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Nov 24, 2021

The week in GRC: IOSCO wants better oversight of ESG ratings and judge unlikely to block board diversity law

This week’s governance, compliance and risk-management stories from around the web

The Wall Street Journal reported that President Joe Biden was set to nominate Federal Reserve chair Jerome Powell to a second term leading the central bank, opting for continuity in US economic policy despite pressure from some Democrats who wanted someone tougher on bank regulations and climate change.

– The International Organization of Securities Commissions (IOSCO) said oversight of ESG ratings needs to improve, Reuters reported. IOSCO wants ESG ratings bestowed on companies to be more transparent in their data and the methodology used to create a grade. IOSCO cited research stating that annual spending on ESG data is growing at a 20 percent clip and could hit $1 bn this year, as asset managers try to ensure they are investing sustainably.

IOSCO’s calls for more transparency are part of a broader trend. The UK government said before COP26 that UK companies would in 2022 have to reveal climate data. The conference also saw the announcement of the new International Sustainability Standards Board, which will issue guidelines for carbon disclosures.

Reuters reported that a California judge said he is unlikely to block a law requiring public companies headquartered in the state to have a minimum number of women on their boards before a December deadline. US District Judge John Mendez said he is still considering OSI Systems shareholder Creighton Meland’s argument that the 2018 law is unconstitutional because it pressures shareholders to vote for women directors. But the judge said during a hearing that Meland has not shown the lawsuit is likely to succeed, meaning he will likely not block California’s secretary of state from enforcing the statute while the case is pending.

The lawsuit is one of several challenging the law, which required companies to have at least one woman on their board by the end of 2019. By the end of this year, boards with five members must include at least two women and larger boards must have three.

Anastasia Boden, who represents Meland, said that although the law may have increased representation, it has led to the patronization of female board candidates.

– According to Reuters, companies in the most polluting industries that have invested in climate action often find themselves valued below peers that have been slower to do so, highlighting the difficulty of getting shareholders to support sustainability. Investors have put more than $30 tn into ESG strategies, data from the Global Sustainable Investment Alliance showed. But the demand for sustainable investment has yet to remove the pressure to put profits first, and pro-climate analysts are concerned the outcome of UN climate talks earlier this month did too little to help.

Analyses of companies globally by management consultancy Kearney in November, as well as data by Credit Suisse Group published in April, finds companies that lowered their emissions in sectors where doing so was expensive and government regulation was limited were valued less, on average, than more emitting peers. Investors were only found to reward the most emitting companies for taking action on climate change when the cost of doing so was relatively small and government support and regulations were relatively strong.