IOSCO recommendations for asset managers to address greenwashing concerns

IOSCO has published its final report setting out recommendations for regulators and policymakers on improving sustainability-related practices, policies, procedures and disclosures in the asset management industry. The report, published on 2 November 2021, follows IOSCO’s consultation report from June 2021.

The recommendations are designed to provide a list of potential areas for regulatory consideration in line with domestic regulatory frameworks. They include:

Setting expectations for asset managers in developing sustainability-related practices, policies and procedures: This is to ensure that asset managers take material sustainability-related risks and opportunities into consideration and integrate them into their decision-making process. IOSCO suggests that asset managers should also consider referencing the TCFD Framework in their disclosures of climate-related risks and opportunities and adopt a phased-in approach to expanding such disclosures beyond climate-related risks and opportunities to other sustainability-related risks.

Clarifying and expanding on existing regulatory requirements or guidance to improve product-level disclosure: This is to help investors better understand sustainability-related products and risks and to promote consistency, comparability and reliability, all of which will help prevent greenwashing at the product level. Among other things, the requirements could cover: product authorisation; naming; labelling and classification; and marketing materials and website disclosure.

The provision of supervisory and enforcement tools: This is to allow regulators and policymakers to monitor and assess whether asset managers and products are in compliance and are able to enforce any breaches.

Developing common terms and definitions: This is to ensure consistency with terminology throughout the global asset management industry. IOSCO notes that there is currently a lack of consistency around terminology in the asset management industry, which is contributing to greenwashing.

Promoting financial and investor education initiatives: These may include promoting sustainability-related risk awareness and improving investor comprehension about, and enhancing transparency of sustainability-related products, which would improve comparability as well as prevent greenwashing. Such initiatives could include tools, methodologies, guidelines and orientations that focus on retail investors as well as the larger public.

In addition to the recommendations, the report also includes the findings from its fact-finding exercises. Among other things, these include that:

In jurisdictions with sustainability-related requirements relating to practices and disclosures by asset managers at the entity level, the requirements can be broadly categorised into the following areas: governance, investment strategy, risk management, and metrics and targets, with governance requirements being the most common among jurisdictions.

Where there are sustainability-related disclosure requirements at product level, despite commonalities in the areas of disclosure covered by the requirements, there are differences in implementation and scope across jurisdictions.

Nearly half of the jurisdictions that responded do not have sustainability-specific rules and instead currently use existing non-sustainability-specific rules to address sustainability-related risks and opportunities at asset manager level and sustainability-related products.

The majority of member jurisdictions currently rely on existing supervisory and enforcement tools to address sustainability-related misconduct.

A separate IOSCO report will be published later in November to cover recommendations for ESG data and ratings providers. It published a report on sustainability-related issuer disclosures in June 2021.