The Canadian Securities Administrators (“CSA”) recently published guidance (the “Guidance”) for investment funds on their disclosure practices that relate to environmental, social and governance (“ESG”) considerations, particularly funds whose investment objectives reference ESG factors and other funds that use ESG strategies (“ESG-Related Funds”).[1] The Guidance is based on existing regulatory requirements and addresses areas of disclosure, including investment objectives, fund names, investment strategies, risk disclosure, continuous disclosure and sales communications. As the investment fund industry creates new funds and incorporates ESG considerations into existing funds to meet demand, there is an increased potential for “greenwashing” – where a fund’s disclosure or marketing intentionally or inadvertently misleads investors about the ESG-related aspects of the fund. The Guidance is intended to help investment funds and their fund managers enhance the ESG-related aspects of the funds’ regulatory disclosure documents and ensure that sales communications of ESG-Related Funds are not untrue or misleading and are consistent with the funds’ regulatory offering documents.
Background – According to a 2020 report from the Global Sustainable Investment Alliance, compared to other regions such as the United States, Japan and Australasia, Canada experienced the largest increase in “sustainable investment” assets over the preceding two years, with 48% growth, and at the time of the report, Canada was the market with the highest proportion of sustainable investment assets at 62%.[2] In 2021, the value of “sustainable funds” in Canada was $18 billion at the end of the first quarter, representing a 160% increase from 2020, and there were 156 sustainable funds at the end of March 2021 as compared to 105 at the same time the prior year.[3] The growth of interest in ESG investing and the increased potential for greenwashing have led securities regulators and international organizations to address issues related to ESG investing, including ESG-Related Funds. In particular, the International Organization of Securities Commissions (“IOSCO”) has recently published a final report setting out recommendations for securities regulators and policymakers to improve sustainability-related practices, policies, procedures and disclosure in the asset management industry (the “IOSCO Report”).[4]
International and domestic Developments related to ESG – A number of securities regulators around the world have developed and implemented regulatory requirements or published policy recommendations and guidance pertaining to ESG or sustainability-related disclosure for investment funds.[5] In addition, IOSCO has established the Sustainable Finance Task Force (the “STF”) with the aims of: (a) improving sustainability-related disclosures made by issuers and asset managers; (b) collaborating with other international organizations to avoid duplicative efforts and enhance coordination of relevant regulatory and supervisory approaches; and (c) conducting case studies and analyses of transparency, investor protection and other relevant issues within sustainable finance. The STF has three workstreams, with Workstream 2 being focused on sustainability- related practices, policies, procedures and disclosure in the asset management industry.[6]
ESG Related Funds Review – Staff have conducted continuous disclosure reviews of the regulatory disclosure documents and sales communications of ESG-Related Funds and other funds that marketed themselves as ESG Related Funds (the “ESG CD Reviews”). In addition, in October 2020, the Canadian Investment Funds Standards Committee (“CIFSC”) proposed a framework to identify Canadian investment funds that practice responsible investing (the “RI Fund Identification Framework”).[7] The goal of the RI Fund Identification Framework is to provide an objective, comprehensive list of Canadian responsible investing funds. In March 2021, following a comment period, the CIFSC published a response to the comments received and announced that it will be releasing a second version of the RI Fund Identification Framework for further comment.[8]
Guidance – Based on the findings of the ESG CD Reviews, staff’s observations of ESG-related changes to existing funds, and the IOSCO recommendations, staff provided guidance on how existing securities regulatory requirements apply to investment funds as they relate to ESG considerations, particularly ESG-Related Funds, in the following areas: (i) investment objectives and fund names; (ii) fund types; (iii) investment strategies disclosure; (iv) proxy voting and shareholder engagement policies and procedures; (v) risk disclosure; (vi) suitability; (vii) continuous disclosure; (viii) sales communications; (ix) ESG-related changes to existing funds; and (x) ESG-related terminology.
The CSA noted that full, true and plain disclosure is essential to maintaining and strengthening investor confidence and efficient capital markets. In addition, it is important that investment funds be marketed to investors using sales communications that are not untrue or misleading, and that are consistent with a fund’s regulatory offering documents. Staff will continue to monitor the regulatory disclosure documents and sales communications of ESG-Related Funds and any other funds that market themselves as being focused on ESG and consider future policy initiatives as needed.
References:
[1] CSA Staff Notice 81-334 “ESG Related Investment Fund Disclosure”, January 19, 2022.
[2] Global Sustainable Investment Alliance, “Global Sustainable Investment Review 2020”, accessible at: http://www.gsi-alliance.org/wp-content/uploads/2021/08/GSIR-20201.pdf.
[3] The Globe and Mail, “Investment firms are shifting their businesses as interest in ESG rises” (June 30, 2021), accessible at: https://www.theglobeandmail.com/investing/globe-advisor/advisor-news/article-investment-firms-are- shifting-their-businesses-as-interest-in-esg/.
[4] International Organization of Securities Commissions, “Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management: Final Report” (November 2021), accessible at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD688.pdf
[5] For example, see the European Union’s “Sustainable Finance Disclosure Regulation” (Regulation 2019/2088, accessible at: https://eur-lex.europa.eu/eli/reg/2019/2088/oj), France’s “Information to be Provided by Collective Investment Schemes Incorporating Non-Financial Approaches” (AMF Position DOC-2020-03, accessible at: https://www.amf-france.org/en/regulation/policy/doc-2020-03), Hong Kong’s “Circular to management companies of SFC-authorized unit trusts and mutual funds – ESG funds” (accessible at: https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/products/product-authorization/doc?refNo=21EC27) and Malaysia’s “Guidelines on Sustainable and Responsible Investment Funds” (SC-GL/4-2017, accessible at: https://www.sc.com.my/api/documentms/download.ashx?id=9a455914-71db-4982-a34b-9a8fc7df79b5). For an overview of regulatory requirements and guidance pertaining to sustainability-related product disclosure, see Chapter 3 of the IOSCO Report.
[6] The Ontario Securities Commission is the co-lead of Workstream 2, along with the Securities and Futures Commission of Hong Kong. Workstream 1 is focused on sustainability-related disclosures for corporate issuers while Workstream 3 is focused on ESG ratings and data providers. The Ontario Securities Commission is a member of Workstream 1 and the Autorité des marchés financiers is a member of Workstream 3.
[7] Canadian Investment Funds Standards Committee, “CIFSC Responsible Investment Identification” (October 2020), accessible at: https://www.cifsc.org/the-cifsc-proposes-to-adopt-an-ri-fund-identification-framework/
[8] Canadian Investment Funds Standards Committee, “RE: CIFSC response to public comments regarding the RI Fund Identification Proposal” (March 19, 2021), accessible at: https://www.cifsc.org/wp- content/uploads/2021/03/CIFSC-response-to-comments-regarding-RI-fund-identification-proposal-1.pdf.
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