Kathryn M. Fuller Lynn M. McGrade July 12 2022 CFA Institute and CSA release ESG investment disclosure standards Borden Ladner Gervais LLP | Banking & Financial Services - Canada Kathryn M. Fuller, Lynn M. McGrade Banking & Financial Services IntroductionGuiding principlesFundamentals of complianceESG terminology recommendations and additional guidanceSubmissions from Canadian industry participantsCommentIntroductionA recent Canadian Securities Administrators (CSA) publication represents the latest foray by regulators and industry into best practices for disclosure about environmental, social and governance (ESG) issues.Issued on 19 January 2022, the CSA Staff Notice 81-334: ESG-Related Investment Fund Disclosure explains and clarifies how current Canadian securities requirements apply to ESG-related investment fund disclosure.The notice sets out the CSA's suggested best practices that would enhance ESG-related fund disclosure and sales communications. The best practices were informed by the CSA's recent continuous disclosure reviews of disclosure documents and sales communications of ESG-related investment funds. The CSA notice also covers ESG-related work and recommendations of the International Organization of Securities Commissions and other international regulators and organisations.The CSA notice refers to the Chartered Financial Analyst (CFA) Institute's November 2021 release of its Global ESG Disclosure Standards for Investment Products (the Standards).Given the significance to the Canadian and international asset management industry of principles developed by the CFA Institute, this article focuses on the Standards.The Standards are intended to help stakeholders better understand, compare and evaluate ESG investment products. They are the first voluntary global standards governing disclosure about how investment managers consider ESG issues in the objectives, investment process and stewardship activities of their products.The Standards are meant to address current issues with ESG investing, including "greenwashing" and inaccurate disclosure practices. They are designed to accommodate the full range of investment vehicles, asset classes and ESG approaches offered in markets globally.While the CFA Institute did not provide guidance on the naming, labelling or rating of investment products, it is expected that many stakeholders will adopt the CFA Institute's terminology and defined terms. This should assist the industry, regulators and investors in using a common vocabulary to describe ESG.Guiding principlesThe Standards are based on the principles of fair representation and full disclosure. They are focused on providing investors with information that is complete, reliable, consistent, clear and accessible.Under the Standards, ESG disclosure statements for investment products should provide all information that investors need in order to understand the product's ESG approach, and they should not include any false or misleading information. ESG disclosure statements should be consistent with regulatory disclosures and marketing materials for the product and made available to all investors.Fundamentals of complianceFor investment managers who choose to observe the Standards, the CFA Institute outlines the following fundamentals of compliance for ESG disclosure. Investment managers must:comply with any laws and regulations that apply to ESG disclosure statements;comply with all the requirements of the Standards if they state that their ESG disclosure statements are in compliance with the Standards;not make any statement of partial compliance with the Standards;not present false or misleading information, omit significant information about an investment product's ESG approach, or contradict disclosures made in regulatory documents;ensure that ESG disclosure statements cover a minimum one-year period (or the period since inception if an investment product is less than one year old);document policies and procedures for establishing and maintaining compliance with the Standards and for monitoring changes to the Standards and interpretive guidance;maintain documents and records necessary to support information included in ESG disclosure statements;notify the CFA Institute of the investment manager's use of the Standards by submitting the ESG Standards Compliance Notification Form;if investment managers apply the Standards to a specific investment product, make the ESG disclosures for that specific investment product available to investors; andupdate an investment product's ESG disclosure statement when changes are made to the Standards or its interpretive guidance, when the investment manager makes changes to information affecting the ESG disclosure statement, or when a significant error is found after the ESG disclosure statement is made available to investors.The CFA Institute recommends that investment managers obtain independent assurance on their ESG disclosure statements. The CFA Institute plans to publish more information on this in the coming months.ESG terminology recommendations and additional guidanceThe CFA Institute published recommendations for terms and definitions related to ESG approaches in investment products. Consistent with regulatory expectations, the CFA Institute recommends that investment managers use plain language whenever possible to describe an investment product's ESG approach and to define any specialised terms used in their ESG disclosure statements.In particular, the CFA Institute recommends defining terms such as "ESG integration", "screening", "thematic and sustainability themed investing" and "impact investing".The CFA Institute also published various appendices to the Standards, including one explaining the relationship of the Standards to other codes and standards, such as the EU's Sustainable Finance Disclosure Regulation, as well as an FAQ for the Standards.Submissions from Canadian industry participantsVarious stakeholders wrote to the CFA Institute during the public comment period for the Standards. Many welcomed the CFA Institute's initiative to develop voluntary ESG disclosure standards for investment products and provided additional commentary and recommendations.The Investment Funds Institute of Canada (IFIC) recommended the CFA Institute incorporate standards for naming and categorising ESG investment products into the Standards, so investors would not confuse a presentation compliant with the Standards with one that achieves a standard of ESG investment practice. The Portfolio Management Association of Canada (PMAC) noted there may be redundancy and potential confusion with other ESG disclosure regimes, as well as with firms' existing legal disclosure requirements.CommentKeeping the Standards at the product level (rather than firm level), along with the voluntary approach used by the CFA Institute, will alleviate some of these concerns.PMAC and IFIC supported the concept that managers should obtain an independent examination of the Standards as a recommendation rather than a requirement, leaving the ultimate decision to the professional judgement and capacity of the manager.The CFA Institute's decision to leave the choice to managers was prudent, given the concern that it would otherwise increase compliance costs and create a new audit industry, without having sufficient understanding of the metrics for assessing use of the Standards.Finally, in the latter part of 2022, the CFA Institute expects to publish procedures for independent assurance of ESG disclosure statements of investment products, as well as a handbook that explains the provisions of the Standards and provides further interpretative guidance. An optional template for ESG disclosure statements to facilitate easier comparison between products is also expected.For further information on this topic please contact Lynn McGrade or Kathryn M Fuller at Borden Ladner Gervais LLP by telephone (+1 416 367 6000) or email ([email protected] or [email protected]). The Borden Ladner Gervais LLP website can be accessed at www.blg.com.