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The CSA Provides Guidance to Investment Funds Regarding ESG Disclosure: Key Takeaways from CSA Staff Notice 81-334

All-time high levels of investor interest in environmental, social and governance (“ESG”) issues has contributed to significant growth in the market for ESG-labelled investment products, with a corresponding increase risk of “greenwashing.” On January 19, 2022, in response to this growing risk, the Canadian Securities Administrators (“CSA”) published CSA Staff Notice 81-334 – ESG-Related Investment Fund Disclosure (the “Notice”) to:

  • summarize the findings from CSA staff’s continuous disclosure reviews of selected investment funds whose investment objectives reference ESG factors or that use ESG investment strategies (collectively, “ESG-Related Funds”); and
  • provide guidance to investment funds concerning ESG disclosure practices.

The Notice provides guidance for all investment funds, investment fund managers (“IFM”) and portfolio managers but particularly ESG-Related Funds, and their managers to enhance ESG-related disclosures to comply with existing securities requirements. The Notice purports to describe best practices, without introducing new requirements or modifying existing ones.

The Notice provides that its references to ESG should be construed broadly, to include other related terms in common usage, including “sustainable investing,” “responsible investing (RI),” “socially responsible investing (SRI),” “ethical investing” or “green” investing.

What are ESG-Related Funds?

The Notice defines an “ESG-Related Fund” as an investment fund that:

  • incorporates ESG factors (regardless of their type or number) into its investment decision-making processes; and/or
  • employs one or more ESG strategies in its investment decision-making processes.

The Notice contains the following non-exhaustive list of “ESG factors” that are commonly taken into account by ESG-Related Funds in their investment decision-making, noting that an ESG-Related Fund could incorporate many ESG factors or focus on one:




Air and water pollution

Community relations

Audit committee structure


Data protection and privacy

Board diversity

Climate change and carbon emissions


Bribery and corruption


Employee engagement

Executive compensation

Energy efficiency

Human rights


Waste management

Indigenous inclusion and reconciliation

Political contributions

Water scarcity

Labour standards

Whistleblower schemes

In the Notice, the CSA Staff observed that a number of investment funds have filed prospectus amendments to add references to ESG factors to their names and/or investment strategies, without referencing ESG factors in their investment objectives.

In addition, the Notice provides the following brief description of some common “ESG strategies” that could be employed by an ESG-Related Fund:

Negative screening
(sometimes referred to as exclusionary screening or ESG exclusions)

The fund excludes certain types of securities or companies from its portfolio based on certain ESG-related activities, business practices, or business segments.

ESG integration

The fund explicitly considers ESG-related factors that are material to the risk and return of the investment, alongside traditional financial factors, when making investment decisions.

Best-in-class (sometimes referred to as positive screening or inclusionary screening)

The fund aims to invest in companies that perform better than their peers on one or more performance metrics related to ESG matters.

Thematic investing

The fund aims to invest in sectors, industries, or companies that are expected to benefit from long-term macro or structural ESG-related trends.

Impact investing

The fund seeks to generate a positive, measurable social or environmental impact alongside a financial return.

Stewardship (sometimes referred to as active ownership)

The fund uses rights and position of ownership to influence the activities or behaviours of underlying portfolio companies in relation to ESG matters. This may include the use of ESG strategies such as proxy voting and/or shareholder engagement, which are explained below.

Proxy voting

The fund votes on management and/or shareholder resolutions in accordance with certain ESG-related considerations or aims.

Shareholder engagement

The fund interacts with the management of the company through meetings and/or written dialogue in accordance with certain ESG-related considerations or aims.

The Notice also states the CSA’s expectation that ESG-Related Funds will describe their ESG strategies for investors using plain language.

Continuous Disclosure Review of ESG-Related Funds

In preparing the Notice, the CSA conducted a review of the disclosure documents and sales communications from 32 ESG-Related Funds managed by 23 different investment fund managers (the “CD Review”) and also considered certain domestic and international policy and regulatory developments regarding ESG matters that the CSA considered relevant. For example, the Notice refers to a November 2021 report of the International Organization of Securities Commissions, Recommendations on Sustainability-Related Practices, Policies Procedures and Disclosure in Asset Management: Final Report (the “IOSCO Report”) and the CFA Institute’s Global ESG Disclosure Standards for Investment Products as a significant development. Our review of the CFA Institute’s standards can be found here.

The CD Review was intended to offer an opportunity for CSA Staff to assess the quality of the ESG-related disclosures made by ESG-Related Funds and to evaluate the efficacy of current disclosure requirements. CSA Staff reviewed the prospectus and, if applicable, annual information form (“AIF”), fund facts document or ETF facts document, the annual and interim management reports of fund performance (“MRFPs”) and online sales communications of (including its website) each ESG-Related Fund that was selected for review.

CSA Staff found that a number of discrepancies in the way that investment strategies were described in an ESG-Related Fund’s prospectus and in sales communications relating to the fund. In addition, although CSA Staff concluded that current disclosure requirements are generally broad enough to address ESG-Related Funds and ESG-related communications, CSA Staff also concluded that regulatory guidance was necessary to clarify the application of existing disclosure requirements in the ESG context.

CSA Staff’s Guidance for ESG-related Disclosure by Investment Funds

Based on its CD Review and consideration of domestic and international ESG developments, including the IOSCO Report, the Notice offers the CSA Staff’s guidance to funds on how existing legislation applies to ESG-related disclosure in several areas. Highlights of the guidance in these areas are set out below:

  1. Guidance on fund names, investment objectives, mutual fund types and suitability

The fund’s name should not reference ESG if ESG aspects are not part of the fund’s fundamental investment objectives. Adding a reference to ESG in the Fund’s name must be followed by a change in fundamental investment objectives. Similarly, a removal of a reference to ESG from a fund’s investment objectives requires a removal of the reference in its name. However, a fund’s investment objectives may reference the relevant ESG aspect even if the fund’s name does not reference ESG.

As a general matter, prior security holder approval is required for changes to a fund’s investment objectives under National Instrument 81-102 – Investment Funds (“NI 81-102”). However, if an ESG strategy is not a material or essential aspect of a fund and is therefore not included in the fund’s fundamental investment objectives, a fund that adds or removes disclosure about the ESG strategy in its investment strategies disclosure is not subject to the security holder approval requirement in NI 81-102.

The Notice encourages funds to state the intended ESG outcome as part of the investment objectives, to allow investors to identify funds that match their ESG-related goals.

In regards to the identification of fund type for a mutual fund, a mutual fund that does not include ESG in its fundamental investment objectives should not characterize itself as a fund that is focused on ESG.

A statement regarding the suitability of the fund should accurately reflect the extent of the fund’s focus on ESG. A fund who does not have ESG-related investment objectives should not include a statement that the fund is particularly suitable for investors who have ESG-related investment objectives.

Funds that do not have ESG-related objectives may still use ESG strategies. However, if ESG strategies are a material or essential aspect of the marketing of the fund, it is required to disclose ESG strategies as an investment objective in its prospectus.

IFMs that are signatories to IFM-level commitments to ESG-related initiatives should clearly disclose that the commitment is at the entity-level rather than at the fund-level and, where applicable, that the funds managed by the IFM may not be focused on ESG.

  1. Guidance regarding investment strategies disclosure

The description of ESG strategies must be written using plain language and in accordance with the requirement that the prospectus provide full, true and plain disclosure of all material facts. The strategies disclosure should also identify any ESG factors used and explain the meaning of each ESG factor and how the ESG factors are evaluated and monitored.

CSA Staff note that funds that reference ESG in their names or investment objectives may invest in companies that appear to be inconsistent with ESG values, as long as the funds respect disclosed ESG-related investment objectives and strategies.

If a fund uses proxy voting as an ESG investment strategy, the prospectus and/or AIF is required to include a summary of the ESG aspects of the fund’s proxy voting policies and procedures. Publishing the most recent proxy voting policies and procedures on their websites is also encouraged to provide investors with greater transparency. Disclosure should include the criteria used by the proxy voting or shareholder engagement strategy, the goal of the proxy voting or shareholder engagement strategy, and the extent of the monitoring process used to assess the success of the proxy voting. (A portfolio adviser may choose to invest in a company that has poor environmental practices in order to improve those practices by way of shareholder engagement.)

If a fund uses ESG ratings, scores, indices or benchmarks as part of its principal investment strategies or investment selection process, the fund should explain how those ratings are used. The description of the methodology used to create the ESG ratings or scores, and the level of subjectivity involved in the methodology should also be disclosed.

  1. Risk disclosure

An investment fund is required to describe in its prospectus any material risks associated with an investment in the fund. All investment funds, regardless of whether they are ESG-Related Funds, should consider whether there are any material ESG-related risk factors that are applicable to the fund and disclose such risk factors (e.g. climate change risk and bribery and corruption risks).

  1. Continuous disclosure

Funds are required to disclose, on a continuous basis, information that is material to the operations of the fund. For funds that have ESG-related objectives (as opposed or in addition to financial performance objectives), material information about fund performance will also encompass disclosure of ESG-related outcomes and changes. Continuous disclosure, including in MRFP, allows investors to monitor a fund’s ESG performance and progress meeting ESG-related investment objectives, thus reducing the risk of greenwashing.

Continuous ESG-related disclosure may include:

  • The composition and changes to the composition of the investment portfolio that relate to the fund’s ESG-related objectives and/or strategies. For example, if a fund that excludes companies with adverse reputations or records in ESG-related matters divests of its holdings in a company because of a recent harassment scandal, the divestment and the reason for the divestment should be disclosed in the MRFP;
  • The fund’s progress in regards to its ESG-related investment objectives should be disclosed. For funds that intend to generate a measurable ESG outcome, the CSA encourages to report in MRFPs on whether the fund is achieving that outcome (e.g. quantitative key performance indicators for carbon emissions);
  • CSA Staff encourage funds to use channels such as websites and non-regulatory documents to provide continuous disclosure around ESG performance in addition to the MRFP;
  • CSA Staff encourage all ESG-related Funds, particularly those that use proxy voting as an ESG strategy, to make all of their annual proxy voting records available on their websites to provide greater transparency (even though funds are only required to make the most recent annual proxy voting record available on their websites under National Instrument 81-106 – Investment Fund Continuous Disclosure). Funds are encouraged to include how proxy voting records align with the ESG-related investment objectives and strategies of the fund in the summary of the results in MRFP; and
  • For funds that use shareholder engagement as an ESG strategy, there is no continuous disclosure requirements relating to a fund’s past shareholder engagement activities. However, funds are encouraged to disclose past shareholder engagement on their websites and to include how past shareholder engagements align with the ESG-related investment objectives and strategies of the fund in the summary of the results.
  1. Sales communications

(a) Sales communications that indicate that the fund is focused on ESG

Sales communications should accurately reflect the aspects of ESG that the fund is focused on. The making of ESG-related claims about a fund’s objectives in sales communications without corresponding references to those objectives in the fund’s investment objectives may conflict with the fund’s regulatory offering documents, and by misleading.

Examples of such a sales communication would be any that do the following (i) suggest that a fund is focused on ESG when it is not (ii) suggest that a fund is focused on all three components of ESG when it is focused on only one such as governance (iii) misrepresent the extent and nature of the fund’s use of ESG strategies such as that the fund’s screening strategy is discretionary, failing to actually use the advertised ESG strategy or failing to prominently disclose material aspects of ESG strategies.

(b) Sales communications that reference a fund’s ESG performance

Sales communications must only make accurate claims about a fund’s ESG performance and results, and must not manipulate elements of disclosure to present results in a positive light (e.g. cherry-picking data).

(c) Sales communications that include fund-level ESG ratings, scores or rankings

Ratings and rankings should be representative of a fund’s ESG characteristics or performance.

Portfolio-Based ESG Ratings or Rankings are currently not considered as ‘performance data’ NI 81-102. While using these ratings or ranking, funds should prevent conflicts of interest by using ratings prepared by a provider using an objective methodology which is not a member of the organization of the fund. The Notice encourages the disclosure of fund-level ESG ratings from at least two different providers.

Funds should ensure that the selection of the fund-level ESG rating is not the result of cherry-picking. The Notice provides a non-exhaustive list of disclosure that should accompany fund-level ESG ratings, such as the name of the provider, the date or time period covered by the ESG rating, etc.

The Notice encourages funds to disclose separate fund level-ratings, scores or rankings, for each of the three components of ESG.

Further Monitoring by the CSA

The Notice states that the CSA will continue to monitor the regulatory disclosure and sales communications of ESG-Related Funds, and consider future policy initiatives as needed.

We’re Here to Help

McCarthy Tétrault has a leading securities regulatory and investment products practice and a multidisciplinary ESG and Sustainability team. We are especially well-equipped to provide investment fund 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 can deliver contextualized advice and guidance. Please contact the authors to learn more – we would be happy to assist you.

The Notice is the latest in a recent series of engagements by the CSA with the topic of ESG and related policy. In September 2021, the Ontario Securities Commission hosted a virtual roundtable entitled “ESG-Related Regulatory Issues in Asset Management”. Our summary of the roundtable and its key takeaways can be found here. The CSA are also currently accepting public comments on the proposed National Instrument 51-107 – Disclosure of Climate-Related Matters (“NI 51-107”). Our review of NI 51-107 can be found here.



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