Canada: New ESG Investment Fund Disclosure Guidance: CSA Issues Staff Notice 81-334

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As an interest in the environment, social and governance (ESG) investment continues to grow at a rapid pace in Canada, as do concerns about the increased potential for “greenwashing”, whereby an investment fund‘s disclosure or marketing materials intentionally or inadvertently lead to mislead investors on the ESG aspects of the fund. This can lead investors to invest in funds that do not meet their objectives, confuse investors and negatively impact investor confidence in ESG investing. Recognizing these potential problems, the Canadian Securities Administrators (“CSA“) published Staff Notice 81-334 – Disclosure of ESG-related investment funds (the Notice to staff). The staff notice, which was published on January 19, 2022, provides clarification and guidance to investment funds on their ESG-related disclosure practices. In particular, it is aimed at funds whose investment objectives refer to ESG factors and at funds that use ESG investment strategies (collectively, ESG-related funds). Common terms used in ESG-related funds include sustainable, responsible (RI), socially responsible (SRI), ethical and green investing.

The Staff Notice was published following the CSA’s review of ESG-related fund regulatory disclosures and marketing materials, which identified several shortcomings such as potentially misleading disclosures and inadequate disclosures about investment strategies, proxy voting practices and ESG performance. While the CSA review concluded that current securities regulatory requirements are sufficient to address these gaps, the CSA were of the view that regulatory guidance is needed to clarify how current disclosure requirements apply. apply to ESG-linked funds. The staff advisory aims to bring greater clarity to ESG-related fund disclosure and marketing communications to enable investors to make more informed investment decisions.

The CSA’s decision is in line with developments elsewhere in the world. In April 2021, the United States Securities and Exchange Commission (SECOND) issued a Risk Alert summarizing the shortcomings observed in reviews of investment advisers and funds in relation to ESG investing. SEC staff cited weak internal controls and poorly designed compliance programs, leading to potential discrepancies between claims made, and therefore investors’ expectations, and the actual practices of investment advisers. The European Union is widely regarded as the world leader in sustainable investing. EU “Regulation on the disclosure of information on sustainable finance” has been in place since 2019. Citing the need to address “divergent disclosure standards and market-based practices [which] make it very difficult to compare different financial products” and confuse end investors, leading to distortion of investment decisions, the European directive sets rules for product manufacturers to standardize disclosure.

The challenge with all of these regulatory efforts is the lack of widely accepted definitions and terminology and authoritative accrediting bodies. “ESG Compliance” can and does mean different things to different people, and these differences in interpretation and approach are unlikely to be resolved in the near future.

The staff advisory provides guidance on best practices for ESG disclosure by investment funds in a number of areas, including:

  • Investment objectives and fund names;

  • disclosure of investment strategies;

  • proxy voting and shareholder engagement policies and procedures;

  • risk disclosure; and

  • commercial communications.

The Staff Opinion is based on existing requirements and does not impose any new regulatory requirements on fund managers. An asset management company considering launching new “ESG” products or making ESG claims on its existing products will be well advised to carefully consider the Staff Opinion. It would be reasonable to expect that there will be an in-depth review of the disclosure of prospectuses, RDRFs and marketing materials by regulators regarding ESG claims in the future.

The authors of this article would like to thank Jay Tomar, a member of the WeirFoulds Securities Law Practice Group, and Emma Brown, law student, for their contributions to this article.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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