IOSCO publishes final report on use of ESG indices as benchmarks

The International Organization of Securities Commissions (IOSCO) has published a final report on environmental, social and governance (ESG) indices used as benchmarks (FR/15/25), referred to as "ESG benchmarks". ESG benchmarks are defined in the report as indices specifically constructed to reflect ESG factors according to its publicly disclosed methodology, and which are used as a reference for assessing ESG risk exposure or ESG impact. The report provides a comparative analysis of ESG benchmarks against IOSCO's Principles for Financial Benchmarks (PFBs). The report compares key characteristics and vulnerabilities of ESG benchmarks against traditional financial benchmarks. It also focuses on greenwashing vulnerabilities and existing market and regulatory initiatives aimed at addressing these vulnerabilities.

The report's assessment is structured around the four core pillars of benchmarks, examining how the relevant PFBs apply and whether ESG benchmark administrators should consider any additional factors when embedding these pillars into benchmark design and administration to maintain transparency, consistency, and reliability.

The four core pillars consist of:

• Governance and the role and responsibility of the administrators, including overall responsibilities, conflicts of interest and internal and third parties' oversight functions.
• Quality and integrity of ESG benchmarks.
• Methodology, including aspects around transparency, data inputs, verification of submissions, changes to methodology, and contingency provisions for episodes of market disruptions, illiquidity or other stresses.
• Accountability, including complaints mechanisms and escalation channels, audit practices and traceability of ESG decisions and methodology.

The report concludes that IOSCO PFBs are broadly applicable and provide a strong foundation for ESG benchmarks, but effective implementation requires proportional application and supplemental measures to address the qualitative and evolving nature of ESG data and methodologies.

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