CFA Institute launches ESG product disclosure standards

Some investor groups are concerned the standards will introduce unnecessary complexity

The CFA Institute has entered the race to develop sustainability disclosure standards with the launch of a global voluntary disclosure framework for ESG products, described as being the world’s first, today. 

The standards – which will apply to “all types of investment vehicles, asset classes, and ESG approaches” – aim to help stakeholders assess the ESG credentials of investment products by providing information on their sustainability objectives, investment process, and stewardship activities. 

In addition, asset managers reporting against the standards will be required to disclose the providers of ESG data which underpin their products, the criteria for screening and exclusions, the use of ESG benchmarks and portfolio-level allocation targets for investments with specific ESG characteristics. 

The CFA said that it will provide interpretative guidance on the standards, procedures for independent assurance and an optional disclosure template in early 2022. 

The standards were subject to a two-year consultation process, beginning with the publication of a first draft of the standards in August 2020, and have been approved by member representatives of the CFA and its ESG Technical Committee. 

The launch of the standards comes despite the CFA being warned in some of the 38 responses to the consultation by multiple bodies that it would serve to further confuse and burden investors.

According to a submission by US financial sector trade bodies the Securities Industry and Financial Markets Association (SIFMA), the standards would “introduce unnecessary regulatory complexity to the already crowded ESG reporting landscape”, while the Investment Company Institute (ICI) – another US-based body – described the project as “merely offer[ing] different, but not materially improved, standards”. 

Separately, regional investment body Swiss Sustainable Finance (SSF) criticised the standards' approach to the selection of material ESG factors, characterising them as being “defined extremely broadly with limited examples or reference to other documents that could provide meaningful examples”. 

“We believe more and more investors are likely most interested in this data in order to compare and make decisions on investments, which we feel did not receive adequate consideration within the standards,” it added.

In response to the consultation feedback from SIFMA and ICI , a CFA spokesperson said to RI: "The Standards have been designed to complement, and not conflict with, national and regional regulation.  They are intended to be a helpful resource for regulators as they develop rules and guidance for their jurisdictions.”

With regards to SSF's comments, the spokesperson said that “the Standards’ use of the term 'ESG characteristics' is intentionally broad because investors have extremely varied preferences when it comes to ESG characteristics. In a well-functioning marketplace, investment managers will create a variety of investment products to meet the varied needs of investors.”

Sustainability-related disclosures rules are already in place for providers of all EU-registered investment products since March this year, with additional disclosure requirements against the EU Taxonomy coming in from 2022. 

Similarly, financial regulators in Hong Kong have issued enhanced disclosure expectations for funds which incorporate ESG factors which will apply from 2022, while the UK Treasury and Financial Conduct Authority have announced preliminary plans to develop a labelling system which will classify investment products “objectively against specified sustainability criteria”. 

“Although there are differing regulations in global markets to address transparency for investors on ESG matters, it is critically important that a harmonised, global approach exists to enable investor protection,” said Paul Andrews, Managing Director for Research, Advocacy, and Standards at the CFA Institute, addressing the subject. 

“Furthermore, such regulation does not always comprehensively cover all market participants,” he added.