In recent years, there has been a proliferation of investment funds that outrightly state or imply their usage of environmental, social, and governance (ESG) factors within their investment process.

In March 2024, the Canadian Securities Administrator (CSA) released a notice providing guidance on investment funds' disclosure and sales communication practices as they relate to ESG matters. This notice updates and replaces a previous communique released in January 2022. The CSA's notice provides clear guidance as to how investment fund managers can accurately position their funds as 'ESG-related' in the public sphere, ultimately reducing the likelihood of 'greenwashing' and 'greenhushing', the latter of which is defined as the under-reporting or publicizing of ESG factors. To access and read the notice in full, click here.

This article will summarize the key takeaways from the CSA's notice and its resulting implications regarding the positioning of ESG funds for investors.

Background

The CSA conducted an ESG-focused review, which examined extensive regulatory disclosure documents and sales communications of ESG-Related Funds and other funds that marketed themselves as ESG-Related Funds. From this review, the CSA was able to establish different disclosure expectations depending on whether a fund considers ESG factors as part of its investment process and the extent to which such factors are considered. Depending on the degree to which ESG factors play in a fund's investment process, they would fall into one of the below categories:

• ESG Objective Funds, funds whose investment objectives reference ESG factors. 
• ESG Strategy Funds, funds whose investment objectives do not reference ESG factors but that use ESG strategies, where the consideration of ESG factors plays a significant role in their investment process. 
• ESG Limited Consideration Funds, funds whose investment objectives do not reference ESG factors but that use ESG strategies, where the consideration of ESG factors plays a limited role in their investment process.
• Non-ESG Funds, funds that do not consider ESG factors in their investment process. 

Based on the above categories, an ESG-Related fund considers ESG factors as part of its investment process. As such, ESG Objective Funds, ESG Strategy Funds, and ESG Limited Consideration Funds fall under this classification. The following illustration provides a guided pathway to determining whether a fund is an ESG Objective Fund, ESG Strategy Fund, ESG Limited Consideration Fund, or Non-ESG Fund.

Source: CSA STAFF NOTICE 81-334 (REVISED) ESG-RELATED INVESTMENT FUND DISCLOSURE

Takeaway: Avoiding the potential for greenwashing and greenhushing

The CSA believes that the more significant a role that ESG factors play in the investment process, the more ESG-related disclosure a fund is expected to provide. By extension, said ESG-related information should be reflected in a fund's disclosures and sales communications. Conversely, the more limited a role that ESG factors play in the investment process, the less ESG-related information there should be in both the disclosure documents and sales communications of the fund, so as not to over-emphasize the role of ESG considerations in the fund's investment process.

The rationale behind the CSA's approach is to avoid and/or minimize the potential for greenwashing. To further reduce the likelihood of greenwashing, the regulatory agency advocates that the name and investment objectives of a fund should accurately reflect the extent to which the fund is focused on ESG, where applicable, including the aspect(s) of ESG that the fund is focused on. The rationale behind this is that a fund's name and investment objectives play key roles in identifying the primary focus of the fund and distinguishing it from other funds. Thus, making the ESG focus of a fund easily apparent and identifiable in its name and investment objective minimizes the likelihood of misrepresentation.

Source: CSA STAFF NOTICE 81-334 (REVISED) ESG-RELATED INVESTMENT FUND DISCLOSURE

Additionally, the CSA believes that a fund that references ESG in its name should primarily invest in assets that meet the fund's ESG-related criteria. If a fund is permitted to primarily invest in assets that do not meet the fund's ESG-related criteria, the fund should not reference ESG in its name or investment objectives, as the name or investment objectives would not accurately reflect the primary focus of the fund and would therefore be misleading. For example, this may include a fund that intends to mainly invest in companies that are transitioning to a low-carbon economy or a fund whose name implies that it will primarily invest in the water conservation industry.

Takeaway: Focusing on investor communication and suitability

Beyond appropriately naming funds to reflect their ESG focus, the CSA notice advocates for the use of plain language when describing the ESG strategies and ESG factors used within a fund. Doing so provides clarity and bolsters surety for investors interested in particular ESG-focused solutions, allowing them to be fully cognizant of an investment solution's focus.

Regarding investor suitability, where appropriate, an ESG objective fund may state that it is particularly suitable for investors who have ESG-related investment objectives or who are interested in ESG-focused investments. However, if the fund is only focused on a particular aspect of ESG, such as gender diversity in leadership or the reduction of carbon emissions, the CSA's view is that any suitability statement that indicates that the fund is particularly suitable for investors who have ESG-related investment objectives should accurately reflect the aspect(s) of ESG that the fund is focused on. Conversely, if a fund is not an ESG objective fund, there should be no reference to ESG in its suitability statement, as such a statement may inaccurately suggest that the fund has an ESG-related focus.

Conclusion

Against the backdrop of an investment environment that is increasingly utilizing ESG factors within investment strategies, the CSA's ESG-related Investment Fund Disclosure notice provides guidelines for investment fund managers to position their ESG-focused solutions truthfully and accurately. For investors who desire to invest according to their convictions, regulatory disclosures and sales communication for ESG-oriented solutions must reflect the genuine nature of a fund's focus, as it is essential to maintaining and strengthening investor confidence and efficient capital markets. 

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.