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The regulatory scrutiny is ultimately positive but could have the unintended consequence of driving some already nervous advisors to avoid integrating ESG into client portfolios entirely.iStockPhoto / Getty Images

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The heat is on environmental, social and governance (ESG) investing, with regulatory scrutiny growing over greenwashing and sustainability assurance providers beginning to consolidate.

Some advisors say the attention is a welcome development and will make sustainable investing more accessible and less perplexing for investors.

“It has been quite a confusing space in the market for a lot of people, including clients and advisors. So, personally, I think it’s a good thing that it’s getting a higher degree of scrutiny, overall,” says Paul Borisoff, portfolio manager and investment advisor with Borisoff Wealth Management at Richardson Wealth Ltd. in Vancouver.

“It’s going to [require] these products [to] justify what exactly they’re doing and explain in more clear language … how they’re going about it.”

In January, the Canadian Securities Administrators (CSA) released guidance for ESG investment fund disclosure. The document reiterated existing regulations that apply to ESG funds, including requiring managers to disclose material or essential strategies in their prospectus or Fund Facts documents, plans to invest primarily in ESG-related issuer types or industry segments, and any intended measurable ESG outcomes of the fund.

The CSA also warned fund managers against making exaggerated or unsubstantiated claims and said any funds with ESG themes in their names – such as “green” or “sustainability” – must reference that aspect in their investment objectives.

In Europe, which has the most advanced sustainable finance regulations, regulators are considering tougher rules on ESG investment products, such as limiting sustainability-related terms in fund names and introducing thresholds for the proportion of investments necessary to justify names.

In the past few weeks, regulators also issued stricter guidance around Article 9 funds, the European Union’s highest ESG designation, which has led asset managers to downgrade funds worth tens of billions of dollars.

Meanwhile, on the standards side, the International Sustainability Standards Board (ISSB) released its proposals earlier this year for sustainability and climate-related disclosures for the capital markets.

Once the ISSB issues its final requirements, they’ll be considered the global baseline for sustainability disclosures, addressing a common criticism that the ESG sector has an “alphabet soup” of disclosure standards. Work is also underway to create standards for validating sustainability disclosures.

Patti Dolan, senior wealth advisor and portfolio manager with Wellington-Altus Private Wealth Inc. in Calgary and a responsible investing (RI) expert, says she would appreciate tighter regulations on the sector to mitigate the possibility of greenwashing, particularly after the major shift toward sustainable investing over the course of the pandemic.

‘Patchwork’ of standards

Kurt Rosentreter, portfolio manager with Manulife Securities Inc. in Toronto, adds consistency in the space is the “biggest missing piece.”

He notes that his firm buys securities globally, which has a whole host of standards and rules for individual companies’ sustainability reporting, and funds’ disclosure practices.

“One of the biggest challenges is whose metric do we use to define what ESG means,” he says. “That’s still very much missing worldwide.”

The vast majority of Mr. Rosentreter’s clients have a low level of ESG knowledge, and the lack of clarity around how to evaluate products makes investor education that much more challenging.

“How do I bring it up in meetings knowing that we’re dealing with a wide variety of products, more all the time, that are bragging about standards, but knowing that behind them there’s really a patchwork of commonality?” he asks.

Mr. Borisoff, who holds the responsible investment advisor certification designation, says that evaluating the merits of ESG funds can be challenging even for advisors who are well-versed in RI.

“It entails a lot more due diligence on the part of the advisors to understand what the [manager’s] strategy is, what goes into the portfolio itself,” he says. “I find I have to do a lot more research on third-party products.”

He notes there’s currently a “wide range of quality” in products, with some not looking much different from non-ESG funds. While many so-called sustainable funds share information on the strategies they use and screening processes, they’ll often include disclaimers that employing them is up to the portfolio manager’s discretion.

Jordan Damiani, senior wealth advisor at Meridian Credit Union in St Catharine’s, Ont., says the growing regulatory attention in the past year was really the impetus to make sure he knew what he was offering.

“I really took a deep dive in terms of the content. …You really want to make sure you’re offering a strong ESG option in general,” he says.

He had virtual meetings with some partners and had an ESG investment company screen various products to get a better understanding of their quality.

Advisors ‘overwhelmed’ in this space

David O’Leary, founder and principal at Kind Wealth in Toronto, says the regulatory scrutiny is ultimately positive but could have a “short-term unintended consequence” of driving some already nervous advisors to avoid integrating ESG into client portfolios entirely.

“It just provides an extra rationale for advisors to not want to get into this [space],” Mr. O’Leary says. “I don’t think this, on its own, is driving a stake into the heart of ESG, it’s just one more thing for advisors who are already overwhelmed in the space.”

He noted that advisors in Canada are older on average and many are seeing ESG boom after decades of it being considered a niche concern.

“They might be skeptical or dubious in the first place, and this certainly doesn’t help any from their perspective. Like, ‘Oh, could I be in trouble at some point for having recommended a fund that is greenwashing?’” he says.

That’s not where regulators are focused right now… but it adds an extra level of, ‘Could we be next?’”

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