IOSCO issues final report on ESG indices as benchmarks

The International Organisation of Securities Commission (IOSCO) has published its final report on ESG indices as benchmarks. 

Similar to traditional financial benchmarks, ESG indices used as a benchmark, or “ESG benchmarks”, are used to anchor financial instruments, guide capital allocation and enable performance comparison, but their distinct feature is that the selection, weighting or exclusion of constituents is based on ESG data and methodologies in addition to financial metrics.

The report compares ESG indices used in benchmarks with IOSCO’s Principles for Financial Benchmarks (PFBs) and takes into account its Recommendations for ESG Ratings and Data Products Providers. It highlights vulnerabilities in ESG indices relative to traditional benchmarks and outlines regulatory and market initiatives to address them. 

Conclusion

The report concludes that while the IOSCO Principles are broadly applicable and serve as a foundation for ESG benchmarks, their effective implementation for ESG benchmarks requires proportional application and supplemental considerations to reflect the often bespoke, qualitative, and evolving characteristics of ESG data and methodologies. 

In terms of governance: 

1. ESG benchmark administrators’ responsibilities should be expanded to include oversight of how qualitative and forward-looking ESG data, and evolving standards, are managed, at the same time ensuring that oversight committees have the necessary ESG expertise.

2. ESG benchmark administrators could also consider oversight mechanisms to ensure that third-party inputs are aligned with the sustainability characteristics promoted by the benchmark. 

3. ESG benchmark administrators might require explicit disclosure and higher institutional independence to avoid conflicts of interest. 

In terms of quality of the benchmark: 

1. ESG benchmark administrators could consider greater transparency on design procedures and data limitations to compensate for potential data gaps and subjectivity. 

2. ESG benchmark administrators could consider disclosing data limitations, estimation methods, and reliability concerns. 

3. ESG benchmark administrators could consider providing greater clarity on when and how expert judgment is applied, particularly during the use of forward-looking information. 

4. ESG benchmark administrators could consider clear disclosures of how they reflect ESG factors in their methodologies.

5. ESG benchmark administrators could consider more frequent reviews due to changing definitions, regulatory developments, or new and evolving sustainability risks.

In terms of quality of the methodology: 

1. ESG benchmark administrators could consider more detailed disclosure around data definitions and how the robustness of the methodology is maintained. 

2. ESG benchmark administrators could consider providing greater advance notice and detailed rationales for methodology changes, as well as the potential effects of such changes. 

3. ESG benchmark administrators could consider plans and conditions for transition or cessation that address the broader implications of ESG benchmark discontinuation, including the impact on sustainability linked financial products. 

4. ESG benchmark administrators could consider requiring, within the submitters' code of conduct, that submitters adhere either to the IOSCO Recommendations for ESG Ratings and Data Providers or to any relevant jurisdictional code of conduct. 

5. ESG benchmark administrators could consider specific controls to cover the additional risk of error in non-financial and self-reported ESG data. In terms of accountability, ESG benchmark administrators could consider reflecting the specificities of ESG benchmarks in their complaint procedures. 

6. ESG benchmark administrators could consider implementing internal controls and audit protocols that explicitly take into account the complexity and subjectivity of ESG data, with an emphasis on methodological consistency.

7. ESG benchmark administrators could consider adjusting control frameworks to address the additional risks in processing and validating subjective ESG data, and potentially greater use of estimation or judgment. 

8. ESG benchmark administrators could consider addressing traceability of ESG-specific practices, such as alignment with external taxonomies and sustainability standards. 

9. Regulators could consider adjusting their frameworks to ensure that supervisory cooperation is proportionate to the specific risks posed by ESG methodologies and data frameworks.

The report published on 3 November 2025 is available here.