Canada: decoding new guidance on ESG investing

Explosive growth in ESG-related invest­ments prompts new guidance from regula­tors

The CSA Notice1 establishes disclosure re­quirements for investment funds as they relate to ESG considerations, particularly funds that use ESG strategies or whose investment objectives reference ESG factors. The notice - which applies to regulatory documents and sales communications - provides guidance about complying with existing requirements and recommends best practices for ESG dis­closure.

The CSA released the notice in response to significant growth in the value and number of ESG funds in Canada, and investor desire for ‘clear, consistent and comparable’ fund disclosure.

The Investment Funds Institute of Canada has reported a dramatic increase in ESG investing over the last two years2. The CSA notice comments that by April 2021, the value of sustainable funds in Canada had grown by 160% since the start of 2020, and the number of sustainable funds increased to 156 com­pared to 105 at the same time the prior year.

Coincident with this significant growth in ESG funds, Canadian investors are increas­ingly looking for reporting on how funds have performed on their ESG objectives to comple­ment investment performance reporting.

“The goal of the notice is to prevent green­washing where there could be an inadvert­ent misconception or confusion for investors about what they are actually buying,” explains Lynn McGrade.

As a result, the notice requires funds to de­scribe their ESG strategies in plain language, using clear and comprehensive explanations of ESG terms.

Review required: are you impacted?

The notice is based on existing securities regulatory requirements and does not create any new legal requirements or modify exist­ing ones. It came into effect upon release and applies to all funds, including those that have ESG terminology in their name, objectives or strategy.

Managers should consider reviewing the notice “as it applies whether or not you have existing ESG funds, plan to launch new ESG funds or have funds without ESG compo­nents,” says David Petiteville.

The notice also introduces the following new terminology:

• ESG funds reference an ESG factor as part of the investment objectives

• ESG strategy funds use ESG strategies but may not have ESG-related terminology in their name or objectives

• ESG-related funds is a catch-all category that includes both ESG funds and ESG strategy funds

Practical steps to position your funds in the ESG context

The guidance covers multiple areas of ESG-related disclosure, including investment objec­tives and fund names, fund types, investment strategies disclosure, proxy voting and share­holder engagement policies and procedures, risk disclosure, suitability, continuous disclosure, and sales communications.

Due to the range of areas included in the no­tice, managers should ensure they review how the guidance may impact their funds.

McGrade says fund managers can follow a three step process for responding to the guid­ance contained in the notice:

1. The first practical step is for managers to ensure they are familiar with the guidance by reviewing the notice in detail

2. Next, fund managers should audit their ex­isting products to see where and how they fall into the new guidance - do they have ESG funds, ESG strategy funds or ESG-related funds

3. Finally, once managers have identified the categories their funds fall into, they should perform a gap analysis by reviewing their website and marketing materials to check whether updates are required to comply with the notice

“Once this process is complete, managers should step back and confirm where they have landed,” says McGrade. “Given the guidance, are your existing and new funds in the categories you would like them to be? If not, consider what changes are needed to position your funds to meet your goals.”

What to expect next as global ESG investing trends accelerate

As ESG investing becomes more mainstream, regulators are expected to increasingly align Canadian standards to global requirements ac­cording to Petiteville.

However, the lack of guidance from the CSA on standard terminology can present challeng­es for Canadian fund managers who are operat­ing in a global context. As a result, he notes that common definitions and taxonomy may be on the agenda for future development.

Petiteville adds that managers should expect to see increased harmonisation of the measure­ment of ESG-related performance, potentially including a regulation to establish rating, rank­ing and scoring measurement standards. He concludes that more enforcement - whether from the CSA or provincial securities regulators - may also be on the horizon.

Sources:

1. Canadian Securities Administrators, CSA Staff Notice 81-334 – ESG-Related Investment Fund Disclosure, January 19, 2022

2. Investment Funds Institute of Canada, 2021 Investment Funds Report, January 2022