The Canadian Securities Administrators (CSA) have published guidance for investment fund issuers with respect to disclosure related to environmental, social and governance (ESG) considerations, particularly funds whose investment objectives reference ESG factors (ESG Funds) and other funds that use ESG strategies (ESG Strategy Funds, and together with ESG Funds, ESG-Related Funds). The CSA guidance was published in response to the growing interest in ESG investing and increased potential for “greenwashing”, whereby a fund's disclosure or marketing intentionally or inadvertently misleads investors about the ESG-related aspects of the fund.
The guidance provided by the CSA does not create new legal requirements, or modify existing ones, but seeks to clarify and explain how, in staff’s view, the current securities regulatory requirements should be applied to ESG-related investment fund disclosure. The guidance also includes best practices that staff believe would enhance ESG-related disclosure and sales communication, and that managers should consider enabling investors to make more informed investment decisions.
CSA Staff Notice 81-334 – ESG-Related Investment Fund Disclosure, published by the CSA on January 19, 2022 (Staff Notice) provides an overview of ESG-themes and strategies, and a brief summary of key international and domestic developments in the area including the recently published report of the International Organization of Securities Commissions (IOSCO) which sets out recommendations for securities regulators and policymakers to improve sustainability-related practices, policies, procedures and disclosure in the asset management industry. The Staff Notice also includes ESG-related guidance (summarized below) 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 Staff Notice is based on a recently completed continuous disclosure review of public disclosure documents and communications of ESG-Related Funds which was carried out to assess the quality of ESG-related aspects of disclosure. Based on its review, staff concluded that ESG-Related Funds in general would “benefit from greater detail about the ESG-related aspects of the fund, particularly regarding investment strategies disclosure, proxy voting disclosure and continuous disclosure.” Managers are encouraged to review their fund disclosure documents and sales communications in light of the Staff Notice as regulators will continue to monitor the regulatory disclosure of ESG-Related Funds to ensure that the disclosure satisfies the relevant requirements and provides investors with balanced and accurate information about the funds and their investment strategies. The Ontario Securities Commission noted that it will review fund documents in accordance with the guidance provided in the Staff Notice and may request copies of all sales communications relating to ESG-Related Funds as part of the reviews.
Investment Objective and Fund Names
A fund's name and investment objectives help investors identify the primary focus of the fund and should accurately reflect the extent to which the fund is focused on ESG. The Staff Notice outlines the link between a reference to ESG in the fund’s name and a reference to ESG in the fund’s investment objectives, as follows:
If the fund’s name references ESG, the fund’s investment objectives are required to reference the ESG aspect included in the fund name.
If the fund’s name does not reference ESG, the fund’s investment objectives may reference a relevant ESG aspect of the fund.
If the fund’s fundamental investment objectives reference ESG, the fund’s name may reference the ESG aspect included in its investment objectives.
If the fund’s fundamental investment objectives do not reference ESG, the fund’s name should not reference ESG.
A mutual fund that is not an exchange traded fund is required under Form 81-101F1 - Contents of a Simplified Prospectus to identify the type of mutual fund that the fund is best characterized as. A mutual fund that includes ESG in its fundamental investment objectives may include ESG as an element of its fund type, in addition to its primary fund type. The Staff Notice states that a fund that does not include ESG in its fundamental investment objectives should not characterize itself as a fund that is focused on ESG as it would not be an accurate identification of the fund type.
Investment Strategies Disclosure
The Staff Notice goes into detail regarding appropriate disclosure of a fund’s investment strategies. In particular, the Staff Notice highlights the importance of full, true and plain ESG-related investment strategies disclosure in order to enable investors to understand the ways in which the fund will meet its ESG-related investment objectives (if the fund is an ESG Fund) and the types of investments that the fund may make.
A fund that uses one or more ESG strategies, either as principal investment strategies or as part of its investment selection process, is required to provide disclosure about the ESG-related aspects of its investment selection process and strategies. For both funds that use one or more ESG strategies as part of their principal investment strategies and those that use one or more ESG strategies as part of their investment selection process, the description of these ESG strategies must be written using plain language in order to ensure that investors are able to understand the fund's investment strategies. In addition, the investment strategies disclosure should include descriptions of any ESG factors used, explain the meaning of each ESG factor and identify how the ESG factors are evaluated and monitored.
The Staff Notice also notes that if a fund's use of one or more ESG strategies includes the use of targets for specific ESG-related metrics, such as carbon emissions, such funds are encouraged to disclose those targets as part of their investment strategies and identify if those targets may evolve or change over time in response to changing circumstances.
The Staff Notice provides additional guidance specifically to funds that use: (a) proxy voting or shareholder engagement as an ESG strategy; (b) multiple ESG strategies; and (c) ESG ratings, scores, indices or benchmarks.
Proxy Voting and Shareholder Engagement Policies and Procedures
The Staff Notice outlines the requirement of funds to include disclosure of a fund's proxy voting policies and procedures. If a fund uses proxy voting as an ESG investment strategy, the prospectus and/or annual information form, as applicable, is required to include a summary of the ESG aspects of the fund's proxy voting policies and procedures. This summary would provide clarity about how the voting rights attached to the fund's portfolio securities will be used to further the fund's ESG-related investment objectives, or in the case of a fund that does not have ESG-related investment objectives but that uses proxy voting as an ESG strategy, how the ESG-related proxy voting strategy is implemented.
The Staff Notice notes that, while not required, funds that use shareholder engagement as an ESG strategy are encouraged to make their shareholder engagement policies and procedures publicly available in order to provide investors with greater transparency into the scope and nature of the fund's use of shareholder engagement as an ESG strategy.
The Staff Notice highlights the importance of risk disclosure by ESG-Related Funds in order to enable investors to better understand the potential challenges faced by the fund in meeting its ESG-related investment objectives and/or using its ESG strategies, as applicable.
The Staff Notice also notes more generally that all funds should consider whether there are any material ESG-related risk factors that are applicable to the fund and disclose such risk factors where applicable.
The Staff Notice clarifies situations when a fund should include ESG-related factors in describing the suitability of the fund for particular investors. The CSA states that if the fund is only focused on a particular aspect of ESG, such as gender diversity in leadership or the reduction of carbon emissions, any suitability statement that indicates that the fund is particularly suitable for investors who have ESG-related investment objectives should accurately reflect the particular aspect of ESG that the fund is focused on. Additionally, an ESG Strategy Fund should not state that the fund is particularly suitable for investors who have ESG-related investment objectives, as the fund does not have ESG-related investment objectives.
The Staff Notice highlights the importance of an ESG-Related Fund’s continuous disclosure in helping to prevent greenwashing by allowing investors to monitor the fund's ESG performance and evaluate the fund's progress in terms of meeting its ESG-related investment objectives.
Funds with ESG-related investment objectives, unlike other types of funds, typically aim to achieve ESG-related outcomes in addition to financial performance. In order to provide investors with meaningful disclosure about those ESG-related outcomes, funds that have ESG-related investment objectives are encouraged to disclose, as part of the summary of the results of the fund's operations, the ESG-related aspects of those operations, including the fund's progress or status with respect to meeting its ESG-related investment objectives. Funds that intend to generate a measurable ESG outcome are also encouraged to report on whether the fund is achieving that outcome.
The Staff Notice acknowledges that websites and non-regulatory documents are being increasingly used to provide ongoing information about the ESG performance and metrics of funds, as well as other ESG-related information, and encourages funds to provide investors with additional periodic information on how they are meeting their ESG-related investment objectives.
The Staff Notice notes that sales communication pertaining to an investment fund should accurately reflect the extent to which the fund is focused on ESG, as well as the particular aspect(s) of ESG that the fund is focused on. A fund should not include statements in its sales communications that indicate that it is focused on ESG unless the fund references ESG in its investment objectives.
A fund that does not reference ESG in its investment objectives but is otherwise an ESG Strategy Fund may include statements in its sales communications that accurately reflect the extent to which that strategy is used. However, such funds should not exaggerate the extent of the fund's focus on ESG in their sales communications.
In contrast, while a fund that does not reference ESG in either its investment objectives or investment strategies may provide factual information about the ESG characteristics of its portfolio (such as fund-level ESG ratings, scores or rankings), it should not include any ESG-related claims about what the fund is trying to achieve.
The Staff Notice provides additional guidance on how to avoid certain issues surrounding including fund-level ESG ratings, scores or rankings.
ESG-Related Changes to Existing Funds
The Staff Notice provides guidance to existing funds who wish to add or remove ESG references from its name, fundamental investment objectives or investment strategies, as follows:
If the fund is adding a reference to ESG to its name, the fund is required to change its investment objectives to reference the ESG aspect included in the fund name.
If the fund is removing a reference to ESG from its name, the fund may change its investment objectives to remove reference to the ESG aspect removed from the fund name.
If the fund is adding a reference to ESG to its investment objectives, the fund may change its name to reference the ESG aspect included in the investment objectives.
If the fund is removing a reference to ESG from its investment objectives, the fund is required to change its name to remove the reference to ESG.
A fund that wishes to change its fundamental investment objectives must obtain the prior approval of its securityholders, as per National Instrument 81-102 - Investment Funds. Where 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 securityholder approval requirement.
The Staff Notice highlights a lack of consistency in ESG-related terminology used throughout the investment fund industry and encourages industry participants to develop common ESG-related terms in order to help investors better understand ESG-Related Funds.
For further information, please contact:
Stacy McLean 416-863-4325
Norbert Knutel 416-863-4013
Jessie Dewdney 416-863-2299
or any other member of our Investment Products & Asset Management group.