THOUGHT LEADERSHIP
Decoding new guidance on ESG investing
In January 2022, the Canadian Securities Administrators (CSA) released new guidance regarding environmental, social and governance or ESG funds in Canada. David Petiteville, director of regulatory solutions at RBC Investor & Treasury Services and Lynn McGrade, partner at Borden Ladner Gervais LLP discuss the impetus for the guidance, how fund managers are impacted, and potential next steps. Explosive growth in ESG-related investments prompts new guidance from regulators The CSA Notice1 establishes disclosure requirements for investment funds as they relate to ESG considerations, particularly funds that use ESG strategies or whose investment objectives reference ESG factors. The notice - which applies to regulatory documents and sales communications - provides guidance about complying with existing requirements and recommends best practices for ESG disclosure. The CSA released the notice in response to significant growth in the value and number of ESG funds in Canada, and investor desire for ‘clear, consistent and comparable’ fund disclosure. The Investment Funds Institute of Canada has reported a dramatic increase in ESG investing over the last two years2. The CSA notice comments that by April 2021, the value of sustainable funds in Canada had grown by 160% since the start of 2020, and the number of sustainable funds increased to 156 compared to 105 at the same time the prior year. Coincident with this significant growth in
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ESG funds, Canadian investors are increasingly looking for reporting on how funds have performed on their ESG objectives to complement investment performance reporting. “The goal of the notice is to prevent greenwashing where there could be an inadvertent misconception or confusion for investors about what they are actually buying,” explains Lynn McGrade. As a result, the notice requires funds to describe their ESG strategies in plain language, using clear and comprehensive explanations of ESG terms.
Review required: are you impacted? The notice is based on existing securities regulatory requirements and does not create any new legal requirements or modify existing ones. It came into effect upon release and applies to all funds, including those that have ESG terminology in their name, objectives or strategy. Managers should consider reviewing the notice “as it applies whether or not you have existing ESG funds, plan to launch new ESG funds or have funds without ESG components,” says David Petiteville.
