ESG data the next frontier for market manipulation
23 June 2021
This morning we ran a very popular online training session on market manipulation. In it, we discussed the regulatory expectations in this area that have been set out under various speeches and publications.
This session follows closely on the heels of our online webinar on ESG regulation.
This juxtaposition of topics has provided us with interesting food for thought on what future issues may arise in the market once the ESG regime is up and running. It's worth sticking our necks out and forecasting that in a couple of years' time we expect that our seminars on market abuse will include a section on how your ESG data could constitute 'inside information' and what controls you will need in order to ensure that such ESG data is not 'manipulated'.
You can see already that this is a nascent area of focus in Europe, with the proposals around the Corporate Sustainability Reporting Directive (known as the "CSRD") requiring third party verification of ESG data. Whilst this appears to be extremely onerous for corporates, it is also an area which is ripe for manipulation. Hypothetically you can easily foresee a scenario where a company could expressly 'stymie' its ESG credentials or reporting, keeping its price low, with the intention of marking certain changes in the future in a timely manner that will 'improve' its ESG credentials and which could increase the price. This will be an important area to consider and how such artificial action compares to good faith actions taken as part of the path towards a net zero carbon economy.
So while financial services firms and corporates are currently grappling with the proposed ESG regulatory changes and what they mean in practice, it's worth keeping in mind that the focus on how this area could be used for individual gain won't be far from the regulators' minds in the future. With this on the horizon, we will keep doing what we do best and thinking outside the box. Our 'reverse holiday' suggestion (described here) is just one such example, so expect more of the same as we see this ESG data manipulation issue develop over the next couple of years.
