IOSCO chair urges global cooperation on ESG rules as EU unveils next steps

Governments and regulators across the world must step up collaboration to provide full clarity and inter-operability on ESG reporting, warned Ashley Alder, board chair of the International Organization of Securities Commissions (IOSCO).

The president of the global standard-setter accepted that separate jurisdictions are likely to begin the rule-making process on ESG alone, but said that, ultimately, a global approach is necessary for investors and providers of capital.

“We fully accept that jurisdictional approaches are bound to differ. But for corporate reporting, at the real-economy level, I think it’s essential that these domestic approaches will be fully interoperable with an emerging global baseline,” Alder said on Wednesday at the City Week 2021 conference.

“We can’t simply work in jurisdictional silos when the climate emergency does not respect national boundaries,” he added.

The IOSCO chair said investors “desperately need” this collaboration to help overcome the hurdles they are facing in their daily operations. For example, he said IOSCO was aware of the “confusing” state of affairs around ESG ratings that raised concerns around the relevance, reliability and potential for “greenwashing” within the sector. An IOSCO report on ESG data and ratings is expected in mid-July, he added.

EBA sets foundations for ESG guidance

Against the backdrop of IOSCO’s call for cooperation, the European Banking Authority (EBA) launched a report this morning laying the groundwork for the EU’s position on how ESG risks and factors should be included in the regulatory and supervisory framework for credit institutions and investment firms.

The banking authority had in fact previously been mandated by the European Commission to assess how to include ESG factors into the EU banking prudential framework and capital requirements legislation.

Within these mandates, the EBA is now also evaluating “whether a dedicated prudential treatment of exposures related to assets or activities that are substantially associated with environmental and/or social objectives would be justified,” the report said.

Meanwhile, the paper published today seeks to provide harmonised guidance on the indicators, metrics and evaluation methods needed for ESG risk management and supervision. It also identifies some key gaps and challenges that would require regulatory improvement, even though it acknowledges that these are partly due to the lack of comparable and reliable data available and to the uncertainty, poor predictability and non-linearity of certain ESG risks.

For example, the report warns that under existing supervisory rules, credit institutions might fail to sufficiently test the resilience of their business in respect of longer-term sustainability risks. To tackle that, the EBA is proposing to extend the time horizon of supervisory assessments so that firms’ business models and governance can be gauged against a 10-year timeframe.

This shift in supervisory requirements would be phased in over time, starting from the inclusion of climate-related and environmental factors and risks.

Overall, the supervisory review should also be widened to incorporate ESG risks as drivers of financial risks at the capital, liquidity and funding levels, the EBA said, and should include not only those banks and financial firms that already fall under the Capital Requirement Directive (CRD 4), but a wider set of players that are now covered by the Markets in Financial Instruments Directive (Mifid II), the agency said.

(Additional reporting by Anna Brunetti)

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