Written By Denise Bright, Suzana Lobo and Oliver Loxley

The CFA Institute has published the first Global ESG Disclosure Standards for Investment Products (the Standards) in relation to environmental, social and governance (ESG) issues in investment products, to allow stakeholders to understand, compare and evaluate how objectives, strategies and stewardship are considered. The Standards are intended to address current issues with ESG investing, such as inaccurate disclosure practices, and aim to support investors with complete, reliable, consistent, clear and accessible information. The Standards have been designed to accommodate the full range of investment vehicles, asset classes and ESG approaches offered in markets around the world.

Guiding Principles for Investment Product ESG Disclosures

The new Standards are ethical requirements based on the principles of fair representation and full disclosure, with a focus on disclosing how an investment product considers ESG issues; however, compliance with the Standards is voluntary. Confidence among investors in Standards compliant ESG Disclosure Statements and the validity of disclosure is derived from adequate internal controls. In order to claim a compliant disclosure statement, an investment manager must ensure that it has satisfied all the applicable requirements of the Standards either independently or through third-party assurance.

The Standards do not address corporate ESG reporting; firm-level ESG disclosures (with an exception related to stewardship activities); naming, labeling, or rating of investment products; or the content of investment products’ periodic reports.

Fundamentals of Compliance

The CFA Institute outlines 10 required fundamentals of compliance for ESG Disclosure Statements by investment managers. Requirements cover the following areas:

• compliance with laws and regulations as well as interpretive guidance;
• the minimum one year time period a Statement must cover, or period since inception if the product has not existed for one year;
• documentation of policies and procedures and maintenance of documents and records
• notifying the CFA Institute of the use of its Standards;
• making Statements available to investors;
• submitting ESG Standards Compliance Notification Form; and
• updating an investment product's ESG Disclosure Statements.

The only recommended fundamental of compliance is that investment managers should obtain independent assurance on their ESG Disclosure Statements

Requirements of ESG Disclosures

As mentioned in the fundamentals of compliance, all of the Standards' requirements are mandatory in order to claim Standards compliance on an ESG Disclosure Statement. They are divided into the following nine categories:

• General;
• Sources and Types of ESG Information;
• Systematic Consideration of Financially Material ESG Information in Investment Decisions;
• ESG Investments Universe;
• Screening;
• Portfolio-Level ESG Characteristics;
• Portfolio-Level Allocation Targets;
• Stewardship Activities; and
• Environmental and Social Impact Objectives.

The full list of requirements can be found on the CFA Institute website. There are currently no listed recommendations for Investment Product ESG Disclosures.

ESG Terminology Recommendations and Additional Guidance

The CFA Institute has published recommendations for terms and definitions related to ESG approaches in investment products.. It is beneficial to use plain language whenever possible to describe an investment products' ESG approach and avoid using specialized terms without defining them. It is recommended that investment managers define the following terms when preparing ESG Disclosure Statements:

• ESG Integration;
• Screening;
• Thematic and Sustainability-Themed Investing; and
• Impact Investing.

The Standards provide definitions and references for each term, as well as a separate glossary for other definitions specific to the Standards. Four sample ESG Disclosure Statements are also provided in an appendix to demonstrate how the requirements and recommendations can be met by various investment products. Additionally, an appendix is included to provide examples of the applicability of provisions when specific ESG approaches are used in an investment product in a specific manner. The examples should only be used as a guide as many investment products use a combination of ESG approaches.

Next Steps

The CFA Institute has announced that it will publish (i) a handbook on the explanation of the provisions and interpretive guidance, (ii) assurance procedures that will enable independent assurance of ESG Disclosure Statements; and (iii) an optional ESG Disclosure Statement Template that will standardize the format of ESG Disclosure Statements for easier comparison, all to be issued on or before May 1, 2022.

If you have any questions about the new guidance, or any aspects of disclosure relating to ESG, please contact any of the authors to discuss.

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