The sheer volume of capital flows into sustainable, or ESG-focused, funds and products over recent months reflects the rapidly increasing number of investors with ESG-related preferences, or demands, when selecting those investments.  Evaluating, and comparing, the ESG credentials of different investment products presents significant difficulties, however, in circumstances where information and disclosures about those products – and even the terminology used – are, at best, inconsistent, and often incomplete; and, at worst, may attract accusations of “greenwashing”, by using marketing materials to mislead investors about the ESG approaches used in their products.

In a welcome development in the move towards addressing these issues, on 1 November 2021, the CFA Institute, a global association of investment professionals, published its first voluntary Global ESG Disclosure Standards for Investment Products (the “Standards“).

The Standards aim to assist investors in better understanding, comparing and evaluating investment products, and to reduce the risks of “greenwashing” by facilitating fuller disclosure of ESG-related issues within the objectives, investment process, and stewardship activities of investment products.  In furtherance of these aims, the Standards set out specific disclosure requirements for investment products which promote their ESG-related features, and which creators of investment products will be required to observe if they choose to adopt the Standards.

We consider below the disclosure requirements under the Standards, and the implications for creators of investment products as they prepare, and position themselves, to make compliant disclosures.

Disclosure requirements under the Standards

The Standard’s disclosure requirements focus narrowly on the disclosure of “ESG approaches” used in investment products (i.e. the methods for considering ESG issues in the context of an investment product’s “objectives, investment processes, or stewardship activities“) and, accordingly, do not address: corporate-level ESG reporting; naming, labelling, or rating investment products; or, the content of investment products’ periodic reports.  The Standards are concerned with the sources and types of ESG information used to describe and define investment products’ ESG credentials (and credibility), as well as the social and environmental impact objectives of investment products and any portfolio-level targets.

The disclosure requirements include, amongst others, the following:

  1. If the investment manager chooses to apply the Standards to a specific investment product, the investment manager must prepare an ESG Disclosure Statement for that specific investment product which includes information such as the period covered by the ESG Disclosure Statement and a prescribed statement;
  2. If ESG information is used in an investment product’s investment process or “Stewardship Activities” (which are defined in the Standards as activities ‘undertaken by an investment manager on behalf of investors, to protect and enhance the value of an investment product’s holdings and to attain an investment product’s objectives’), then the investment manager must disclose information such as a description of the type of ESG information used, as well as how any risks and limitations associated with the use of the ESG information are managed;
  3. If the investment product has portfolio-level allocation targets for investments that have specific ESG characteristics, then the investment manager must disclose, for each allocation target, the specific ESG characteristics of the investments for which there is an allocation target and the allocation target value or range; and
  4. If investments are made with the intention to generate positive, measurable social and environmental impact alongside a financial return, then the investment manager must disclose information such as the impact objectives in measurable or observable terms, as well as how progress towards the attainment of the impact objectives is reported to investors.

Preparing to make compliant disclosures

The Standards include “Guiding Principles for Investment Product ESG Disclosures“, designed to assist creators of investment products who adopt the Standards to comply with the requirements when making investment product ESG disclosures::

  1. Complete: Investment product ESG disclosures should fully disclose information that investors need in order to understand the investment product’s ESG approaches.  Significant information should not be omitted;
  2. Reliable: Investment product ESG disclosures should fairly represent the investment product’s ESG approaches.  Investment product ESG disclosures should not be false or misleading;
  3. Consistent: Investment product ESG disclosures should agree with, and supplement, regulatory disclosures and marketing materials;
  4. Clear: Investment product ESG disclosures should be sufficiently specific and precise to effectively communicate to investors the investment product’s ESG approaches; and
  5. Accessible: Investment product ESG disclosures should be readily available to investors.

Ensuring that these “Guiding Principles” are observed will be key to ensuring that investment product ESG disclosures comply with the Standards.

Further materials supplementing the Guiding Principles are expected to be produced by the CFA Institute on or before 1 May 2022.

The release of the Standards is a welcome, and potentially significant, step towards effective – and perhaps, ultimately, standardised – ESG disclosure requirements in the context of sustainable investment products.  Whilst adoption of the Standards is voluntary, compliance may come to be seen as essential, particularly for those creators aspiring to “best in class” performance.