CSA issues ESG disclosure guidance for investment funds

To combat the growing threat of “greenwashing” in the investment fund business, the Canadian Securities Administrators (CSA) are issuing new guidance for fund managers on environmental, social and governance (ESG) disclosure.

The growth of ESG investing has led to calls for funds to provide investors with proper disclosure about ESG factors in areas such as portfolio construction and proxy voting.

Greenwashing has become an issue for regulators who worry that investors could be intentionally or inadvertently misled about the green credentials of the funds they buy.

“In addition to leading investors to invest in funds that do not meet their objectives or needs, greenwashing may also have the effect of causing investor confusion and negatively impacting investor confidence in ESG investing,” the CSA warned in its notice setting out the new guidance.

The regulators reported that targeted reviews of investment funds’ continuous disclosure in this area revealed a number of shortcomings. Some funds had potentially misleading disclosure, the CSA found, while others featured inadequate reporting to investors on investment strategies, proxy voting practices and ESG performance.

Many funds “lacked detailed disclosure” about the specific ESG factors considered in their investment strategies and how those factors are evaluated.

Regulators also found that many funds provided more detailed ESG disclosure in their marketing materials than in their prospectuses; that most funds didn’t detail portfolio changes that were driven by ESG considerations; and that more than half of the funds that use proxy voting as part of their ESG strategies didn’t set out specific voting policies.

“In addition, the vast majority of the funds reviewed did not report on their progress or status with regard to meeting their ESG-related investment objectives,” it said.

In the wake of that review, the regulators indicated they don’t believe current disclosure requirements need to be revised to specifically address ESG factors. However, the CSA said “regulatory guidance is needed to clarify how the current disclosure requirements apply to ESG-related funds and other ESG-related disclosure in order to improve the quality of ESG-related disclosure and sales communications.”

The new guidance doesn’t add requirements for fund managers, but it does provide insight into areas where firms may be falling short of meeting existing disclosure expectations.

On the issuer side, the CSA is consulting on proposed new climate risk disclosure requirements for public companies.

For investment funds, the regulators are hoping that guidance will be enough by bringing “greater clarity to ESG-related fund disclosure and sales communications to enable investors to make more informed investment decisions.”

Among other things, the guidance recommends that funds that aim to generate a measurable ESG outcome report their results to investors.

“For example, where a fund’s investment objectives refer to the reduction of carbon emissions, investors would benefit from disclosure in the fund’s [performance report] that includes the quantitative key performance indicators for carbon emissions,” it said.

On marketing materials, the CSA said that “a sales communication that does not accurately reflect the extent to which a fund is focused on ESG, as well as the particular aspect(s) of ESG that the fund is focused on, would both be misleading and conflict with the information in the fund’s regulatory offering documents.”

It also said that the use of fund-level ESG ratings, scores or rankings may be misleading. Reasons include conflicts with the rating provider, cherry-picking positive scores, and failing to disclose qualifications or limitations to a rating or ranking that would supply added context.

“Interest in ESG investing is on the rise and this enhanced and practical guidance will play an important role in helping investors make informed decisions about ESG products, as well as preventing potential greenwashing,” said Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers (AMF), in a release.

The CSA indicated that it will continue to review ESG-related disclosures as part of its continuous disclosure reviews.