CSA expands ESG guidance for investment funds

As regulators around the world sharpen their focus on greenwashing risks, the Canadian Securities Administrators (CSA) are bolstering their guidance to investment funds and fund managers around ESG-related disclosure.

The CSA issued updated regulatory guidance Thursday that expands on and replaces guidance that was first issued back in January 2022.

The regulators said the revised guidance “aims to bring greater clarity and consistency to ESG-related fund disclosure and sales communications to enable investors to make more informed investment decisions.”

The new guidance covers issues that weren’t addressed in the CSA’s previous publication, and provides insights on the regulators’ expectations for the level of disclosure from funds driven by the extent to which ESG factors into the investment process.

It also responds to issues that were revealed in the regulators’ reviews of ESG-related fund disclosure and sales communications in 2022 and 2023.

Those reviews found relatively few issues with the naming of funds, the regulators said, but did raise concerns about the clarity and accuracy of funds’ investment objectives when it comes to ESG, the lack of clarity about the extent to which ESG factors are considered by fund managers, and the lack of insight into funds use of proxy voting and shareholder engagement as ESG strategies.

Regulators also flagged concerns about misleading or inaccurate ESG-related statements in funds’ sales communications, and statements in marketing documents that conflicted with the information in funds’ prospectus disclosure, and they raised issues with the use of ESG ratings, scores and rankings.

The regulators’ reviews uncovered a need for guidance to specific types of ESG-related funds “to reduce the potential for greenwashing,” the CSA said in its notice.

For instance, the notice adds specific guidance for:

• funds that track an ESG-related index;
• funds with carbon offset series;
• funds that address ESG issues in proxy voting or engagement with companies;
• funds run by managers that use ESG strategies in multiple funds; and
• certain funds of funds.

It also aims to clarify when ESG-related communications to investors represent sales communications; adds guidance on the use of disclaimers and explanatory language in sales communications; and explains how regulators scale their disclosure expectations for funds that don’t reference ESG factors in their investment objectives but do use ESG strategies.

“It is important that investment funds be marketed to investors using sales communications that are not untrue or misleading, and that are consistent with a fund’s regulatory offering documents,” the CSA said in its notice, adding that the regulators will continue to monitor these kinds of disclosures.

In the meantime, the reviews highlighted the need for updated guidance in this area, “given the evolving nature of ESG investing” over the past couple of years.

The CSA stressed that the revised guidance doesn’t create any new legal requirements; it seeks to help the industry comply with existing requirements, and it also provides some guidance on best practices for ESG-related regulatory disclosures and sales communications.

“Amid sustained public interest in ESG investing and the potential for greenwashing, the CSA’s updated guidance is aimed at bringing greater clarity and consistency to ESG-related fund disclosure and sales communications, which will ultimately help investors make more informed investment decisions,” said Stan Magidson, chair of the CSA, and chair and CEO of the Alberta Securities Commission, in a statement.

“We will continue to monitor developments involving ESG-related funds going forward,” he added.

The updated guidance for investment funds also comes in the wake of the U.S. Securities and Exchange Commission (SEC) adopting long-awaited new rules on corporate disclosure of climate-related risks.

The CSA’s own proposed rules in this area have been in limbo, partly in anticipation of confirmation of the SEC’s policy direction.

In a statement, the CSA said it “continues to monitor international developments in this area, including the SEC’s climate-related disclosures rule approved on March 6, 2024.”

The group added that it “will share more information in the coming days about its planned consultation on a revised climate-related disclosure rule.”