CFA Institute Releases ESG Disclosure Standards for Investment Products

On May 19, 2021, CFA Institute released the Exposure Draft of ESG Disclosure Standards for Investment Products (Standards). 

The Standards are a global, voluntary set of principles-based disclosures aimed at providing investors with greater transparency and consistency in ESG-related disclosures for investment products. Public comment on the Standards is open now through July 14th, 2021. 

Meeting an Industry Need

In January 2020, CFA Institute formed an ESG Working group, consisting of volunteer industry professionals to explore concepts for an ESG disclosure standard. Then, in August 2020, CFA Institute released a consultation paper on the development of the Standards, opening a communication channel on the concepts proposed by the ESG Working Group in an effort to confirm the need for a standard and what it should look like. 

Out of 111 respondents to the consultation paper, 91% agreed that a standard is needed to help investors better understand and compare investment products with ESG-related features.

While there is some overlap with other standards, regulations, and codes, the Standards fill a gap in the industry by providing a clear and consistent way to disclose how ESG is integrated into the investment process on a product-level basis, allowing for comparability among investment products and across managers. 

There are four key distinguishing characteristics that, in combination, make the Standards unique:

1. They apply at the investment product level only – no firm level requirements or disclosures.
2. The product doesn’t have to have certain characteristics to comply with the Standards.
3. The Standards can be adopted globally.
4. Disclosures are required pre-contractually.

Design and Implementation of the Standards

In creating the Standards, CFA Institute relied on the success of the GIPS standards in some design and implementation elements. For example, a firm that is compliant with the Standards is required to make every reasonable attempt to provide a compliant presentation to prospective investors before they invest in the product. The compliant presentation includes all of the required disclosures of the Standards. A GIPS compliant firm has the same requirement, albeit it is referred to as a GIPS Report instead of a compliant presentation. GIPS compliant firms will also notice several other overlapping fundamental requirements of the Standards, such as:

• Document policies and procedures used to maintain compliance;
• Capture and maintain records to support the requirements;
• Annually disclose compliance with CFA Institute; and 
• Must not present anything that is false or misleading.

A very distinct difference between the GIPS standards and the ESG Disclosure Standard is that a firm may choose which products will comply with the Standards. The firm could apply the Standards to all of its investment products, only one product, or only those that are currently being marketed. In terms of the GIPS standards, this is the equivalent of claiming compliance at the composite level, which is prohibited. 

Disclosure Requirements 

There are eight investment product ESG-related features that must be disclosed to describe how and why ESG information is used in the implementation of the strategy.  

• Objectives – Financial objective, impact objective (if applicable), and all other types. 
• Benchmark – A description and any characteristics or aspects that are compared between the investment product and the benchmark.
• Sources and types of ESG information - What ESG information does the product rely on and where does it come from. Firms must also disclose the steps taken to ensure the data is reliable.
• ESG exclusions – A description of all exclusion criteria that are based on ESG information or issues.
• Material ESG information used in financial analysis and valuation - For example, if SASB standards are used determine material ESG factors, firms must describe the process including how it’s used in the analysis and valuation.
• Portfolio-level ESG criteria and characteristics – Specific exposures or characteristics that are based on ESG information or issues such as minimum requirements for asset-weighted percentages of the portfolio invested in companies deemed sustainable. 
• Process to achieve impact objective – If the product has an impact objective, describe how the firm is going to achieve the impact objective.
• Stewardship – Policies and processes, including the types of stewardship activities that are undertaken and the ESG issues that could trigger stewardship.

Examination

Firms that comply with the Standards will have the option to obtain an independent third-party examination. An examination provides assurance that the firm has prepared and presented the compliant presentation for the investment product and designed and implemented related policies and procedures in compliance with the Standards. The Exposure Draft of the CFA Institute ESG Disclosure Standards for Verifiers will be released for public comment on July 21, 2021. The purpose of the verifier standards is to provide a consistent framework from which all ESG Disclosure Standards examinations are based on. 

Timeline

Industry stakeholders, including investment managers, investors, asset owners, consultants, advisors, regulators, investment professionals and database providers, are encouraged to provide comments on the proposed Standards by July 14th, 2021. There are specific questions about the Standards that are posed to different groups of stakeholders, primarily focusing on the helpfulness and feasibility of the Standards. In addition to answering the broad questions about the Standards, industry stakeholders may also provide feedback on the provisions themselves. This type of feedback is critical to the development of a standard that is effective and efficient and provides a unique opportunity for self-regulation. Respondents can provide as little or as much feedback as they choose.

After the comment period has closed, the ESG Disclosure Standards Technical Committee will review the feedback provided and make changes to the Standards as appropriate. The final version of the Standards is expected in November 2021.

Adoption of the Standards

Adoption and compliance with the Standards should be a fairly simple and straightforward exercise as firms likely already meet the general requirements. Initial adoption may take some time as firms will need to prepare the compliant presentation, but the information that must be included is likely available in other internal or external documents. Once the compliant presentation is prepared, it does not need to be updated unless there are changes to the investment product that would require disclosure changes.

Our Guidance

In our opinion, the Standards will be well received by firms and investors, alike, particularly in the U.S. where there is little guidance on what a firm must disclose as it relates to ESG, and heavy regulatory scrutiny. The SEC’s stance so far has been “Do what you say, say what you do” with regard to ESG disclosures. Although the Standards are not a substitute for regulation, they at least provide a framework to guide firms on what to disclose. The Standards will also make it easier for investors to compare ESG products across different managers through consistent disclosures.

How we help

• ESG advisory: Our team of ESG experts are working with clients to build, enhance, and manage ESG programs that are fit-for-purpose and meet regulatory and investor expectations. 
• Performance services: Our team of more than 60 professionals with extensive performance experience are on hand to provide GIPS standards verification and consulting services to investment managers around the globe.

Contact us to learn more about how we can help you address your ESG, Performance and wider GRC challenges.