Global regulators are cracking down on environmental, social, and governance ratings, providing oversight on a largely unregulated market segment that could help socially responsible investment funds attract trillions of dollars in new inflows.

The International Organization of Securities Commissions (IOSCO), which groups market regulators from the United States, Europe, and Asia, argued that ESG raters and data providers are unregulated, lack transparency in their methodology, offer uneven coverage, and harbor potential conflicts of interest, Reuters reports.

IOSCO warned that since asset managers running ESG focused funds rely on about 160 different raters globally to help categorize stocks and bonds, the disparate methodologies raise investor protection questions. Meanwhile, users don’t even conduct any formal verification of the ratings, with some observers calling the process a “black box.”

“Users have signaled that having multiple ESG ratings and data products can cause confusion, raising serious questions about relevance, reliability and greenwashing,” Ashley Alder, who chairs IOSCO and heads Hong Kong’s securities watchdog, told Reuters, referring to those passing off green credentials to attract investor interest.

IOSCO formally recommends regulators to monitor the ESG market sector, mirroring similar remarks from credit rating agencies in the wake of the global financial crisis when similar concerns were raised.

“ESG ratings and data products providers could consider making high levels of public disclosure and transparency an objective in their ESG ratings and data products, including their methodologies and processes,” IOSCO said.

IOSCO argued that ESG raters could keep internal records to back up their rating claims and show that the rankings are “free from political or economic pressures.” The organization stated that raters should maintain no conflict of interest between selling ratings on companies they are also in business with.

“Financial market participants could consider conducting due diligence on the ESG ratings and data products that they use in their internal processes,” IOSCO added.

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