The Chartered Financial Analyst Institute’s draft voluntary environmental, social and governance disclosure standards are vulnerable to greenwashing, warns the Investment Funds Institute of Canada.
In an open letter to the CFA regarding its drafted voluntary regulations, the IFIC is criticizing the proposed standards’ failure to define what does and doesn’t qualify as an ESG investment. “The standards don’t establish thresholds or necessary or sufficient requirements for products to be considered ESG, responsible, sustainable or impact.”
Ian Bragg, IFIC’s vice-president of research and statistics and the author of the open letter, explains that the draft standards will do little to make ESG investments more transparent. “When it comes to advisors or investors, we need the standards, but we need standards for naming and categorizing ESG products. At the end of the day, advisors and investors need a simplified disclosure to compare ESG products and align them with investment goals.”
The lack of a standard for naming and categorizing ESG products makes it very difficult to judge how ESG-conscious an investment actually is, he says. “The risk is that an investment product gives the impression that it’s adopting an ESG standard that it isn’t achieving. The depth of ESG practice wouldn’t be in line with the investment objectives.”
Despite the warning in the IFIC’s letter, Bragg isn’t particularly concerned about greenwashing in Canada. “I think it’s conceptually a risk. Do I think a lot of mutual funds are trying to intentionally mislead investors? No. Most funds that say they’re doing something meaningful are doing something meaningful. But there’s always that potential for misalignment of practice and investment goals.”
The IFIC is generally in favour of the proposed standards, he adds. “The CFA’s done a very good job in terms of establishing and clarifying what should be included in ESG disclosures for investment products, including mutual funds and ETFs. We’re supportive of that. For disclosure standards, they’re robust. What they aren’t is a standard for identifying and categorizing ESG products.”
Bragg believes his concerns about the CFA’s proposal are shared by the Canadian Investment Funds Standards Committee, which provide investors with a consistent set of mutual fund categories. The CIFSC has also announced plans to create a naming and categorization standard for ESG investments.