FR08/2021 Recommendations on Sustainability-Related ...

1 Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset management Final Report The Board OF THE. INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS. FR08/21 NOVEMBER 2021. i Copies of publications are available from: The International Organization of Securities Commissions website International Organization of Securities Commissions 2021. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ii Contents Executive Summary .. 1. Chapter 1: Introduction .. 4. Chapter 2: Regulatory Approaches to Sustainability-Related Practices and Firm-Level Disclosures by Asset Managers.

2 12. Chapter 3: Regulatory Approaches to Disclosures for Investment Products .. 28. Chapter 4: Financial and Investor Education .. 53. Chapter 5: Challenges .. 59. Chapter 6: Recommendations .. 65. Annex 1: 71. Annex 2: WS2 Consultation Report Feedback .. 72. iii Executive Summary In recent years, there has been a growing recognition of the significant economic and financial impacts of climate change and environmental, social and governance (ESG) risks. There have been challenges associated with the growth of ESG investing and Sustainability-Related products, including the need for consistent, comparable, and decision-useful information and the risk of greenwashing.

3 In addition, stakeholders have called on financial market regulators to act decisively in global efforts to achieve the climate change commitments under the Paris Agreement. Regulators and policymakers worldwide have been examining issues relating to sustainable finance, including climate change risks, in their regulatory and supervisory roles in order to address these challenges, including how asset managers take Sustainability-Related risks and opportunities into consideration. Internationally, industry participants, investors, regulators, and policy makers have stepped up their efforts to address Sustainability-Related risks, opportunities, and impacts and to help improve Sustainability-Related disclosures.

4 This Final Report (the Report), drafted by the IOSCO Task Force on Sustainable Finance (STF), follows the Consultation Report titled Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset management that was published on 30. June 2021 (the Consultation Report).1 This Report aims to improve Sustainability-Related practices, policies, procedures and disclosures in the asset management industry through five Recommendations for securities regulators and policymakers. These Recommendations are designed to provide a list of potential areas for consideration as regulators and policymakers consider developing Sustainability-Related rules and regulations, consistent with their mandates and domestic regulatory frameworks.

5 We received a total of forty-five (45) responses to the Consultation Report. A summary of the responses is provided in Annex 2 of this Report. Overall, respondents were supportive of the IOSCO's work and were broadly in agreement with the proposed Recommendations set out in the Consultation Report. The IOSCO Board is grateful for the responses received and took them into consideration when preparing this Report. The final Recommendations , reflecting the comments received after the publication of the Consultation Report, are: Recommendation 1: Asset Manager Practices, Policies, Procedures and Disclosure. Securities regulators and/or policymakers, as applicable, should consider setting regulatory and supervisory expectations for asset managers in respect of the: (a) development and implementation of practices, policies and procedures relating to material Sustainability-Related risks and opportunities; and (b) related disclosure.

6 Recommendation 2: Product Disclosure. Securities regulators and/or policymakers, as applicable, should consider clarifying and/or expanding on existing regulatory requirements or guidance or, if necessary, creating new regulatory requirements or guidance, to improve 1. CR01/2021 Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset management Consultation Report, Report of the Board of IOSCO, 30 June 2021, available at 1. product-level disclosure in order to help investors better understand: (a) Sustainability-Related products; and (b) material Sustainability-Related risks for all products. Recommendation 3: Supervision and Enforcement.

7 Securities regulators and/or policymakers, as applicable, should have supervisory tools to monitor and assess whether asset managers and Sustainability-Related products are in compliance with regulatory requirements and enforcement tools to address any breaches of such requirements. Recommendation 4: Terminology. Securities regulators and/or policymakers, as applicable, should consider encouraging industry participants to develop common sustainable finance- related terms and definitions, including relating to ESG approaches, to ensure consistency throughout the global asset management industry. Recommendation 5: Financial and Investor Education. Securities regulators and/or policymakers, as applicable, should consider promoting financial and investor education initiatives relating to sustainability, or, where applicable, enhance existing sustainability- related initiatives.

8 In addition to setting out the final Recommendations , this Report also includes the findings from the STF's fact-finding exercises. The Report found 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. Furthermore, where there are Sustainability-Related disclosure requirements at the product level, there are some commonalities in the areas of disclosure covered by the requirements, but there are differences in implementation and scope across jurisdictions.

9 Approximately half of the responding jurisdictions to the fact-finding exercises do not have sustainability-specific rules and instead currently use existing non-sustainability-specific rules to address Sustainability-Related risks and opportunities at the asset manager level and Sustainability-Related products. The main reasons cited for this regulatory approach include that (i) Sustainability-Related products comprise only a small portion of the local market, and (ii) the existing rules adequately address Sustainability-Related risks and opportunities at the asset manager level and Sustainability-Related products. However, the findings also indicate that the majority of member jurisdictions currently rely on existing supervisory and enforcement tools to address Sustainability-Related misconduct, even in jurisdictions with sustainability-specific requirements.

10 The majority of member jurisdictions believe that financial and investor education can play a role in sustainable finance, including in building awareness among investors so that they can better identify greenwashing, misleading advertising and misinformation, and in supporting the mainstreaming of sustainable finance. The most common financial and investor education initiatives were those dedicated to addressing Sustainability-Related instruments and products, and the main platform for the dissemination of content for financial and investor education is the internet. The primary audience for financial and investor education initiatives is retail investors, but there is also 2.