Analysis from the CFA Institute finds that regulation in EU and Canada has helped alleviate potential confusion for investors, but greater harmonisation of terms across jurisdictions is needed to accelerate progress.
Disclosure regulations, like the EU’s Sustainable Finance Disclosure Regulation (SFDR), have had a positive impact in improving transparency in investment fund disclosures, according to the paper, entitled ‘An Exploration of Greenwashing Risks in Investment Fund Disclosures: An Investor Perspective’.
The report finds that regulation such as SFDR has helped to reduce the amount of potentially confusing information about investment funds’ environmental, social, and governance (ESG) factors.
SFDR requires asset managers in the EU to disclose a fund’s environmental and social objectives, characteristics, methodologies, data sources, engagement policy, and due diligence/limitations to the data. This promotes transparency, as this level of detail gives retail investors greater insight into how funds are managed, and how asset managers consider ESG in the investment process.
Whilst the paper concludes that these requirements have likely helped mitigate potentially confusing information, the complexity of the SFDR and EU Taxonomy regulatory landscape risks funds setting more ambitious sustainable investment objectives.
The report also finds that, like SFDR, the Canadian Securities Administrators (CSA) Staff Notice, which explains how existing securities regulatory requirements apply to ESG-related investment fund disclosures, may have also helped to reduce the risk of greenwashing. By way of contrast, the US has yet to implement any comparable regulation.
Chris Fidler, Head of Global Industry Standards, at CFA Institute and contributor to the report says: “Accurate, transparent disclosures are vital to market integrity and the health of the asset management industry, as they provide retail investors with a clear picture of how ESG factors are incorporated into the investment process. While our research suggests that SFDR in the EU and the CSA Staff Notice in Canada have led to more accurate disclosures, challenges remain in ensuring that investors have the information they need to make informed decisions.
“Comprehensive regulation coupled with proactive, positive action from asset managers – such as adhering to independent, global industry standards – can help to improve the quality of information provided to investors and ultimately mitigate the risk of greenwashing.”
The paper analysed product disclosures for 60 investment funds that are marketed to retail investors and incorporate ESG factors in the investment process. The sample includes 30 funds from the EU and 30 funds from the US and Canada.
Of the funds analysed, there were five cases in which a specific inconsistency, exaggeration, omission, or unsubstantiated claim in a fund’s product disclosures might confuse an investor, giving rise to the risk of a perception of greenwashing, or a problematic disclosure.
Inconsistencies – discrepancies in the presentation of funds’ screening criteria – were the most common problematic disclosure, whilst cases of an exaggerated claim and of an omission/unsubstantiated claim – where a fund did not disclose a meaningful piece of information or made a claim that could not be supported by the appropriate evidence – also featured.
Recommendations for investors, asset managers and regulators
To encourage effective and comprehensive fund disclosure practices and help retail investors better assess a funds’ ESG factors, CFA Institute has outlined a series of recommendations, including:
· Investors should not rely solely on fund’s marketing materials and should closely examine the fund’s offering documents, as well as any sustainability reports. For funds that have a positive change or real-world impact objective alongside a financial objective, investors should review the fund’s impact report or other methodology reports for disclosures on how the fund’s impact is measured, monitored, and reported.
· Asset managers should strive for full disclosure and fair representation of the fund’s sustainability claims or objectives. The use of plain language rather than ESG terminology or jargon should be the standard; however, if ESG terminology is used, the terms should be defined including, where relevant, how they are calculated.
· Regulators should work to harmonise terms and definitions so that there is a common understanding of these issues across jurisdictions. Further clarification and guidance will help asset managers as they create and promote their sustainable funds.
