Rating your fund’s greenness: easier said than done

Rating levels of sustainability is simple in theory but difficult in practice, says Chris Fidler, senior director of product management with the CFA Institute.

Fidler, who was speaking during a panel discussion held during the third Responsible Investment Association Virtual Conference on June 10, was responding to an audience comment suggesting that funds could be classified using different shades of green.

“You [would] need to do what Europe has done, which is to establish a taxonomy that says ‘These things are green. These things are not green.’ And then you need to establish a calculation methodology,” Fidler said during Demystifying Disclosure: New & Emerging Standards from CSA, CFA & CIFSC.

There would need be one calculation methodology at the issuer level and another at the fund level.

“You have to decide on threshold points – when it goes from light green to green to dark green,” Fidler said. “It sounds great, but there are a lot of challenges in getting agreement [on] what is green and what is not green. There are tons of factors that you can consider. It is just not cut and dry.”

When it comes to disclosure guidelines for responsible investing, Canada has not been “as prescriptive” as the European Union, suggested panelist Fate Saghir, senior vice-president and head of sustainability with Mackenzie Investments.

“It really does leave it up to advisors and investors to decide what is important to them. What is nice about best-in-class investing, from an advisor perspective, is if you are thinking about how you are going to allocate your portfolio, you likely do want broad exposures. You will want exposures to energy,” Saghir said.

During the online event, panelists discussed disclosure guidelines for responsible investing funds released both by CFA Institute and the Canadian Securities Administrators, as well as the Canadian Investment Funds Standards Committee’s (CIFSC) draft framework for identifying responsible investing funds, for which comments are due June 15.

The first draft of the CIFSC framework, released in 2020, attempted to incorporate ESG and sustainability ratings from CIFSC members. However, the organization found that to be too difficult, and decided against including ratings in the latest draft.

During the panel, an audience member asked whether a fund can be classed as “ESG” if it has no oil or gas holdings but does hold nuclear.

“[Approximately] every 25 years, there is a nuclear catastrophe, so [some investors] are just not comfortable taking that risk,” Saghir said. “For the most part we are very supportive of nuclear. We think it is essential, at this point, for the transition [from fossil fuels] so it is important to look at the nuances and ensure you are aligned with your client’s values.”

In February, the European Commission opted to include nuclear power as a “transitional” activity in its taxonomy for sustainable activities.

Ian Tam, director of investment research with Morningstar Canada, was also a panelist during this session, which was moderated by Melissa Shin, editorial director of Advisor’s Edge and Investment Executive.

Disclosure: Advisor’s Edge was a media partner for the RIA conference.