On 19 August 2020, the CFA Institute, a global association of investment professionals, published a consultation paper on the proposed scope, structure, and design principles for its forthcoming "Environmental, Social and Governance (ESG) Disclosure Standards for Investment Products" (the "Standard"). The Standard is designed to reduce inconsistency and variation in ESG-related terms, investment approaches and disclosures among both investors and asset managers, while at the same time reducing ESG-related disclosure burdens for asset managers.
For investors, the Standard will provide greater product transparency and comparability by establishing a framework for asset managers to more clearly and consistently communicate the ESG-related features of their investment products. This framework will establish fundamental disclosure requirements for investment products with ESG-related features, procedures for independent examination of disclosures and a classification of ESG-related features of investment products. For asset managers, the Standard is a solution tailor-made for the industry that could reduce or eliminate the costs of developing proprietary product disclosure standards or adapting standards developed for other industries to fit their needs.
We expect the Standard to meaningfully contribute to the developing ESG disclosure landscape, and also to provide guidance for regulators and policymakers around the world as they develop their own disclosure regimes. This Legal Update highlights certain key aspects of the consultation paper relevant to asset managers, investors and other ESG-focused market participants.
Purpose and Scope
Consistent with other ESG disclosure standards, the Standard is structured to help investors better understand and compare the ESG-related features offered by an investment product. Importantly, however, the Standard does not seek to define or prescribe what constitutes an ESG or sustainable investment product like some other existing standards. Instead, the information disclosed pursuant to the Standard is intended to provide investors with the tools and data to make that decision for themselves.
To that end, the Standard will establish:
- Fundamental requirements, which will address the applicability of the Standard, recordkeeping, and distribution of ESG-related marketing materials;
- Disclosure requirements, which will provide investors a way to more clearly understand and compare investment products based on a consistent set of information;
- Independent examination procedures, which will provide a level of assurance that an investment product’s disclosures meet the Standard and fairly describe the investment product; and
- ESG-related features classification, which will provide investors with a way to more easily choose an investment product that aligns with their ESG-related needs.
In further distinguishing the Standard from other ESG-related disclosure standards and taxonomies, the CFA Institute notes that the Standard will not:
- Define best practice for any particular strategy or approach;
- Prescribe criteria for the design or implementation of investment products with ESG-related features (i.e., the Standard will not provide a label or rating for investment products); or
- Apply to the issuers of securities or the information they provide to investors (i.e., the Standard will not define requirements for corporate issuer ESG disclosures).
Focus on Investment Product Disclosures and ESG-Related Features
The Standard will not apply to an asset manager's entire organization, but rather take a disclosure-based approach to describing individual investment products "as they are". The CFA Institute contrasts this approach with a "prescriptive" standard, which would describe the features that a sustainable investment product must have to be properly labelled "sustainable". As noted above, the Standard's goal is to provide an investor with enough information about a specific product to determine whether or not it meets that investor's own, specific ESG-related needs.
In limiting the universe of its application, the Standard will only apply to investment products that have one or more of the following "ESG-related features":
- ESG Integration;
- ESG-Related Exclusions;
- ESG-Related Thematic Focus;
- Impact Objective; and
- Proxy Voting, Engagement and Stewardship.
Asset managers will be able to choose the investment products to which they apply the Standard, so long as the selected product has at least one of the above features. Once an asset manager has chosen to apply the Standard to a specific investment product, the asset manager must comply with all of the Standard’s requirements with respect to that product.
Proposed Disclosure Requirements
Many of the Standard’s requirements relate to disclosures. The Standard’s disclosure requirements are the means of ensuring transparency and comparability for investors. There are a number of design principles underpinning these disclosure requirements that seek to enhance the quality, simplicity and clarity of presentation, and the relevance of information available to investors.
In particular, the Standard will include both "general" and "feature-specific" disclosure requirements for eligible investment products:
- General disclosure requirements will apply to all investment products that use the Standard.
- Further, each of the six ESG-related features set out above will require an additional subset of disclosures specific to that feature.
- A product with multiple ESG-related features will require the feature-specific disclosures tied to each ESG-related feature applicable to that product, in addition to the Standard's general disclosure requirements.
General disclosure requirements include:
- A description of the investment product’s investment mandate, objective, or strategy;
- A time horizon of the ESG investment analysis;
- The investment universe (prior to any exclusions);
- The investment product’s benchmark(s);
- A description of any monitoring and review procedures to evaluate the investment product’s alignment with its stated investment objectives;
- The ESG-related or sustainable labels and standards with which the investment product claims compliance;
- Whether the investment product has been independently examined; and
- Material changes to the investment product’s ESG-related features and the effective date of the changes, including whether the investment product has transitioned from an investment product without ESG-related features to an investment product with ESG-related features.
The consultation paper also includes additional proposed "feature-specific" disclosures for each of the six ESG-related features set out above. For example, a product with an ESG Integration feature should disclose how material ESG factors are distinguished from non-material ESG factors, as well as the sources of ESG data, estimates and analysis used in decision making.
Responses to the consultation paper are due by 19 October 2020. The CFA Institute expects to issue an Exposure Draft of the Standard in May 2021.