On 5 June 2019, the International Organization of Securities Commissions (IOSCO) published a final report on sustainable finance in emerging markets and the role of securities regulators.

IOSCO notes that during the past several years, market participants, regulators and policy makers have increasingly focused their attention on issues concerning sustainable finance in its many forms. In particular, the increasingly intense focus on global sustainability issues has been accompanied by growth in innovative sustainability-themed capital market products, such as green bonds and sustainable funds.  Also, the disclosure of environmental, social and governance (ESG) risks have grown in importance and these risks are being incorporated into investment analysis and decision making.

The final report puts forward ten recommendations that IOSCO member jurisdictions should consider when issuing regulations or guidance regarding sustainable instruments and additional disclosure requirements of ESG-specific risks.        When applying these recommendations, regulators and market participants are encouraged to maintain an open dialogue, taking into account local conditions, the level of market development in their jurisdiction and global/ regional efforts in the area of sustainable finance.

The recommendations are as follows:

  1. Integrating ESG-specific issues in overall risk assessment and governance. Issuers and other regulated entities should integrate material ESG-specific issues in their overall risk assessment and governance.
  2. Institutional investors. Consistent with their fiduciary duties, institutional investors, including asset managers and asset owners, are encouraged to incorporate ESG-specific issues into their investment analysis, strategies and overall governance, and take into account material ESG disclosures of the entities in which they invest.
  3. ESG-specific disclosures, reporting, and data quality. Regulators should require disclosure with regard to material ESG-specific risks (including transition risks) and opportunities in relation to governance, strategy and risk management of an issuer. Where regulators determine that ESG-specific reporting is needed, regulators and issuers should aim to ensure adequate data quality for ESG-specific reporting, including, among others, through updating listing rules, the use of external reviews and through the operation of other information service providers.
  4. Definition of sustainable instruments. Sustainable instruments should be clearly defined and should refer to the categories of eligible projects and activities that the funds raised through their issuance can be used for.
  5. Eligible projects and activities. Funds raised through sustainable instruments should be used for projects and activities falling under one or a combination of the broad ESG categories listed below:

(i) environmental (renewable resources; combatting/mitigating climate change; pollution and waste; and other environmental opportunities);

(ii) social (human capital; product liability; and other social opportunities); and

(iii) governance (corporate governance; corporate behavior).

  1. Offering document requirements. Regulators should establish requirements for the offerings of sustainable instruments including, amongst others, the use and management of the funds raised through the issuance of such instruments, and the processes used by issuers for project evaluation and selection.
  2. Ongoing disclosure requirements. Regulators should establish ongoing disclosure requirements regarding the use of the funds raised through the issuance of sustainable instruments including the extent of unutilised funds, if any.
  3. Proper use of funds. Regulation should provide for measures to prevent, detect and sanction the misuse of the funds raised through the issuance of sustainable instruments.
  4. External reviews. Issuers should consider the use of external reviews to ensure consistency with the definition of the sustainable instruments and eligible projects as provided in Recommendation 4 and 5.
  5. Building capacity and expertise for ESG issues. Regulators should analyse the gaps in capacity and expertise with regard to ESG-related issues mentioned in the above recommendations and consider targeted capacity building to address these gaps. Regulators should also have appropriate monitoring mechanisms in place to encourage application of these recommendations.

A detailed explanation of each recommendation can be found at Chapter 5 of the report.