Why comply with the CFA Institute global ESG disclosure standards

In my role at CFA Institute, market participants often ask me why they should comply with our Global ESG Disclosure Standards for Investment Products, particularly when our European colleagues already must comply with the EU’s Sustainable Finance Disclosure Regulation (and potential future regulations around carbon dioxide removal).

Similarly, our US colleagues that are awaiting rulemaking from the Securities and Exchange Commission, tell me they wish to wait until the dust settles and comply with what is mandated. I certainly understand and fully appreciate these reservations, but I worry my colleagues may not be seeing the full picture. Let me explain.

While consideration of ESG factors has become a highly charged political issue in the US, outside the US, there is less debate about whether it is appropriate to consider ESG factors. In both jurisdictions, however, there is still much concern about “greenwashing”— that is, advertisements or other disclosures that contain false or misleading information about an investment product’s environmental characteristics or impact.

There is a common root cause that underpins these seemingly disparate problems. ESG factors can be viewed through various lenses, including risk and return, personal values, and impacts on other people or the planet. When investment professionals, asset owners or investors evaluate a fund or strategy, it’s often not clear which of these lenses they are using. Some, but not all, markets have begun to address this problem through new regulatory disclosure requirements or guidance. However, uncertainty remains due to ambiguities in the requirements themselves as well as if and when new regulations will take effect.

In response to these problems, CFA Institute developed the Global ESG Disclosure Standards for Investment Products—global voluntary standards for disclosing how a fund or strategy incorporates ESG information or issues into its objectives, investment process, and stewardship activities.

We have found that often, standards are an effective way to resolve misalignments in the expectations of buyers and sellers. And, we have experience in this area. For example, prior to our development of the CFA Institute Global Investment Performance Standards (GIPS®), it was difficult to make meaningful comparisons of the historical investment performance among different funds and strategies.

The GIPS Standards solved this problem by establishing standards for the calculation and presentation of historical investment performance. Today, these are recognized by firms, regulators and investment professionals as the performance standard in the industry.

Similarly, investors today have difficulty making meaningful comparisons of ESG approaches used in investment products. The Global ESG Disclosure Standards for Investment Products address this challenge by requiring managers to provide prospective clients with an ESG Disclosure Statement, a document that provides key information about the fund or strategy, including:
• Environmental and social impact objectives
• Sources and types of ESG information
• Systematic consideration of financially material ESG information in investment decisions
• The use of an ESG index as an investment universe
• ESG screening criteria
• Targets for portfolio-level ESG characteristics
• Allocation to investments that have specific ESG characteristics
• ESG considerations in proxy voting, engagement, and other stewardship activities

Our Global ESG Disclosure Standards for Investment Products help asset owners—and their intermediaries—better understand, evaluate, and compare funds and strategies irrespective of whether there are local regulations in place, particularly because capital markets are global. We say this because an ESG Disclosure Statement can be a valuable input into an asset owner’s due diligence process and can help an asset owner ensure that a fund or strategy aligns with its investment policy statement. The Global ESG Disclosure Standards for Investment Products give asset owners an easy way to obtain higher-quality information about a fund or strategy by simply requesting an ESG Disclosure Statement.

The Global ESG Disclosure Standards for Investment Products help managers as well, by, for example, helping them explain to clients how ESG information and issues are considered in the design of a fund or strategy. These statements can save manager’s time and effort when responding to requests for proposals (RFPs) and due diligence questionnaires (DDQs). They can reduce risk by helping managers ensure that they have fully and fairly disclosed how and where ESG information and issues are considered in the design of a fund or strategy.

We know that asset owners and managers will continue to be scrutinized by clients, beneficiaries, regulators, and politicians.

The Global ESG Disclosure Standards for Investment Products provide asset owners and managers a mutually beneficial way to help them meet rising expectations for clarity and precision when communicating about the use of ESG factors in investment funds and strategies.

Instead of asking why market participants should embrace these standards, the better question may be: why wait? The wheels of regulation turn slowly and don’t always capture all the essential elements of the markets. Industry standards allow market participants to solve problems proactively.

As such, we urge all our constituents to adopt the Global ESG Disclosure Standards for Investment Products.

Paul Andrews is managing director for research, advocacy, and standards at CFA Institute.