Guidance on ESG Fund Disclosure
The Canadian Securities Administrators (CSA) updates the guidance on ESG fund disclosure, aiming to enhance the disclosure framework of ESG funds and help investors make decisions.
This updated ESG fund information disclosure guide covers various aspects such as investment objectives, fund names, investment strategies, risk disclosure, continuous disclosure, and sales communication, and is in line with the existing regulatory requirements of CSA.
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Definition of ESG Fund and Non-ESG Fund
The adjustments to the ESG fund information disclosure guidelines are based on CSA’s previous ESG fund reviews, the market development of existing ESG funds, and relevant guidance issued by the International Organization of Securities Commissions (IOSCO).
First, the CSA provides a new interpretation of the definitions of ESG funds and non-ESG funds. This interpretation depends on whether the fund considers ESG factors as part of investment decisions and the extent to which these ESG factors are applied in investment decisions. When the application of ESG factors in a fund becomes more important, the more ESG-related information disclosure the fund needs to provide, and the more ESG information is displayed to investors during the sales process. CSA divides ESG funds and non-ESG funds into four categories:
- ESG Objective Funds: incorporate ESG factors into investment objectives.
- ESG Strategy Funds: do not incorporate ESG factors in investment objectives, but ESG factors are taken into essential consideration during the investment process.
- ESG Limited Consideration Funds: do not incorporate ESG factors in investment objectives, but ESG factors are taken into limited consideration during the investment process.
- Non-ESG Funds: do not include ESG factors in investment objectives and investment process.
CSA refers to ESG Objective Funds, ESG Strategy Funds and ESG Limited Consideration Funds as ESG-Related Funds. These funds incorporate ESG factors into the investment process together with traditional financial factors. The distinction between ESG Strategy Funds and ESG Limited Consideration Funds depends on the importance of ESG factors in the investment process. This classification method can set different information disclosure requirements for different funds and reduce the risk of greenwashing.
Guidance on Fund Name and Investment Objectives
CSA believes that the fund name and investment objectives are important factors in determining the focus of the fund and distinguishing it from other funds. Therefore, whether it is an ESG fund or a non-ESG fund, it is necessary to accurately reflect the degree of application of ESG factors. When ESG is used in the fund name, ESG factors need to be included in the investment objectives. If the fund’s investment objective does not include ESG factors, it cannot include ESG in the fund name. This requirement maintains consistency between the fund’s name and its investment objectives.
In addition to the above general requirements, the CSA also has separate requirements for some specific types of ESG funds:
- Funds tracking the performance of ESG indexes: The ESG factors in the fund name should be consistent with the ESG factors of the corresponding index, and the fund’s investment objectives should disclose the composition of key ESG issuers.
- Funds that invest in other funds (like Fund of Fund): The investment objectives of the fund need to be consistent with the investment objectives of the invested funds.
- Funds that aim to produce measurable ESG outcomes: The fund’s investment objectives need to disclose expected results and how these results will be measured, and the fund also needs to meet continuous disclosure requirements.
- Funds that include carbon offset: The fund’s investment objectives should include carbon offset features.
Guidance on Investment Strategies Disclosure
The CSA requires ESG Objective Funds and ESG Strategy Funds to disclose the ESG factors used in their investment strategies and explain what these factors mean and how they are evaluated and monitored. ESG Limited Consideration Funds are not required to disclose ESG strategies unless their offering documents include a statement of ESG factors. In this case, the disclosure of ESG limited consideration funds needs to be sufficient, true, and simple to avoid misleading investors by excessive statements.
When ESG funds use internal or third-party ESG ratings, ESG benchmarks or ESG scores, they need to explain these ratings, benchmarks or scores in the investment strategies and provide a description of these methodologies.
Reference:
CSA Publish Updated Guidance on ESG-related Investment Fund Disclosure
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