Responsible investment: Developments in disclosure and standards

Industry action will help provide clarity to investors

Guest column for Investment Executive

By: Paul Bourque, President and CEO, The Investment Funds Institute of Canada

As interest and growth in responsible investment (RI) continues, the investment funds industry has made major strides in responding to the growing demand for agreement in terminology and definitions.

Two years ago, I wrote in this space about the significant interest and growth in RI. I also observed the potential for investor confusion and the need for clear and consistent definitions and effective disclosure.

Since then, two major developments have occurred and another is pending, each with the intent to help investors align their RI objectives with RI strategies and to avoid the risk of greenwashing.

In January the Canadian Securities Administrators (CSA) released detailed guidance for investment funds on their disclosure practices relating to ESG considerations. At the heart of the guidance is the expectation that funds clearly articulate ESG objectives and strategies and how these inform securities selection, changes in portfolio construction, proxy voting and engagement strategies. The disclosure guidance applies across all key elements of disclosure, from prospectuses to Fund Facts and ETF Facts, to Management Report of Fund Performance documents, proxy voting policies and records, and sales communication.

In November 2021 the CFA Institute released its final voluntary Global ESG Disclosure Standards for Investment Products. The standards set out detailed reporting requirements for investment managers that choose to apply them. In particular, the standards relate to an investment product’s consideration of ESG issues in its investment objectives, investment processes and stewardship activities. The standards also provide recommended terminology and definitions for investment managers to use in describing their ESG strategies.

While it will be up to fund managers to determine whether to use these standards, according to both the CFA and the CSA, the standards do not conflict with the CSA regulatory guidance and in fact complement it. Put simply, while the CSA guidance sets minimum expectations around ESG disclosure, the CFA standards provide a detailed guide for one way of meeting the disclosure.

The pending development is the work by the Canadian Investment Funds Standards Committee (CIFSC) to develop an RI identification framework. I’m pleased to report significant progress has been made since I first made note of this in my March 2020 article. CIFSC is an independent third party that has standardized the classification of Canadian mutual funds for more than 20 years. CIFSC has developed a draft framework for the identification of RI funds, and this framework is expected to align with the CSA guidance and the CFA disclosure standards. CIFSC, as an independent body, will use the detailed ESG disclosure by fund companies to identify RI funds and the key ESG strategies used by the funds. The intent is to provide advisors and investors a credible and simplified method of finding and understanding RI funds. The Investment Funds Institute of Canada (IFIC), as a non-voting member of CIFSC, expects the draft framework to be issued for public consultation in the coming weeks.

Our research has shown that interest in RI continues to grow. According to IFIC’s 2021 Investment Funds Report, there has been a dramatic increase in RI net sales in the last two years. In 2021, RI mutual fund net sales totalled $13.2 billion, which is 11.7% of total industry net sales, and RI ETF net sales totalled $4.2 billion, or 7.2% of total industry net sales.

IFIC’s 2021 Pollara investor survey also found that a third of mutual fund investors (35%) and two-fifths of ETF investors (41%) currently own responsible investments. What is especially telling is that these numbers are significantly higher than in 2020 — 11% higher for mutual fund investors and 16% higher for ETF investors. Furthermore, 60% of mutual fund investors and 63% of ETF investors who do not currently own responsible investments state they may include these investments in their portfolios in the next couple of years.

We have come a long way over the last two years, and there is no doubt that, with the CSA guidance, CFA disclosure standards and upcoming CIFSC RI identification framework, investors will be provided more information and clarity about the growing number of RI products.