IOSCO Reports on its role in Sustainable Finance and that of Securities Regulators

The Board of the International Organization Of Securities Commissions (IOSCO) published its final report on ‘Sustainable Finance and the Role of Securities Regulators and IOSCO’ in April 2020. In its report, IOSCO noted that sustainability and climate-related issues raise important challenges to securities regulators in meeting their core regulatory objectives of protecting investors, reducing systemic risk, and maintaining fair, efficient and transparent markets. However, IOSCO has served as a forum for regulators to discuss coordinated approaches, identify cross-border issues, avoid regulatory conflicts, and knowledge-sharing to address such challenges.

Regulators, like businesses, are continuing to recognise climate-related risks as a source of financial risk that can impact both specific firms or sectors as well as the stability of the financial system more broadly. Some jurisdictions, such as the UK and the EU, are taking policy or regulatory steps to enhance the role of the financial system in the transition towards sustainable development. Such steps include promoting transparency in the market through the forthcoming Disclosure Regulation and the Low Carbon Benchmark Regulation, allowing market participants to identify sustainability-related risks and opportunities. When increasing their mandate of ensuring the resilience of financial systems to material risks, prudential regulators have also increased their focus on the issues of the physical effects of rising temperatures and a transition towards a low-carbon economy triggering risks that have “distinct characteristics compare to other structural risks” and that may have “far-reaching impact in terms of breadth and magnitude”. In the EU, this has led to the European Commission engaging BlackRock’s Financial Markets Advisory in April 2020, to advise on how the EU could use ESG-related factors in the prudential supervision and regulatory risk analysis of banks in the EU, as well as how the EU could increase the growth of green finance and the market for sustainable financial products.

In May 2019, IOSCO’s Sustainable Finance Network (SFN) conducted a survey on the sustainable finance-related initiatives taken or planned by securities regulators, market participants and other international stakeholders. IOSCO then reported back on the 34 regulators’ responses it received to the SFN survey, which revealed the extent to which regulators in multiple jurisdictions are beginning to incorporate ESG factors into their regulatory frameworks. Although 62 percent of the regulators that responded stated that their regulatory mandates do not include any specific references to ESG matters, many of them stated that they consider ESG issues are relevant to their work, because of their relevance to both investor protection and financial stability. These were also the results of how their role in sustainable finance involved work in more than one of the following functions:

“- Facilitating sustainable investment by promoting transparency – 83 percent.
- Preventing greenwashing – 45 percent.
- Defining ESG-related risks as financial risks that need to be managed and disclosed – 41 percent.
- Promoting Corporate Social Responsibility (CSR) among financial companies – 28 percent.
- Promoting the re-orientation of capital towards sustainable investments – 14 percent.”¹

Many also have supplemented their regulatory frameworks in relation to sustainability with soft-law tools e.g. guidelines and codes of conduct that are not strictly enforceable. addressing themes such as disclosure of environmental matters; social, green and sustainable bonds; carbon offsetting by collective investment schemes; and marketing of complex financial instruments using ESG-themed filters. One such example is the EU non-binding guidelines on methodologies for reporting non-financial information, issued by the European Commission.

Others also indicated that they have a “comply or explain” policy applicable to corporate governance and investment issues, or to the disclosure of non-financial information when a business does not have a specific policy on environmental factors, social- and staff-related matters, human rights, anti-corruption, bribery, etc.

Nearly half of regulators that responded to the SFN survey stated that they carry out supervisory functions relating to risks associated with greenwashing of financial products. But many of these regulators do not have specific rules directed at ESG greenwashing and that these cases are covered under the already existing general miss-selling provisions or, more specifically, under rules of misrepresentation and wrongful disclosure on listed and unlisted capital market products.

However, almost half of the SFN survey regulatory respondents have developed training programmes for their staff to increase awareness of sustainable finance matters.

So with this in mind, financial services firms and issuers should be mindful of “soft law” soon becoming accompanied by regulatory “hard law” in terms of securities regulators across multiple jurisdictions enforcing measures to align their objectives to those of a sustainable economy going forwards.