
Global ESG disclosure standards for investment products
This report presents the “Global ESG disclosure standards for investment products” developed by the CFA Institute to facilitate fair representation and full disclosure by investment managers in relation to how environmental, social and governance (“ESG”) issues are considered in an investment product’s objectives, investment process or stewardship activities.
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OVERVIEW
This report presents the “Global ESG disclosure standards for investment products” (“the Standards”) developed by the CFA Institute, a non-profit association of investment professionals that provides leadership on ethical standards for the investment profession. The CFA Institute began exploring the need for environmental, social and governance (“ESG”) standards in 2019, forming a working group to develop global standards on ESG disclosure. In doing so, the CFA Institute reviewed regulations, frameworks and guides that encompassed ESG approaches and disclosure, including its own codes and standards related to ethical and professional conduct.
The purpose of the Standards is to facilitate fair representation and full disclosure of an investment product’s consideration of ESG issues in its objectives, investment process or stewardship activities. From its research, the CFA Institute found that this was necessary because a significant number of investors have needs and preferences that relate to ESG issues.
Investors’ motivations for this vary greatly and, in response, a wide variety of investment products that consider ESG issues are available in the marketplace. Apart from being difficult to sort these products into well-defined categories, terminology associated with incorporating ESG issues into those products is not standardised.
The combination of all of these factors has resulted in an increase in “greenwashing” where disclosures about ESG facets of an investment product may be misleading, potentially causing a loss of trust in the investment management industry. Fair representation and full available disclosure as required by the Standards could diminish that problem by enabling investors to better understand, evaluate and compare investment products.
The Standards are solely focused on disclosure by investment managers of the approaches used in their ESG investment products. They do not address labelling of products or corporate ESG reporting. The Standards are global in that they can be used in all types of investment vehicles, asset classes and markets as well as active and passive strategies. They can be used for all ESG approaches including integration, exclusion, screening, best in class, thematic, sustainability themed or impact investing and stewardship. Compliance with the Standards is voluntary and investment managers must decide which of their investment products will be subjected to them. The Standards require that investment managers also comply with any laws and regulations that apply to ESG disclosure statements.
In essence, the Standards require disclosure of a summary description of the ESG approaches used in the investment product along with disclosure of the sources and types of ESG information on which the product relies. The Standards then make specific provision for disclosure related to certain ESG approaches including screening, stewardship activities and impact investing. The Standards advance definitions for investment managers to use for terminology that can cause confusion, terms such as “ESG integration” and “screening”. They provide examples of disclosure statements for investment products that cover different ESG approaches.
The Standards recommend that investment managers obtain independent assurance on the disclosure. For this the CFA Institute will produce separate guidance along with interpretive and explanatory guidance for the Standards as they continue to be developed.
KEY INSIGHTS
- All investors have needs and preferences related to risk tolerance, return objectives, time horizon and liquidity. A significant number of investors also have needs and preferences related to environmental, social and governance (“ESG”) issues.
- Investors’ motivations related to ESG issues are diverse. They include:
• incorporating ethical or religious values into investment decisions.
• avoiding ESG risks that may adversely impact investment value.
• mitigating the negative impacts of investments on the environment and people.
• contributing to the achievement of positive and measurable environmental or social outcomes. - In response to investors’ interest in ESG issues, a diverse range of investment products that consider ESG issues exist in the marketplace. To allocate these products into well-defined categories is very difficult.
- ESG terminology hinders investors’ understanding of the ESG approaches used in an investment product. Investment managers may use technical terms with which the average investor is unfamiliar. Investment managers may use words that have a commonly understood meaning but, in the context of ESG investing, carry a special meaning. Descriptions of investment products’ ESG approaches should be in plain language whenever possible.
- The terminology associated with ESG approaches in investment products is not standardised. The same term may be used to refer to different ESG approaches or types of investment products. Different terms may be used for the same ESG approach or type of investment products.
- The lack of standardised ESG terminology and proper categorisation of ESG investment products has resulted in “greenwashing” in which disclosures or advertising materials intentionally or inadvertently mislead investors about the ESG approaches used in an investment product.
- Multiple, mutually reinforcing solutions are required to address the problem of greenwashing and its causes, for all types of investment products in all markets around the world. Regulation will be a key tool but the "Global ESG disclosure standards for investment products" (“the Standards”) will also play an important role.
- When investment products’ ESG approaches are fairly represented and fully disclosed, investors can better evaluate and compare investment products, with the potential for greenwashing diminished.
- The use of internal controls by investment managers when producing disclosure on ESG investment products will instil confidence in the validity of the disclosure as well as the claim of compliance with the Standards.
- This report contains the following useful resources:
• Recommendations for definitions of ESG terminology to be used in disclosure on ESG investment products.
• Examples of the requirements in the Standards that would apply to different types of ESG approaches and investment products.
• Sample ESG disclosure statements that demonstrate how the provisions of the Standards can be met for a variety of investment products and ESG approaches.
• Reference to other codes and standards considered in developing the Standards, such as the European Union Sustainable Finance Disclosure Regulation.