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CFA Institute creates the first global voluntary ESG disclosure standards for investment products

On November 1, 2021, the CFA Institute issued its Global Environmental, Social, and Governance (“ESG”) Disclosure Standards for Investment Products (“Standards”). The Standards are the first voluntary global standards designed to report on how an investment product considers ESG issues in its objectives, investment process, and stewardship.

Although, it is not a capital markets regulator, the CFA Institute, as a professional accreditation body, represents the views of investment professionals before regulatory authorities and legislative bodies worldwide on issues that affect the practice of financial analysis and investment management, education and licensing requirements for investment professionals, and on issues that affect the integrity of global financial markets.

The Standards are designed to allow those engaged with ESG investment products to better understand, compare, and evaluate the products. In a press release, Margaret Franklin, the President and CEO of the CFA Institute, stated that the Standards were developed as a means to “preserve the integrity of the information being shared about ESG investment products to make them more understandable and comparable to the end investor.”

The Standards are designed to address issues currently plaguing ESG investing such as investor confusion and “greenwashing” that detract from capital markets integrity. Paul Andrews, the CFA Institute’s Managing Director for Research, Advocacy, and Standards stated “[t]he Standards fill these market needs on a global scale, facilitating important disclosures that will drive greater communication between the buyers of investment products and an industry marketing increasing numbers of funds and strategies that offer an ESG-centric approach.”

Guiding Principles

The Standards are rooted in providing investors with information that is complete, reliable, consistent, clear, and accessible. Completeness will be ensured through full disclosure by an investment manager, including the disclosure of all significant information. Reliability will be achieved through ensuring that all disclosures fairly represent the investment product’s ESG approaches and are not false or misleading. Current ESG disclosure practices have been accused of encouraging “greenwashing”, a practice whereby marketing materials discussing ESG approaches and characteristics are either intentionally or inadvertently misleading.

Consistency will ensure that ESG disclosure statements (“ESG Disclosures”) are aligned with regulatory disclosures and marketing materials. Clarity will result from ESG Disclosures that are sufficiently specific and precise to effectively communicate to investors. Finally, all investment product ESG Disclosures will be readily available to investors to guarantee accessibility.

Fundamentals of Compliance

The CFA Institute outlines ten required and one recommended fundamentals of compliance. The requirements are as follows:

  1. Investment managers must comply with any laws and regulations related to ESG Disclosures;
  2. Investment managers must comply with the Standards if they state that their ESG Disclosures are in compliance with the Standards;
  3. Investment managers must not make any statement of partial compliance with the Standards;
  4. Investment managers must not present false or misleading information, omit significant information about an investment product’s ESG approaches, nor contradict disclosures made in regulatory documents in their ESG Disclosures;
  5. ESG Disclosures must cover at least one year (or the period since inception if an investment product is less than one year old);
  6. Investment managers must document policies and procedures for establishing and maintaining compliance with the Standards and for monitoring changes and additions to the Standards and related documents;
  7. Investment managers must gather and maintain any records and documents required to support information included in ESG Disclosures;
  8. Investment managers must notify the CFA Institute of their use of the Standards by submitting the ESG Standards Compliance Notification Form;
  9. If investment managers apply the Standards to a specific investment product, the ESG Disclosures for that specific investment product must be made available to investors; and
  10. Investment managers must update ESG Disclosures when changes are made to the requirements or interpretive guidance of the Standards, when the investment manager makes changes to information affecting the ESG Disclosures, or when a significant error is found in ESG Disclosures after being made available to investors.

The only recommended fundamental of compliance is that investment managers should obtain independent assurance on their ESG Disclosures. The CFA Institute will issue assurance procedures on or before May 1, 2022 that will enable independent assurances of ESG Disclosure.

Guidance on the Use of ESG Terminology

Investment managers are encouraged to use plain language as much as possible and define any specialized terms that are used in their ESG Disclosures. The CFA Institute has outlined several terms and definitions related to ESG approaches that tend to cause confusion. Investment managers preparing ESG Disclosures should review and utilize definitions such as those provided by the CFA Institute. In particular, the CFA Institute suggests defining terms such as “ESG integration”, “screening”, “thematic”, and “impact investments”.

Additional Guidance

Although it is an investment manager’s responsibility to determine which provisions apply when preparing its ESG Disclosures, the CFA Institute has provided an appendix to assist in determining the applicability of provisions through examples. The CFA Institute also provided an appendix including four sample ESG Disclosures to demonstrate how the provisions of the Standards can be met by various investment products implementing different ESG approaches. Finally, the CFA Institute provided an appendix explaining the relationship of the Standards to other codes and standards such as the European Union’s Sustainable Finance Disclosure Regulation (“SFDR”). Our analysis of the SFDR can be found here. The CFA has also published a practical FAQ document that explores the ESG Standards and their implementation. The FAQ document can be found here.

Next Steps

The CFA Institute will issue a handbook on or before May 1, 2022 explaining the provisions of the Standards as well as an optional template that will create a standardized ESG Disclosures format for ease of comparison across investment products. Before the end of 2022, the CFA Institute will require investment managers preparing ESG Disclosures in accordance with the Standards to notify the CFA Institute of their use of the Standards.

We’re here to help

McCarthy Tétrault has a multidisciplinary ESG and Sustainability team that is equipped to provide clients with a full suite of advice and support to assist them in integrating ESG thinking into their organizational DNA. With a robust understanding of business, industry, and market drivers, we are well-suited to provide contextualized guidance. Please contact Robert Richardson, Sonia Struthers, Sean Sadler, Laure Fouin, Will Horne, or Gurvir Sangha to learn more – we would be happy to assist you.



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