2022 work plan for sustainable finance focuses on assurance, carbon markets and reporting standards.
The development of assurance standards for corporate disclosures will be a key focus of the 2022 Sustainable Finance work plan of the International Organisation of Securities Commissions (IOSCO), the global standard setter for securities regulation.
Released this week, IOSCO’s work plan is “very ambitious but it is of utmost importance that the regulatory community steps up its efforts in ensuring markets contribute positively to sustainability challenges”, said Ashley Alder, IOSCO Chair and CEO of Hong Kong’s Securities and Futures Commission.
IOSCO said independent assurance of the quality of corporate reporting was a key element of building trust in sustainability disclosures.
“To develop the level of trust required, we need two things: firstly, global standards such as the International Sustainability Standard Board (ISSB) is going to issue. Secondly, you need information every year about ESG topics that is both consistent with the issuers’ annual financial accounts and, also, subject to an independent checking or review process,” said Martin Moloney, IOSCO’s Secretary General.
Such a process is “even more important” for ESG-related information than it is for financial information, said Moloney, where accounts are already subject to an annual audit by external auditors.
“Getting the ISSB standards issued will be a great step forward, but the icing on the cake will be for the markets to be assured that every year the information issued by the security issuer has been subject to an independent review,” he added.
The 2022 work plan builds on IOSCO’s 2021 release of recommendations for the oversight of ESG ratings and data providers, and guidance on preventing greenwashing in fund products.
Carbon market review
IOSCO has also committed to an in-depth review of the nascent carbon markets in its 2022 sustainable finance work plan. The review will identify any vulnerabilities and will examine the transparency and integrity in the functioning of carbon markets from the perspective of financial regulation.
“COP26 made important progress in developing rules for issuance in carbon markets; it is clear to us that there is likely to be growth in these markets,” said Moloney. “It would make no sense for IOSCO to push to get issuer information into proper shape and to have carbon markets out there that are not trusted or don’t operate to standards equivalent to those in other markets.”
Independent research and data company Trove Research recently predicted that the voluntary carbon market would grow by 50-80% this year to total between US$1.5-US$1.7 billion.
IOSCO wants carbon markets that are “fully integrated into the global financial markets” infrastructure, said, asserting that the body is “well placed to make that happen when it comes to the secondary market structures within which carbon credits will be traded and the derivatives markets that accompany them”.
In parallel with the work on assurance standards, IOSCO will review the ISSB’s exposure drafts of proposed climate and general sustainability disclosure requirements, and the final standards when they are produced. If IOSCO determines that the IFRS Sustainability Standards are fit for purpose, all 140 IOSCO members will be able to decide how they might adopt, apply or be informed by the standards.
Erik Thedéen, Chair of IOSCO’s Sustainable Finance Task Force, said the work on endorsing the ISSB standards was part of a wider push by IOSCO to professionalise all aspects of sustainable finance. The task force will work across a range of key issues “which have to be worked out if markets are to gear up to supporting investors’ desire to invest in ESG”.
Avoiding greenwashing
The 2022 work plan will involve extensive engagement in keeping with IOSCO’s guiding practices, said Moloney. IOSCO will also step up its engagement with both national regulators and market participants to push for the implementation of its recommendations addressed to asset management and ESG ratings and data providers. Rodrigo Buenaventura, head of the Spanish regulator and one of the leaders of the assurance part of IOSCO’s workplan, said “IOSCO has explained very clearly to market participants how green-washing can be avoided. We need everyone in the securities sector to work with us now to promote good practices and call out greenwashing. Building trust through high standards of behaviour is critical so that investment products described as sustainable actually are.”
Additionally, the organisation will aim to issue recommendations that are compatible with different types of legal frameworks and different approaches to supervision of markets. Moloney said: “On that basis, anything we develop will be designed to be capable of global application and will help to reduce fragmentation between markets.”
Moloney said IOSCO would aim to be consistent in approach “as much as possible” in its recommendations. “You will see us calling out regulatory issues around principal-agent relationships which often involve the need to manage conflicts of interest; you will see us focusing a lot of attention on transparency, which is critical, so that different types of investors can use markets for differing purposes,” he said.
