The sheer volume of capital flows into sustainable, or ESG-focused, funds and products over recent months reflects the rapidly increasing number of investors with ESG-related preferences, or demands, when selecting those investments. Evaluating, and comparing, the ESG credentials of different investment products presents significant difficulties, however, in circumstances where information and disclosures about those products – and even the terminology used – are, at best, inconsistent, and often incomplete; and, at worst, may attract accusations of “greenwashing”, by using marketing materials to mislead investors about the ESG approaches used in their products.
In a welcome development in the move towards addressing these issues, on 1 November 2021, the CFA Institute, a global association of investment professionals, published its first voluntary Global ESG Disclosure Standards for Investment Products (the “Standards“).
The Standards aim to assist investors in better understanding, comparing and evaluating investment products, and to reduce the risks of “greenwashing” by facilitating fuller disclosure of ESG-related issues within the objectives, investment process, and stewardship activities of investment products. In furtherance of these aims, the Standards set out specific disclosure requirements for investment products which promote their ESG-related features, and which creators of investment products will be required to observe if they choose to adopt the Standards.
We consider below the disclosure requirements under the Standards, and the implications for creators of investment products as they prepare, and position themselves, to make compliant disclosures.
Disclosure requirements under the Standards
The Standard’s disclosure requirements focus narrowly on the disclosure of “ESG approaches” used in investment products (i.e. the methods for considering ESG issues in the context of an investment product’s “objectives, investment processes, or stewardship activities“) and, accordingly, do not address: corporate-level ESG reporting; naming, labelling, or rating investment products; or, the content of investment products’ periodic reports. The Standards are concerned with the sources and types of ESG information used to describe and define investment products’ ESG credentials (and credibility), as well as the social and environmental impact objectives of investment products and any portfolio-level targets.
The disclosure requirements include, amongst others, the following:
Preparing to make compliant disclosures
The Standards include “Guiding Principles for Investment Product ESG Disclosures“, designed to assist creators of investment products who adopt the Standards to comply with the requirements when making investment product ESG disclosures::
Ensuring that these “Guiding Principles” are observed will be key to ensuring that investment product ESG disclosures comply with the Standards.
Further materials supplementing the Guiding Principles are expected to be produced by the CFA Institute on or before 1 May 2022.
The release of the Standards is a welcome, and potentially significant, step towards effective – and perhaps, ultimately, standardised – ESG disclosure requirements in the context of sustainable investment products. Whilst adoption of the Standards is voluntary, compliance may come to be seen as essential, particularly for those creators aspiring to “best in class” performance.
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