The growth of environmental, social, and governance (ESG) funds and ETFs has skyrocketed as of late. Investors are flocking to investments that reflect their views on climate, social equality, renewable energy, corporate governance, and sustainable products.

But with this exponential growth, a term called greenwashing has also increased in use within financial circles. Greenwashing refers to asset managers misrepresenting the ESG features of their investment products. This may include inappropriate use of ESG terms in their documents, marketing materials, or their investments’ ESG commitments.

To address these issues, the International Organization of Securities Commissions (IOSCO), a leading global policy forum for securities regulators, has released a report outlining its recommendations on sustainability-related practices, procedures, and disclosures for the asset management industry.

“Improving underlying data is critical but not sufficient if asset managers do not properly integrate sustainability risks into their risk management procedures – or if they misrepresent the ESG features or performance of their funds to their investors,” said Erik Thedéen, head of the Swedish Financial Supervisory Authority and Chair of the Sustainable Finance Taskforce set up by the IOSCO Board, which issued this report.

IOSCO regulates more than 95% of the world’s securities markets in 130 jurisdictions. Its board comprises 34 securities regulators, including the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.

The organization’s goal is to develop and promote internationally recognized and consistent standards of regulation, oversight, and enforcement, as well as maintain fair, efficient, and transparent markets and address systemic risks. This would enhance investor protection and promote trust in the integrity of the markets.

IOSCO’s recommendations include for securities regulators to:

1. Set regulatory and supervisory expectations for asset managers for the development and implementation of practices, policies, and procedures regarding ESG risks and opportunities, and to provide related disclosure;
2. Expand on existing requirements or guidance, and if necessary, create new guidance for product-level disclosure so that investors can better understand sustainability-related products and their risks;
3. Have supervisory tools to monitor and assess whether asset managers and ESG products comply;
4. Encourage industry participants to develop common terms and definitions relating to ESG and ensure consistency across the global asset management industry;
5. Educate investors on sustainability and enhance existing initiatives.

The report found 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.”

So far, regulators have focused on increasing the awareness of financial risks due to non-financial, ESG-related issues of investment products. There is a heightened recognition that worsening climate factors are a source of financial risk and could result in the instability of the financial system, according to studies by FSB/NGFS. IOSCO’s report notes that combining these two factors may encourage financial regulators to tackle these issues.

“Asset managers, who are a critical part of the sustainable finance ecosystem, play a major role in helping investors achieve their investment objectives,” said Ashley Alder, Chairman of IOSCO and CEO of the Hong Kong SFC. “Regulatory guidance on how asset managers consider material sustainability-related risks and opportunities, integrate them into the decision-making process, and make disclosures, will allow investors to understand the impact of their investments.”