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New voluntary disclosure standards for environmental, social and governance (ESG) investment products fall short of what some investors want. But the framework will provide a starting point for categorizing and comparing investment funds.

After two rounds of consultations, the CFA Institute released its final disclosure standards in November. While the voluntary standards don’t cover product naming or labelling, the CFA Institute hopes the new rules address investor confusion by streamlining the way fund companies communicate a product’s ESG approach.

Fund companies that adopt the standards must provide a three- to five-page “compliant presentation” outlining a fund’s ESG components. Standardizing the disclosure format will allow data providers to simplify the presentation further, said Marie-Justine Labelle, head of responsible investment with Desjardins Financial Security Investments Inc.

The result could be a table that compares ESG products “without going into the small print of the entire disclosure,” Labelle said, which would be more client-friendly. “I think, now that this standard is out, there will be other initiatives to fill those gaps.”

Data providers already are looking at ways of using the forthcoming disclosures to create a broader classification system for ESG products.

Reid Baker, chairman of the Canadian Investment Funds Standards Committee (CIFSC), said the disclosures will be used to group funds by strategy. The standards will be “crucial for transparency,” he said.

Baker, who also is vice-president, analytics and data, with Fundata Canada Inc., said the CIFSC is grouping ESG products into six buckets, including impact investing, engagement and stewardship, and best in class.

Fundata and the CIFSC’s other members (Morningstar Canada, CANNEX Financial Exchanges Ltd., Refinitiv and MSCI Inc.) will use the categories in their fund ratings and analyses.

“Once the data providers start sending out data using the categories and the classifications, that will find its way to the [financial] advisors,” Reid said. “The intent is that it’s easy for advisors to talk to their clients about why each fund is categorized in a certain manner, and what the responsible investing approach actually means.”

The final standards also help define ESG strategies. Labelle called that a “welcome evolution” from the previous draft. The definitions aren’t a requirement in the standards, but the CFA Institute is “still influencing the market” by including definitions and recommending that fund companies that use those terms in their disclosure follow the definitions provided, she said.

The CFA Institute’s initial consultation paper on ESG disclosure, released in August 2020, featured a matrix that matched common client needs with six “ESG-related features” of funds. Some industry participants were disappointed when the draft standards, released in May of this year, abandoned the matrix and declined to establish a minimum threshold for product labelling.

The Investment Funds Institute of Canada’s (IFIC) July submission on the draft standards urged the CFA Institute to establish naming and categorization standards for ESG products. Otherwise, investors could confuse a “compliant presentation” under the standards with a seal of approval.

The final disclosure standards released last month satisfy some of those concerns. In a statement to Investment Executive, Ian Bragg, IFIC’s vice-president for research and statistics, said IFIC is pleased to see the CFA Institute’s recommended terminology, as it was “something that was missing from the last draft iteration.”

The demand for labelling still exists, though.

“The disclosure will help make clear what the product does, but it won’t be by looking at the name of the product that you will know,” Labelle said.

Bragg said fund companies will decide how they communicate their products’ ESG features, but suggested the Canadian Securities Administrators may provide guidance next year on funds’ ESG disclosure.

Labelle said fund companies should be eager to adopt standards that have been vetted by a professional body such as the CFA Institute.

“There’s a lot of talk of ‘greenwashing’ in investment products,” Labelle said. “This is a way firms can say: ‘We are aiming to provide more disclosure to protect investors, to educate investors, and this is [how] we’re doing this.’”

Another remaining question: how will fund companies’ disclosures be vetted? The CFA Institute will release the final version of its verification procedure in May 2022, Labelle said, along with a handbook for implementing the disclosure and a standardized template.

Labelle also said fund companies probably will wait until then before preparing the wording of their disclosure, meaning that uptake will be clearer by the end of next year.