The CFA Institute publishes the world’s first ESG disclosure standards | Bennett Jones LLP

The CFA Institute published the first Global ESG Disclosure Standards for Investment Products (the Standards) with respect to environmental, social and governance (ESG) issues in investment products, to enable stakeholders to understand, compare and assess how objectives, strategies and stewardship are taken into account. The Standards aim to address current issues with ESG investing, such as improper disclosure practices, and aim to support investors with complete, reliable, consistent, clear and accessible information. The Standards have been designed to suit the full range of investment vehicles, asset classes and ESG approaches offered in markets around the world.

Guidelines for ESG Information on Investment Products

The new standards are ethical requirements based on the principles of fair representation and full disclosure, with an emphasis on disclosure of how an investment product takes ESG issues into account; however, compliance with standards is voluntary. Investor confidence in standards-compliant ESG disclosure statements and the validity of disclosure stems from adequate internal controls. In order to claim a compliant statement of compliance, an investment manager must ensure that it has satisfied all applicable requirements of the Standards, either independently or through third party assurance.

The Standards do not deal with ESG reports from companies; ESG information at company level (except for management activities); the denomination, labeling or rating of investment products; or the content of periodic investment product reports.

Fundamentals of Compliance

The CFA Institute outlines 10 core compliance principles required for ESG disclosure statements by investment managers. The requirements cover the following areas:

  • compliance with laws and regulations as well as interpretation advice;
  • the minimum period of one year that a declaration must cover, or the period since its creation if the product has not existed for one year;
  • documenting policies and procedures and maintaining documents and records
  • inform the CFA Institute of the use of its standards;
  • make the statements available to investors;
  • submit the ESG compliance notification form; and
  • update the ESG disclosure statements of an investment product.

The only principle of compliance recommended is that investment managers obtain independent assurance on their ESG disclosure statements.

ESG Disclosure Requirements

As mentioned in the Core Principles of Compliance, all standards requirements are mandatory for claiming compliance with the standards on an ESG disclosure statement. They are divided into the following nine categories:

  • General;
  • Sources and types of ESG information;
  • Systematic consideration of financially important ESG information in investment decisions;
  • ESG investment universe;
  • Screening;
  • ESG characteristics at portfolio level;
  • Allocation targets at the portfolio level;
  • Stewardship activities; and
  • Environmental and social impact objectives.

The full list of requirements is available on the CFA Institute website. There are currently no recommendations listed for ESG information on investment products.

ESG terminology recommendations and additional tips

The CFA Institute has published recommendations for terms and definitions related to ESG approaches in investment products. It is advantageous to use plain language whenever possible to describe the ESG approach of an investment product and to avoid using specialized terms without defining them. It is recommended that investment managers define the following terms when preparing ESG statements:

  • ESG integration;
  • Screening;
  • Thematic investment focused on sustainable development; and
  • Impact investing.

The Standards provide definitions and references for each term, as well as a separate glossary for other definitions specific to the Standards. Four examples of ESG statements are also provided in the appendix to show how requirements and recommendations can be met by various investment products. In addition, an annex is included to provide examples of the applicability of the provisions when specific ESG approaches are used in an investment product in a specific way. The examples should only be used as a guide, as many investment products use a combination of ESG approaches.

Next steps

The CFA Institute has announced that it will publish (i) a manual on explaining provisions and interpretation advice, (ii) assurance procedures that will allow independent assurance of ESG statements; and (iii) an optional ESG disclosure statement template that will standardize the format of ESG disclosure statements for easier comparison, all to be published no later than May 1, 2022.

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