Classification of Canadian ESG funds moves one step closer

Investors are one step closer to having common categories for all Canadian responsible investing funds.

On Wednesday, the Canadian Investment Funds Standards Committee (CIFSC) released a second draft of its responsible investing identification framework for mutual funds, ETFs, segregated funds and pooled funds. The framework classifies the universe of Canadian-listed and domiciled responsible, sustainable and ESG funds into six categories:

• ESG integration and evaluation (e.g., ESG index investing; ESG rules-based funds)
• ESG thematic investing (e.g., cleantech and board diversity funds)
• ESG exclusions (e.g., funds that use negative screening)
• Impact investing (e.g., funds that intend to generate a measurable social impact)
• ESG engagement and stewardship activities (e.g., funds with managers that propose and/or vote in support of climate-related proposals)
• ESG best in class (e.g., ESG leaders funds)

Funds may fall into more than one category. Once funds are classified, the result will be a single, consolidated list of all responsible investing funds in Canada, usable by all industry stakeholders.

The six categories create a “consistent language” for analysts and investors when referring to ESG funds, said Ian Tam, chairman of CIFSC and director of investment research, Canada, with Morningstar Canada.

For investors who know what they want to achieve through ESG investing, “hopefully it’ll be a lot easier for you to find a fund that meets those objectives,” he said.

Tam stressed that the framework is not a labelling standard, rating or certification stating that a fund has met a minimum standard. Nor does inclusion in a category indicate whether a fund adequately achieves its stated mandate.

“It’s a disclosure-based framework, so we’re relying strictly on what is written in prospectus documents” and regulatory fund filings, Tam said. However, the framework will allow investors to compare a fund’s performance with others in the same category.

By way of analogy, a fund being classified as “Canadian equity balanced” indicates nothing about the fund manager’s skill, the fund’s performance or whether the fund is straying from its mandate, Tam said.

“Generally, we are in favour of the direction that CIFSC is taking,” said Pat Dunwoody, executive director of the Canadian ETF Association, in a statement. “We always want to try to be in alignment with standards [and] classifications from around the world wherever possible. This is a great step toward that goal but it also enables Canadian advisors and investors to compare ESG investment funds more easily.”

Ian Bragg, vice-president of research and statistics with the Investment Funds Institute of Canada, said in a statement that his organization supports CIFSC’s work “and believes that investors will be well served by a framework for identifying responsible investment funds and one that provides a common set of terminology.”

CETFA and IFIC are both non-voting members of CIFSC. Both organizations noted they will be submitting comments on the draft framework.

Tam said the RI identification framework complements the Canadian Securities Administrators’ guidance from January — in fact, the six CIFSC categories line up with the common ESG strategies the regulators included in staff notice 81-334 for illustrative purposes.

The six categories also align with the CFA Institute’s global ESG disclosure standards for investment products, though compliance with these standards is not a requirement to be identified under CIFSC’s framework.

Bragg said IFIC is pleased that the proposed framework is disclosure-based and that it aligns with the CSA’s guidance and CFA’s standards.

The first draft of the RI framework, released in 2020, attempted to incorporate ESG and sustainability ratings from CIFSC members. “We couldn’t quite come to consensus on that,” Tam said. “The scores and ratings were a little too varied on the same fund, in some cases, to be able to offer a very objective way to classify funds.” For example, not every score captures the intent of the fund.

For now, “the right thing to do to make [the framework] still useful for the retail investor is to have a set of language that everyone can rely on,” Tam said. “In the future we can iterate on having some kind of pass/fail gate, but I don’t think we’re quite there in Canada.”

CIFSC allows funds to request a classification review, and this process will apply to the RI framework as well. The committee meets monthly to consider such requests. Tam noted that funds can only be considered for the framework if they submit information to one of CIFSC’s members (Fundata, Morningstar, MSCI and Refinitiv).

Tam said the framework will be operational before the end of 2022. Comments on the proposed framework are due June 15.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.