certain cases, it can include support such as insight into how ESG ratings and data products
are developed or support with reporting that influences ESG ratings and data products (e.g.
review of responses to providers’ questionnaires, guidance on how to improve the quality ofreporting). Some ESG ratings and data products providers also offer regulatory reporting
assistance to help companies and financial market participants comply with new sustainability
regulations while others, in addition to providing ESG ratings or data products, advise
companies on how to improve their ESG ratings or data products. This could result in conflictsof interest where the consulting side of business may provide information to the company toallow said company to gain an advantage in terms of receiving a good rating or data productoutcome from the ESG ratings or data product side of the business. This type of potential
conflict of interest was highlighted as another potential concern by users of ESG ratings anddata products.
In this regard, some respondents observed that some ESG ratings and data products providers
are seeking to identify and mitigate the risk of conflicts of interest. For example, one response
mentioned that some global ESG ratings and data products providers are separating the function
between ESG ratings or data products and indices to ensure their independence andtransparency. IOSCO received limited information from respondents about good practices by
ESG ratings and data products providers to avoid potential conflicts of interest.

31

Chapter 5: Final Recommendations
Introduction
Before determining whether it was appropriate for IOSCO to propose recommendations in thisarea, IOSCO canvassed the opinions of stakeholders to understand: (i) whether developmentsin the area of ESG ratings and data products providers pose risks to investor protection; (ii)whether there are already existing standards or guidance in the market for ESG ratings and data
products providers; and, (iii) whether there would be value in IOSCO playing a role to provide
this guidance.
To receive feedback on this issue, IOSCO addressed specific questions to stakeholders during
the fact-finding exercise and also included a request for further information at the consultation
stage. IOSCO asked ESG ratings and data products providers to identify practical steps that
could be taken to improve the usability and reliability of the information entities currently
disclose. Respondents suggested the following:
•
•

•

•

entities could, to the extent possible, use one existing report as their primary form of
ESG disclosure, such as an annual sustainability report. Respondents noted that thiswould help place the reporting of ESG data on par with financial data. 27
entities could work to ensure consistency of the KPIs referred to in these reports, forexample by making clear where figures are being restated from a previous year, making
clear the scope of the figures that are being presented, and providing time series
information where possible.
entities could provide more transparency about the timing of disclosures and dialogues
with ESG ratings and data products providers. For example, respondents suggested thatif, at the start of the year, entities were to publish a calendar for when and where their
ESG disclosures were to be made, this would help ESG ratings and data products
providers align their review frequencies with the availability of information.
there could be more dialogue between entities and ESG ratings and data products
providers to understand when ESG ratings and data products will be subject toreview/update to ensure both are aware of when engagement may be beneficial toaddress information gaps, or errors/omissions in ESG ratings and data products.

Based on the fact-finding exercise and consultation responses, IOSCO believes that there aresome areas that could be improved from the users’ perspective.
Reliability of raw ESG data
Raw data is a key factor to determine the quality of ESG ratings and data products. Given thatthe quality of raw ESG data relies to a large degree on the quality of corporate disclosure, mostusers expect that improvements in the quality of corporate disclosures would contribute toenhancing the consistency of ESG ratings and data products. This could also contribute toimproving the availability of raw data, which would allow users to directly access data points
to access raw data.

27

As stated in IOSCO’s press release of 24 February 2021, IOSCO aims to promote closer integration withfinancial reporting and independent assurance of companies’ disclosures.

32

Lack of transparency around ESG ratings methodology and ESG data products
In addition to having good quality underlying raw data, the quality of ESG ratings depends on
the robustness of ESG ratings methodologies. Likewise, for ESG data products, data collection,
frequency and verification will impact data quality. Lack of transparency on the process ofdeveloping ESG ratings and ESG data products could make it difficult for users to understandand interpret providers’ outputs.
Reliability of ESG ratings and data products and potential conflicts of interest
To help users make more informed investment decisions, reliability of ESG ratings and data
products is a key issue. This relates primarily to ESG ratings and data products providers
having robust and transparent governance processes around business models and fee structures,conflicts of interest policies, and quality management systems. This could include, for instance,
explicit measures to help ensure independence and separation of ESG ratings and data products
and consulting services.
Where ESG ratings and data products providers also receive fees related to other services suchas consulting services from entities, potential conflicts of interest could arise from suchinterplay of services. Most respondents suggested that there should be procedures in place atthe level of the provider to separate the staff responsible for ESG ratings and data products
from the staff providing consulting services.
Communication between ESG ratings and data products providers and entities
As noted in Chapter 4, the lack of interaction between ESG ratings and data products providers
and entities exists in the three different phases of the providers’ process to varying degrees.
The data collection process could be improved through more transparency about the timing of
the questionnaires, pre-filled baseline surveys with historical or publicly available information
to assist resource-constrained entities and more transparency about how the requested data will
be used by the ESG ratings or data products provider.
Respondents suggested that ESG ratings and data products providers could consider submitting
a copy of the company’s last completed questionnaire for the company to update. Respondents
noted that this could likewise reduce the effort required on the part of the company subject toassessment and could enable it to focus its efforts on verifying the accuracy of the available
information or updating information where needed.
In the ‘data assessment’ phase, the lack of transparency behind the factors and criteria that
underpin methodologies has raised concerns amongst entities. Similar to the feedback received
from users of ESG ratings and data products, some entities have asked for clearer and moretransparent disclosure of information on how an ESG ratings or data product is derived and theopportunity to correct any erroneous information through ongoing dialogue.
In the ‘pre-publication’ phase, the seeming lack of opportunity given to entities to correct any
errors could lead users to make investment decisions based on erroneous information.
As a result of these challenges, respondents to the fact-finding exercise were of the view thatproviders should engage more actively with entities once they have finalised their assessment,33

before publication, rather than wait for the company to approach them to rectify any potential
error or provide additional information. In this regard, it should be noted that there is a potential
risk of conflicts of interest in the interaction between ESG ratings and data products providers
and entities.
Support for IOSCO Guidance
There was clear support from stakeholders for IOSCO to provide guidance that addressed a
broad spectrum of ESG ratings and data products; support which also came through the
responses to IOSCO’s consultation report. This spectrum ranged from recommendations
addressing the internal processes of the providers themselves, the uses and users of the
products, as well as interactions between covered entities and the providers. On this basis,
IOSCO has proceeded with recommendations addressing the key areas of concern.
Overview of Recommendations
Based on specific suggestions and stakeholder feedback received from the fact-finding exercise
conducted by the STF, as well as the public consultation responses, this chapter sets out highlevel recommendations and guidance on possible policies and procedures for meeting theobjectives of the recommendations. The suggestions for policies and procedures are provided
as guidance on the implementation of the goals of the high-level recommendations. They areintended to serve as illustrations for specific steps that can be voluntarily taken for each
recommendation. They are intended as helpful concrete suggestions that regulators could
consider as ways to address recommendation 1 and that market participants could consider withrespect to recommendations 2-10. Given the nascent and developing nature of the ESG ratingsand data products market, the guidance on policies and procedures might need to be updated
as the ESG industry evolves.
The set of recommendations are provided according to 5 sections:••••

Section 1 provides recommendations on possible regulatory and supervisory
approaches.
Section 2 provides recommendations on the internal processes of ESG ratings and data
products providers.
Section 3 provides recommendations concerning the use of ESG ratings and data
products.
Sections 4 and 5 provide recommendations concerning the interactions of ESG ratingsand data products providers with entities subject to assessment by ESG ratings and data
products providers.

How these recommendations could be implemented may depend upon the priorities of
stakeholders, local market circumstances and jurisdictions’ legal and regulatory frameworks.
For their part, ESG ratings and data products providers, and entities covered by ESG ratingsand data products providers, could consider inclusion of the relevant provisions in their internal
policies and procedures. In some cases, regulators could consider the recommendations in thedevelopment of their regulatory frameworks or in the supervision of their supervised or
regulated entities. Regulators could also consider whether their existing regulatory regimes are
sufficient for oversight, or, where appropriate, clarify or expand their existing regulatory
regime where additional regulatory authority may be appropriate.
34

5.1

Recommendations for Authorities concerning ESG ratings and data products

Where regulatory or supervisory authorities have authority over ESG ratings and data products
providers, they could consider whether the reliability, comparability and interpretability of
ESG ratings and data products could be enhanced by taking steps to improve the governanceand transparency of the assessment process and the management of conflicts of interest of theproviders. This could include the possibility of establishing regulatory expectations aroundgood practices in corporate governance to help ensure appropriate independence, objectivity
and challenge at board or other appropriate level within the providers.
The recommendations focus on ways through which authorities could enable ESG ratings anddata products providers to deliver high quality and independent ESG ratings and data products,
whilst appropriately addressing conflicts of interest. The ESG ratings and data products market
is still developing and includes a diverse range of providers and products covering for example,
aggregated ESG assessments as well as analyses of individual E, S and G issues, using different
approaches. This diversity of views, independent methodologies, innovation and competition
can be beneficial to the markets and investors, with sufficient transparency and robust
governance, calling for providers to issue ratings and data products that are internally consistent
with their own disclosed in-house methodologies. The implementation of these measures couldin turn contribute to a greater level of confidence in the use of these products within thefinancial system, supporting a greater up-take in usage while simultaneously helping to protect
investors and ensure that markets are fair and efficient, in line with IOSCO objectives.
However, mechanistic or over-reliance on ESG ratings or data products should be avoided. For
this reason, it is not recommended that regulators use ESG ratings in legal, regulatory or
supervisory frameworks (e.g., for disclosure, risk management, product construction or
scenario analysis) as the basis for compliance.
Where regulators have authority over Credit Rating Agencies (CRAs) or exchanges that also
issue ESG ratings and data products, these regulated entities should consider whether there
exists the potential for conflicts of interest between a CRA’s or an exchange’s offerings and its
ESG ratings or data product offerings, and if so, the steps they could consider to mitigate andaddress those potential conflicts of interest.
Finally, regulators, could consider whether there are opportunities to encourage industry
participants to develop and follow voluntary common industry standards or codes of conduct
and IOSCO could also consider what role it can play in supporting the development of suchvoluntary standards or codes.
Recommendation 1: Regulators could consider focusing more attention on the use of ESG
ratings and data products and ESG ratings and data products providers that may be subject
to their jurisdiction.
 Regulators could examine their existing regulatory regimes and where applicableconsider whether there is sufficient oversight of ESG ratings and data products
providers.
 Regulators could support voluntary industry-led development of standardised
definitions for the terminology used and referred to by ESG rating and data products
providers.
35 Where regulators have authority over ESG ratings and data products providers, they
could consider:o Requiring the provider to identify, disclose and, to the extent possible, mitigate
potential conflicts of interest that may arise betweenESG ratings and data productofferings and other relationships with the covered entities such as provision of third
party opinions for green finance products and ESG consulting services.
o Whether the corporate governance organisational and operational structures of theprovider are sufficient to identify, manage and mitigate any potential conflicts ofinterest.
o Whether the data and information sources that the provider relies on are publicly
disclosed, including the use of industry averages, estimations or othermethodologies when actual data is not available or not publicly disclosed.
o Whether the provider’s methodologies are publicly disclosed, including whether
and how the methodologies are defining the individual components Environmental,
Social, Governance of “ESG”, including the specific issues being assessed, the
KPIs used and measurement methodologies underlying each KPI.
o Whether the providers’ ESG ratings and data products are issued in a manner thatis internally consistent with the relevant provider’s in-house methodologies.
o Whether the underlying processes and methodologies of the ESG ratings and data
products are subject to the provider’s written policies and procedures and/orinternal controls designed to help ensure the processes and methodologies are
rigorous, systematic, and applied consistently.
o Whether to provide facilities for the reporting of complaints or misconduct relating,but not limited to, the independence, transparency or integrity of ESG rating or data
products.
 Regulators, could consider whether there are opportunities to encourage industry
participants to develop and follow voluntary common industry standards or codes ofconduct. IOSCO could also consider what role it can play in supporting thedevelopment of such voluntary standards or codes, regarding:o the identification, management and mitigation of potential conflicts of interest for
ESG ratings and data products providers;o the integrity, transparency and independence of ESG ratings and data productmethodologies; and/or
the disclosure of ESG rating and data products terminology to help improveunderstanding of these terms in the markets.

36

5.2

Recommendations for ESG ratings and data products providers

For ESG ratings and data products providers, IOSCO has received feedback that there is scopefor guidance to improve the reliability, comparability, and interpretability of ESG ratings anddata products.
The focus of these recommendations is on the providers’ production of high quality ESG
ratings and data products, consistent with the internal methodology and procedures of theratings or data products provider. IOSCO has provided recommendations regardingtransparency and the providers’ internal consistency in the application of the in-house rating
and assessment process, the identification, management, and mitigation of conflicts of interest,
transparency of data sources, and disclosures and handling of confidential information. The
goal here is to provide high level recommendations for ESG ratings and data products providers
that are sufficiently flexible to accommodate a diversity of views, innovation and competition
within the context on the developing nature of this market.
Recommendation 2: ESG ratings and data products providers could consider adopting andimplementing written procedures designed to help ensure the issuance of high quality ESG
ratings and data products based on publicly disclosed data sources where possible and otherinformation sources where necessary, using transparent and defined methodologies.
 ESG ratings and data products providers could consider:o adopting and implementing written policies and procedures designed to help ensurethat the ESG ratings and data products they issue are based on a thorough analysisof all relevant information available to them.
o adopting, implementing and providing transparency around methodologies for their
ESG ratings and data products that are rigorous, systematic, applied continuously
while maintaining a balance with respect to proprietary or confidential aspects ofthe methodologies.
o for ESG ratings, publishing on a regular basis an evaluation of their methodologies
against the outputs which they have been used to produce.
o subjecting these methodologies to regular review, with sufficient communication
regarding changes made to the methodologies as well as potential impacts of thesechanges to the ESG ratings and data products.
o providing transparency, where reasonably possible, around the sources of data usedin determining their ESG ratings and data products, including the use of any
industry averages, estimations or other methodologies when actual data is notavailable. This may include transparency around whether the data used is up to date,
and the time period that data is relevant to as well as whether the data is publicly
sourced or proprietary in nature, including through approximations.
o monitoring on an ongoing basis, and regularly updating, their ESG ratings and data
products, except where specifically disclosed that the rating is a point in time rating.
37

o maintaining internal records to support their ESG ratings and data products.
o sufficient resources to carry out high-quality ESG-related assessments, including
sufficient personnel and technological capabilities, to seek out information theyneed in order to make an assessment, analyse all the information relevant to theirdecision-making processes, and provide quality assurance.
ohow to ensure personnel involved in the deliberation of ESG ratings and data
products are professional, competent, and of high integrity.

oOffering ESG ratings and data products to clients in a machine-readable format.

Recommendation 3: ESG ratings and data products providers could consider adopting andimplementing written policies and procedures designed to help ensure their decisions are
independent, free from political or economic interference, and appropriately address
potential conflicts of interest that may arise from, among other things, the ESG ratings anddata products providers’ organizational structure, business or financial activities, or thefinancial interests of the ESG ratings and ESG data products providers and their officers andemployees.
Recommendation 4: ESG ratings and data products providers could consider identifying,avoiding or appropriately managing, mitigating and disclosing potential conflicts of interest
that may compromise the independence and objectivity of the ESG rating and ESG data
products provider’s operations.
 ESG ratings and data products providers could consider:o adopting written internal policies and procedures and mechanisms designed to (1)identify, and (2) eliminate, or manage, mitigate and disclose, as appropriate, any
actual or potential conflicts of interest related to their ESG ratings or data productsthat may influence the opinions and analyses ESG ratings and data products
providers make or the judgment and analyses of the individuals they employ who
have an influence on their ESG ratings or data product decisions.
o disclosing such conflict avoidance and management measures.
o taking steps to help ensure the ESG ratings and data products would not beaffected by the existence of or potential for a business relationship between the
ESG ratings and data products providers (or their affiliates) and any entity or any
other party for which it provides ESG ratings or data products.
o putting in place measures to help ensure their staff members refrain from any
securities or derivatives trading presenting inherent conflicts of interest with the
ESG ratings and data products.
o structuring reporting lines for their staff and their compensation arrangements toeliminate or appropriately manage actual and potential conflicts of interest related38

to their ESG ratings and data products.
o not compensating or evaluating staff on the basis of the amount of revenue that an
ESG rating and data products provider derives from an entity that staff provides
ESG ratings and data products for, or with which staff regularly interacts
regarding such ESG ratings and data products.
owhere consistent with confidentiality, contractual and other business, legal andregulatory requirements, disclosing the nature of the compensation arrangement
or any other business or financial relationships that exist with an entity for which
the ESG ratings and data products provider provides ESG ratings or data products.

Recommendation 5: ESG ratings and data products providers could consider making
adequate levels of public disclosure and transparency a priority for their ESG ratings anddata products, including their methodologies and processes to enable the users of the productto understand what the product is and how it is produced, including any potential conflictsof interest and while maintaining a balance with respect to proprietary or confidential
information, data and methodologies.
 ESG ratings and data products providers could consider:o making public disclosure and transparency a priority for their ESG ratings anddata product offerings, subject to commercial sensitivity considerations.
o clearly labeling their ESG ratings and data products to enable the user tounderstand the ESG rating’s or ESG data product’s intended purpose including
its measurement objective.
o publicly disclosing the data and information sources they rely on in offering
ESG ratings and data products, including the use of industry averages,
estimations or other methodologies when actual data is not available.
o publishing sufficient information about the procedures and methodologies
underlying their ESG ratings and data products to enable the users of theseproducts to understand how their outputs were determined.
 Information regarding methodologies that ESG ratings and data products providers
could consider publishing include, but is not limited to:the measurement objective of the ESG rating or data product;
the criteria used to assess the entity or company;
the KPIs used to assess the entity against each criterion
the relative weighting of these criteria to that assessment;
the scope of business activities and group entities included in the assessment;
the principal sources of qualitative and quantitative information used in theassessment as well as information on how the absence of information was
treated;o the time horizon of the assessment; ando the meaning of each assessment category (where applicable).
o
o
o
o
o
o

39

Recommendation 6: ESG ratings and data products providers could consider adopting andimplementing written policies and procedures designed to address and protect all non-public
information received from or communicated to them by any entity, or its agents, related totheir ESG ratings and data products, in a manner appropriate in the circumstances.
 ESG ratings and data products providers could consider :o adopting and implementing written policies and procedures and mechanisms
related to their ESG ratings and data products designed to address and protect
the non-public nature of information shared with them by entities under theterms of a confidentiality agreement or otherwise under a mutual understandingthat the information is shared confidentially.
o adopting and implementing written policies and procedures designed to address
the use of non-public information only for purposes related to their ESG ratingsand data products or otherwise in accordance with their confidentiality
arrangements with the entity.
o including information on data confidentiality management and on the protectionof non-public information to the extent terms of engagement are published.

5.3

Recommendations for market participant users of ESG ratings and data products

For the users and uses of ESG ratings and data products, IOSCO has been able to draw on theprocess of its fact-finding exercise and consultation responses. The fact-finding exercise
showed that ESG ratings and data products may underpin many ESG indices, and screening
criteria for certain ESG-oriented products. IOSCO has identified that it would be beneficial toprovide recommendations that promote the adoption of written policies and procedures
designed to address the conduct of due diligence, or information gathering and review, andgovernance to help ensure mechanistic reliance on ESG ratings and data products is avoided
where at all possible.
Recommendation 7: Market participants could consider conducting due diligence, orgathering and reviewing information on the ESG ratings and data products that they use in
their internal processes. This due diligence or information gathering and review could
include an understanding of what is being rated or assessed by the product, how it is being
rated or assessed and, limitations and the purposes for which the product is being used.
 Market participants could consider evaluating the published methodologies of any ESG
ratings or data products that they refer to in their internal processes. This evaluation
could cover:o the sources of information used in the product, the timeliness of this information,
whether any gaps in information are filled using estimates, and if so, the methods
used for arriving at these estimates;o An evaluation of the criteria utilised in the ESG assessment process, including if they
are science-based, quantitative, verifiable, and aligned with existing standards andtaxonomies, the relative weighting of these criteria in the process, the extent ofqualitative judgement and whether the covered entity was involved in the assessment
40

process; ando5.4

a determination as to the internal processes of the financial market participant for
which the product is suitable.
Recommendations on how ESG ratings and data products providers could
consider interacting with entities subject to assessment

IOSCO has drawn on feedback received during the fact-finding exercise and the consultation
process to provide recommendations that providers could consider to help address some of thereported shortcomings with respect to interactions with entities covered by ESG ratings anddata products. For ESG rating and data providers this means providing greater forward
visibility to covered entities as to what to expect from their assessment processes. An exampleof how this can be addressed could be the introduction of “Terms of Engagement” that areagreed upon between ESG ratings and data product providers and the covered entities. These
terms of engagement could provide covered entities with visibility on the assessment process,when data is likely to be requested and how it will be treated by the ESG rating and data
provider.
Recommendation 8: ESG ratings and data products providers could consider improving
information gathering processes with entities covered by their products in a manner that leads
to more efficient information procurement for both the providers and these entities.
Recommendation 9: Where feasible and appropriate, ESG ratings and data products
providers could consider responding to and addressing issues flagged by entities covered bytheir ESG ratings and data products while maintaining the objectivity of these products.
 Where they collect information from covered entities on a bilateral basis, ESG ratingsand data products providers could consider:o communicating sufficiently in advance when they expect to request thisinformation regarding their ESG ratings and data products.
o including in their requests, pre-inputted information either from publicly
available sources or from the covered entities previous submissions, where
possible, for the covered entities’ review or confirmation.
 ESG ratings and data products providers could consider:o providing a clear and consistent contact point with whom the covered entity caninteract to address any queries relating to the assessment provided by the ESG
ratings and data products provider.
oinforming covered entities of the principal grounds on which an ESG rating or
ESG data product is based before the publication of the ESG rating or data
product.

oallowing the covered entity time to draw attention to any factual errors in the
product, including the data and information underlying the product.
41

o publishing terms of engagement describing how and when the ESG rating anddata providers will typically engage with their covered entities, including
when information is likely to be requested and the opportunities available tothe covered entity for review.
5.5

Recommendation on how covered entities could consider interacting with ESG
ratings and data products providers

The final part of IOSCO’s recommendations addresses those entities covered by ESG ratingsand data products providers. This element is included with the intention to address the full
spectrum of issues relevant to the production of ESG ratings and data products. For the entities
covered by these products, IOSCO recommends that they consider disclosing information in amanner that is consistent, predictable and easy to access. In this regard, some practical steps
that could be considered might include making sustainability information public andconsolidating it in the minimum number of locations, with maximum visibility over previous
and upcoming disclosures. These steps may help provide ESG ratings and data products
providers with the information they need to carry out up to date and accurate assessments,
which might reduce the burden on covered entities to follow up with providers to discuss any
errors or omissions. 28
As discussed in greater detail in the Introduction to this report, IOSCO, through WS1, hasengaged with the IFRS Foundation as the IFRS Foundation has worked towards theestablishment of an ISSB. IOSCO considers that the newly launched ISSB can deliver a global
baseline for investor-oriented sustainability-related disclosure standards focussed on enterprisevalue creation, which jurisdictions could consider incorporating or building upon as part oftheir mandatory reporting requirements as appropriate and consistent with their domestic legal
frameworks. These efforts by WS1 are intended to drive much-needed international
consistency and comparability in sustainability-related information. In turn, this information
could become an essential part of any methodology underpinning the development of ESG
ratings or data products. 29
Recommendation 10: Entities subject to assessment by ESG ratings and data products
providers could consider streamlining their disclosure processes for sustainability related
information to the extent possible, bearing in mind jurisdictions’ applicable regulatory andother legal requirements.
 Entities subject to assessment by ESG ratings and data products providers could
consider:o creating a dedicated section of their website, or a corporate publication, that
includes links to, or coordinates for, all the entities’ sustainability related
publications.
28

The STF Workstream 1 report can be accessed at the following link:
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD678.pdf

29

The STF Workstream 1 report can be accessed at the following link:
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD678.pdf

42

o including, in the information provided on the dedicated section of their website or
corporate publication, the dates of the relevant publications, as well as thetimelines for which they are expected to be updated or refreshed.
o designating a dedicated point of contact to address any requests from or queries
to ESG ratings and data products providers that provide coverage for that entity.

43

Annex 1: Glossary
In developing an overview of the market for ESG ratings and data products a common frameof reference is beneficial. In this regard, a common understanding of what “ESG ratings” and“ESG data products” refer to is called for, as different studies have looked at different markets,referring to broad terminologies such as ESG data products and ESG ratings.
Following feedback by respondents during its fact-finding exercise and public consultation,
IOSCO has refined these terms as per the box below. The terms used in this Report should
therefore be understood as per the definitions within the box. Certain Financial Benchmarks
with an ESG or climatic focus may be captured by the spirit of the below terminology. Where
the providers of these products are already applying IOSCO’s principles for Financial
Benchmarks 30 the recommendations applicable to ESG rating and data providers should not be
considered as relevant for those products. The basis for this being that the governance andquality of these benchmarks is already being assured by these existing principles.
Scoping Terminology – ESG Data Products and ESG Ratings“ESG data products”: refer to the broad spectrum of data products that are marketed as providing either a
specific E, S, or G focus or a holistic ESG focus on an entity, financial instrument, product or company’s ESG
profile or characteristics or exposure to ESG, climatic or environmental risks or impact on society and theenvironment, whether or not they are explicitly labelled as “ESG data products”.
“ESG ratings”: refer to the broad spectrum of ratings products that are marketed as providing an opinion
regarding an entity a financial instrument or a product, a company’s ESG profile or characteristics or exposure
to ESG, climatic or environmental risks or impact on society and the environment that are issued using a definedranking system of rating categories, whether or not these are explicitly labelled as “ESG ratings”.

In addition to assessing whether there is a common terminology for the products that are offeredin this market, IOSCO has sought to understand if there is a common understanding of theattributes that these products are intended to measure.
The starting point was to assess whether there is a common understanding of the terms “ESG
factors” and “ESG risks” among market participants and, in this context, what it meant from an
investment decision-making perspective. Respondents suggested that there is no such common
understanding in the market, that is, no systematic and consistent approach to assess risk
stemming from ESG factors. As such, what these terms mean from an investment decisionmaking perspective varied by geographical regions or areas of specialisation.
In the absence of a common understanding of the meaning or relevance of these terms amongst
market participants, IOSCO sought to explore whether market participants had developed theirown internal working definition of ESG. Responses to this question proved inconclusive. Whilesome respondents indicated that they had set certain investment objectives relating to ESG or
sustainability performance of business models, very few respondents indicated that they had
developed an internal working definition of the term “ESG risks or factors” and were unable toset out what they would consider to be a good ESG profile from an investment perspective. In
conclusion, the practices amongst the users of ESG ratings and data products seem to mirror

30

FR 07/13 IOSCO Principles for Financial Benchmarks

44the practices of the providers, with individual views being set according to specific investment
or measurement objectives and different expectations on sustainability practices.
Comments Provided by Stakeholders During IOSCO Fact-Finding Exercise
Term “ESG” has been defined by some market participants, although this was a minority of cases.
For us, ESG means a systemic risk which would be critical to our long-term return. In the short-term, it isdifficult to clearly identify it. But, as our investment time horizon goes beyond the short-term, it would be more
likely that ESG factors impact us directly or indirectly. We do ESG to maximise our risk adjusted return.
Other more ad-hoc judgements for “ESG” in place where this is not present.
While we have not developed a definition for ESG, we have defined what sustainability means to our company
to ensure we had a common understanding and to guide forward progress:
Sustainability is embedded in the way we do business. It means creating a safe and inclusive workplace,partnering with local and Indigenous communities, and innovating to minimize our impact on the environment.
We believe striking the right balance among environmental, economic and social considerations creates longterm, sustainable value.

Beyond these key terms, other important sustainability-related terms may be used within theReport. IOSCO has defined them as follows:•

Greenwashing refers to the practice by asset managers of misrepresenting their own
sustainability-related practices or the sustainability-related features of their investment
products•

IFRS Foundation refers to International Financial Reporting Standards Foundation. A
not-for-profit, public interest organization established to develop a single set of highquality, understandable, enforceable and globally accepted accounting standards—
IFRS Standards—and to promote and facilitate adoption of the standards. IFRSStandards are set by the IFRS Foundation’s standard-setting body, the IASB.

•ISSB refers to International Sustainability Standards Board. An independent group of
experts with an appropriate mix of recent practical experience in setting accounting
standards, in preparing, auditing, or using financial reports, and in accounting
education. Broad geographical diversity is also required. Board members are
responsible for the development and publication of IFRS Standards, including the IFRS
for SMEs Standard. The Board is also responsible for approving Interpretations of IFRSStandards as developed by the IFRS Interpretations Committee (formerly IFRIC).
Members are appointed by the Trustees of the IFRS Foundation through an open andrigorous process that includes advertising vacancies and consulting relevantorganisations.

•“Sustainability” refers to meeting the needs of the present without compromising theability of future generations to meet their needs. In that regard, it covers ESG factors.

45

Annex 2: Final IOSCO Recommendations
Recommendation 1: Regulators could consider focusing more attention on the use of ESG
ratings and data products and ESG ratings and data products providers that may be subject totheir jurisdiction.
Recommendation 2: ESG ratings and data products providers could consider adopting andimplementing written procedures designed to help ensure the issuance of high quality ESG
ratings and data products based on publicly disclosed data sources where possible and otherinformation sources where necessary, using transparent and defined methodologies.
Recommendation 3: ESG ratings and data products providers could consider adopting andimplementing written policies and procedures designed to help ensure their decisions are
independent, free from political or economic interference, and appropriately address potential
conflicts of interest that may arise from, among other things, the ESG ratings and data products
providers’ organizational structure, business or financial activities, or the financial interests ofthe ESG ratings and ESG data products providers and their officers and employees.
Recommendation 4: ESG ratings and data products providers could consider identifying,avoiding or appropriately managing, mitigating and disclosing potential conflicts of interest
that may compromise the independence and objectivity of the ESG ratings and ESG data
products provider’s operations.
Recommendation 5: ESG ratings and data products providers could consider making adequatelevels of public disclosure and transparency a priority for their ESG ratings and data products,
including their methodologies and processes to enable the users of the product to understandwhat the product is and how it is produced, including any potential conflicts of interest andwhile maintaining a balance with respect to proprietary or confidential information, data andmethodologies.
Recommendation 6: ESG ratings and data products providers could consider adopting andimplementing written policies and procedures designed to address and protect all non-public
information received from or communicated to them by any entity, or its agents, related to their
ESG ratings and data products, in a manner appropriate in the circumstances.
Recommendation 7: Market participants could consider conducting due diligence or gatheringand reviewing information on the ESG ratings and data products that they use in their internal
processes. This due diligence or information gathering and review could include anunderstanding of what is being rated or assessed by the product, how it is being rated orassessed and, limitations and the purposes for which the product is being used.
Recommendation 8: ESG ratings and data products providers could consider improving
information gathering processes with entities covered by their products in a manner that leads
to more efficient information procurement for both the providers and these entities.
Recommendation 9: Where feasible and appropriate, ESG ratings and data products providers
could consider responding to and addressing issues flagged by entities covered by their ESG
ratings and data products while maintaining the objectivity of these products.
46

Recommendation 10: Entities subject to assessment by ESG ratings and data products
providers could consider streamlining their disclosure processes for sustainability related
information to the extent possible, bearing in mind jurisdictions’ applicable regulatory andother legal requirements.

47

Annex 3: WS3 Consultation Report Feedback
Feedback was submitted by the following three (3) individuals and fifty-eight (58)organisations to the Consultation Report.
Individuals
1. Robin Whitecross
2. William J. Harrington
3. William Michael Cunningham
Organisations
1.
2.
3.
4.

2percent
AIMA
AKFI: Actionable Knowledge Foundational Institute
Allan Gray

5.
6.
7.

Allianz Global Investors
Apex ESG Rating Ltd
Asset Management Group of the Securities Industry and Financial Markets
Association (“SIFMA AMG”)
8. Association of Real Estate Fund
9. Austrian Association of Investment Fund Management Companies
10. Austrian Federal Economic Chamber
11. AXA Investment Managers
12. Bloomberg L.P.
13. BVI
14. CaixaBank
15. CDP
16. Chartered Professional Accountants of Canada
17. CHFT Advisory and Appraisal
18. CRISIL Ratings Limited
19. Deloitte Touche Tohmatsu Limited
20. Deutsche Börse Group
21. EcoVadis
22. EFAMA
23. Euronext
24. Eurosif
25. FICC Markets Standards Board (FMSB)
26. Finance Denmark
27. First Nations Financial Management Board.
28. Fitch Ratings
29. Friends of the Earth (HK)
30. Global Financial Markets Association (GFMA)
48

31. Global Legal Entity Identifier Foundation (GLEIF)
32. Hermes Fund Managers Limited
33. ICE Data Services
34. IHS Markit
35. Institute of International Finance
36. Institutional Shareholder Services Inc.
37. International Regulatory Strategy Group
38. Investment Company Institute
39. ISO CCCC and ISO TC68
40. Japanese Bankers Association
41. LSEG
42. Mirova
43. Moody’s ESG Solutions Group
44. Morningstar
45. MSCI
46. Principles for Responsible Investment’s (PRI)
47. RAEX-Europe
48. S&P Global
49. SEC Thailand
50. Stichting Onderzoek Multinationale Ondernemingen (SOMO)
51. Superintendent of the Securities Market of Panama
52. The Brazilian Institute of Corporate Governance
53. The Investment Association
54. The World Federation of Exchanges
55. UK Finance
56. World Bank
57. World Business Council for Sustainable Development
58. Worldwide fund for Nature
The IOSCO Board is grateful for the responses and has taken them into consideration when
preparing this final report. The rest of this section summarises the replies received to the
proposed recommendations and consultation questions. Overall, respondents were supportiveof IOSCO’s work and were broadly in agreement with the proposed recommendations set out
in the Consultation Report; although they provided further suggestions to the underlying text
explaining how the recommendations could practically be implemented.
Proposed Recommendations for IOSCO and IOSCO Members concerning ESG ratingsand data products (Recommendation 1) as set out in the Consultation Report.

Recommendation 1: Regulators may wish to consider focusing more attention on the useof ESG ratings and data products and ESG ratings and data products providers in theirjurisdictions.
Most of the respondents were supportive of this recommendation and encouraged thedevelopment of regulatory framework or code for ESG ratings and data product providers.
49There was overall agreement over the fact that such a framework should contain elements suchas the avoidance of conflicts of interest, transparency on underlying methodologies andassociated data collection disclosures, with some suggesting it should also consider the
introduction of standardised definitions for the terminology used and referred to by ESG rating
and data products.
A few respondents suggested that any framework contemplated for ESG ratings and data
products providers needs to be proportionate and remain fundamentally principles-based innature as not to stifle market innovation. As such, they noted IOSCO’s approach should not be
overly prescriptive and asked the action points either be deleted or clarified as voluntary innature. A couple of respondents also suggested making a more linear distinction between
recommendations – and the guidance underpinning them – that would apply to ESG ratings
providers and those which could apply to ESG data product providers.
IOSCO’s response: IOSCO welcomes respondents’ support for the view that a regulatory
framework should exist for ESG ratings and data product providers. We added a description of
the action points, now referring to them as guidance on policies and procedures, and clarifyingthat they are provided as helpful guidance that may need to be updated as the ESG industry
evolves. While IOSCO agrees the way some of the recommendations applies to ESG ratings anddata product providers may at times need to differ to account for their underlying businessmodels, the philosophy contained within each high-level recommendation is sufficiently
proportionate to apply to both. Where applicable, we will make distinctions or provide examples
in the guidance that underpins those recommendations.
Proposed Recommendations for ESG ratings and data
(Recommendations 2-6) as set out in the Consultation Report.

products

providers

Recommendation 2: ESG ratings and data products providers could consider issuing highquality ESG ratings and data products based on publicly disclosed data sources where
possible and other information sources where necessary, using transparent and defined
methodologies.
Most respondents were supportive of the proposed recommendation. Some respondents pointed
out that regulatory efforts focused on greater standardisation of ESG and climate disclosure
would contribute in improving the quality of underlying inputs that go into ESG andsustainability ratings, assessments, and scores. However, they also noted the need to be
proportionate in the implementation of this recommendation, suggesting it may not always beappropriate to provide data sources where these stem from proprietary information. A numberof commenters raised a concern that there was a call for standardized methodologies, consistentacross the industry, which could be detrimental in the developing ESG market.
In respect of validation, some respondents mentioned that, statistical validation can be difficult
and the recommendation should instead focus on promoting the publication of ESG
performance reviews by the provider. On the element of ‘sufficient resources to carry out highquality ESG-related assessments’, one respondent proposed spelling out that there should be
sufficient resources for quality assurance of ratings provided.

50

IOSCO’s response: IOSCO welcomes respondents’ overall support for the recommendation.
We take on board comments about the need to be balanced in expectations on transparency andhave made some minor amendments to the underlying guidance. We have added an explicit
note that the focus is on transparency and internal consistency. As such, there is no call forstandardized methodologies, consistent across the industry.
Recommendation 3: ESG ratings and data products providers could consider ensuring theirdecisions are, to the best of their knowledge, independent and free from political or economic
pressures and from conflicts of interest arising due to the ESG ratings and data products
providers’ organizational structure, business or financial activities, or the financial interests ofthe ESG ratings and ESG data products providers’ employees
Recommendation 4: ESG ratings and data products providers could consider, on a best efforts
basis, avoiding activities, procedures or relationships that may compromise or appear tocompromise the independence and objectivity of the ESG rating and ESG data products
provider’s operations or identifying, managing and mitigating the activities that may lead tothose compromises.
Most respondents backed these recommendations, but suggested IOSCO should also consider
disclosure of these potential conflicts of interest as part of the recommendations. One
respondent specifically highlighted the need to be totally independent and free from any politicalor economic pressures in addition to other potential conflicts of interest.
IOSCO’s response: IOSCO has slightly modified the wording of recommendation four toclarify its intent. We do not believe any further changes need to be made.
Recommendation 5: ESG ratings and data products providers could consider making highlevels of public disclosure and transparency an objective in their ESG ratings and data products,
including their methodologies and processes.
Most respondents agreed that transparency in methodologies is important, noting this would
contribute in enhancing the comparability and reliability of ESG ratings and data products. One
respondent suggested that a minimum level of disclosure could include reference to the relevant
methodology used, where to find the methodology and any relevant supporting documents, alist of relevant data sets or information used to create the product, the provider’s governanceprocess for the product, whether the product is based on any information that is not public, theterms and conditions of the product’s use, any potential conflicts of interest, and – in the caseof an ESG rating product – whether the rating was solicited and / or paid for by the subject
entity.
Without going into the same level of detail, many respondents indicated that information
disclosed by rating agencies should be of sufficient quality to allow stakeholders to have areasonable sense of what the rating was intending to measure and how they approached thismeasurement. They however suggested a balance needs to be struck between what information
ESG ratings and data products providers are willing to publish, given the commercial proprietarynature of methodologies, and the usefulness of that information.
IOSCO’s response: IOSCO has made some amendments to the recommendation, to clarify that
disclosures should be sufficiently detailed to enable the users of the product to understand what
the product is and how it is produced, including any potential conflicts of interest. Within the51

guidance, we also encourage ESG ratings and data product providers to be transparent about
how and when they will typically engage with a rated entity. We also added a note that there
should be a balance between disclosure of methodologies and data, and preservation of
proprietary or confidential information.
Recommendation 6: ESG ratings and data products providers could consider maintaining in
confidence all non-public information communicated to them by any company, or its agents,
related to their ESG ratings and data products, in a manner appropriate in the circumstances.
The majority of respondents supported this recommendation, with some however noting thatdata reliability was an issue as it was not always possible to verify the information received.
Generally, it was suggested that the solicitation of price-sensitive, non-public information
should not be encouraged. Where non-public information was shared, the ESG ratings or data
product provider should share information on data confidentiality management and on theprotection of non-public information.
IOSCO’s response: We welcome respondents’ support for the recommendations and agree
that, where non-public information is shared; the provider should have, and be transparent about,data confidentiality arrangements in place. We have amended the underlying guidance toaccount for this point. We also note that, in some jurisdictions, it is impermissible for public
issuers to selectively disclose material non-public information and issuers and ESG ratings firms
or data providers should bear in mind such restrictions.
Proposed Recommendation for users of ESG ratings(Recommendation 7) as set out in the Consultation Report.

and

data

products

Recommendation 7: Financial market participants could consider conducting due diligence on
the ESG ratings and data products that they use in their internal processes. This due diligence
could include an understanding of what is being rated or assessed by the product, how it is being
rated or assessed and, limitations and the purposes for which the product is being used.
The majority of respondents welcomed this recommendation, suggesting due diligence should
be a key aspect of investment decision making for any investors that use these products as partof their processes. Some suggested due diligence should include a process for the treatment of
new information and quality control checks, data quality of the filtered information,
classification procedures of the information, methodologies, human capital management
policies and performance regarding talent attraction and retention of ESG experience andexpertise and certifications and or additional assurance, including systems testing.
IOSCO’s response: IOSCO welcomes respondents’ support for the recommendation. We do
not however propose, at this stage, to go into the level of detail proposed by some respondents
with regard to due diligence; noting that existing regulatory frameworks may already coversome of these aspects.

52

Proposed Recommendation on how ESG ratings and data products providers could
consider interacting with entities subject to assessment (Recommendations 8-9) as set out
in the Consultation Report.

Recommendation 8: ESG ratings and data products providers could consider improving
information gathering processes with entities covered by their products in a manner that is
efficient and leads to more effective outcomes for both the providers and these entities
Recommendation 9: ESG ratings and data products providers could consider responding toand addressing issues flagged by entities covered by their ESG ratings and data products while
maintaining the objectivity of these products
Most respondents were in favour of these recommendations. They emphasised the significanceof the interaction between companies and rating providers in obtaining reliable data. They
pointed out that it is the more efficient and effective way to assess an organisation’s ESG
performance and encouraged companies to provide a point of contact to address any requests
from or queries to ESG ratings and data product providers. However, respondents wished tomake it clear this should not be a way for covered entities to influence the outcome of the rating.
IOSCO’s response: We welcome respondents’ feedback and will not make any changes to therecommendations, with the exception of noting that recommendation 9 should be met “to theextent feasible”.
Proposed Recommendation on how covered entities could consider interacting with ESG
ratings and data products providers (Recommendation 10) as set out in the Consultation
Report.

Recommendation 10: Entities subject to assessment by ESG ratings and data products
providers could consider streamlining their disclosure processes for sustainability related
information to the extent possible, bearing in mind regulatory and other legal requirements intheir jurisdictions.
Most of the respondents were of the view that the standardisation of minimum disclosure atcompany-level would be beneficial and allow for greater comparability. They suggested entities
could be asked to fill in one master questionnaire for all ESG ratings and data products providers
on a periodic basis. Several respondents noted the overlap with WS1 and IFRS and TCFD workon ESG disclosures.
IOSCO’s response: We will keep the recommendation as it is based on feedback by
respondents, and have added a more explicit reference to the work and report of WS1 withrespect to this recommendation.

53