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As money pours into environmental, social and governance (ESG) funds, regulators and industry organizations are playing catch-up as they set disclosure rules and develop tools to inform investors about what they’re buying.

Global ESG assets hit US$1.06 trillion as of June 30. According to the CFA Institute’s most recent trust survey, almost seven in 10 retail investors are interested in ESG products.

However, investors don’t always know what’s in the funds they’re buying or what ESG criteria are being used. Some investors have been left wondering why their ESG funds contain oil companies or weapons manufacturers, and advocates have warned of “greenwashing,” or products marketed as sustainable but not meeting objective standards.

Since global Black Lives Matter protests gained momentum in June, some investors have also called for greater disclosure from companies about employee and board diversity.

One problem for investors — and for advisors recommending products — is the lack of a single standard to which funds should comply. A July report from Morningstar said issuers’ ESG disclosures “are all too often inconsistent and non-comparable, and material information is not always available.”

“Sustainable” and “ESG” can refer to various strategies, the report stated, and portfolio disclosure is inconsistent. Morningstar called for regulators to work with standard-setting organizations and craft legally required disclosures.

“As investors increasingly consider ESG factors, regulators must help the market coalesce around a standard set of ESG disclosures. Investors do not just need more ESG data — they need material, comparable, and timely ESG data that helps them make decisions about their investments,” the report said.

Funds that use “sustainability” or “ESG” in their names should be required to “evaluate all aspects of ESG, both qualitatively and quantitatively,” the report added.

Regulators are at various stages of developing ESG standards.

In June, European Union legislators adopted taxonomy regulations that will require investment firms to disclose an investment’s environmental sustainability and to back up ESG claims by the end of next year. European financial regulators are also consulting on the Sustainable Finance Disclosure Regulation that interacts with the taxonomy.

The regulations will affect how products are marketed. A report from FactSet said products sold in the EU that aren’t “sustainable investments” and that don’t promote ESG characteristics will have to include the following boilerplate disclosure: “The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities.”

The regulations will “replace the morass of voluntary schemes with a single classification system for the EU,” the FactSet report said. Establishing the first regional framework could give the EU a first-mover advantage and establish its regulations as the “de facto” global ESG standard.

“Moreover, its formal legitimacy, compared with the voluntary nature of other regimes, is likely to draw ‘appetite’ from investors outside of the EU who are seeking reassurance (including from their clients) that their investments are genuinely sustainable rather than greenwashed,” the report said.

In Canada, the task force reviewing Ontario’s securities laws recommended that enhanced disclosure of material ESG information, including forward-looking information, be required for Toronto Stock Exchange issuers.

“While many issuers include ESG disclosures, both issuers and investors have expressed concerns about the lack of a standardized framework for this disclosure,” the task force’s report said.

The task force proposed mandating disclosure of material ESG information in line with either the Sustainability Accounting Standards Board framework or the Taskforce on Climate-Related Financial Disclosures through the Ontario Securities Commission’s regulatory filings.

Canadian Securities Administrators issued guidance in August 2019 to help companies develop disclosure material for climate risk.

The U.S., meanwhile, has moved away from establishing any kind of ESG standard. Earlier this year, the U.S. Department of Labor proposed a rule that would require 401(k) retirement plan managers to prioritize returns over ESG considerations.

Other organizations are making their own attempts at establishing standards, however.

Last month, the CFA Institute released proposed standards for ESG disclosures to help investors examine products’ objectives. The consultation paper outlined six “ESG-related features”: ESG integration, ESG-related exclusions, best in class, ESG-related thematic focus, impact objectives, and engagement and proxy voting.

The idea is to create a matrix matching the features to five investor needs. The latter range from identifying ESG factors material to an investment’s risk and return, to investing in specific solutions for an environmental or social problem, need or goal.

The CFA Institute is seeking input on the consultation paper before it drafts standards to be released in May 2021.