IOSCO Highlights Need for Investor Education Regarding ESG Products
Commentary by Steven Lofchie
IOSCO reviewed "developments in investor education with regard to sustainable finance" and described challenges in regulating against risks associated with ESG products.
According to its August Report, IOSCO found that retail investors are increasingly interested in sustainable investments, and therefore securities regulators must focus on facilitating a safe and efficient market for sustainability products. IOSCO expressed concern, however, that "investors currently lack a consistent and comparable framework to enable their understanding of sustainable finance products."
IOSCO stated that "there is no common or generally accepted definition of sustainable finance or ESG, and not even a single definition or characterization of 'environmental', 'social', or 'governance' factors." Further, the regulators stated that there "is a lack of consistent corporate disclosures, metrics and methodologies that could provide the basis for comparability of different products or strategies," which "presents important challenges for regulators, market intermediaries, and retail investors."
IOSCO warned that the lack of consistency coupled with low levels of ESG-related financial literacy exposes retail investors to risks, including greenwashing, while simultaneously diminishing investor confidence in the market. IOSCO encouraged regulatory agencies to consider how to provide investors with the proper resources to better align their investments with their sustainability and investment goals.
In order to improve financial education in relation to sustainable finance, IOSCO urged regulators to (i) develop educational content about sustainable investment, (ii) use different channels to inform investors of the features of investments and (iii) improve the education of the regulators' own staffs and of financial advisors that serve investors.
Commentary
The IOSCO Report is an example of how completely amorphous the concept of ESG/sustainable investment is in practice.
The Report begins by saying that ESG investments may include factors having to do with issues such as "climate change or poor labor or governance practices." It continues to say that regulators are troubled by the "lack of a consistent and comparable framework to aid retail investor understanding of sustainable finance."
The absence of a framework is not surprising, as it is difficult to imagine one that encompasses all of climate change, labor and governance practices. Are the regulators supposed to develop a framework that includes offsets of, say, child labor vs. solar power, or of an independent board vs. use of fossil fuels? How would regulators weigh the sins of the issuer versus its qualities? Would they produce a virtue number (which could be a negative!) for every security?
Rather than confront the fact that the concept of ESG is wholly ambiguous, the Report redefines the challenge for regulators as one of investor education. But educate them about what? And to what end? Those are questions the Report does not address.