The Canadian Securities Administrators (“CSA”) have released a revised version of their previous guidance on investment fund disclosure relating to environmental, social and governance (“ESG”) matters (the “Notice”). The Notice was updated to reflect the CSA’s findings in reviews of fund disclosure documents and sales communications conducted in 2022 and 2023 (the “ESG-Focused Reviews”). While the Notice responds to developments in ESG investing and provides more guidance for certain funds, it does not create new or modify existing legal requirements.

ESG-Focused Reviews

Following the initial publication of the Notice in January 2022, which we discussed in a previous post, CSA Staff (“Staff”) reviewed a selection of ESG-Related Funds (as defined below). These ESG-Focused Reviews were intended to assess whether such funds’ disclosure was consistent with the guidance in the Notice, to resolve any issues identified and to determine whether further policy work is required. Staff conducted 112 prospectus reviews involving 57 investment fund managers (“IFMs”), 39 continuous disclosure reviews involving 35 IFMs and separate sales communication reviews on an as-needed basis involving six IFMs. Staff also reviewed the disclosure documents and sales communications of certain carbon-related funds involving five IFMs.

Key Findings and Further Guidance

According to Staff, the ESG-Focused Reviews revealed the need for an updated Notice with further relevant and practical guidance. We highlight aspects of Staff’s findings and guidance below.

Types of funds

The Notice classifies funds into the following four types, listed in descending order of how significant a role ESG factors play in their investment process:

• ESG Objective Funds: funds whose investment objectives reference ESG factors;
• ESG Strategy Funds: funds whose investment objectives do not reference ESG factors but that use ESG strategies, where the consideration of ESG factors plays a significant role in their investment process;
• ESG Limited Consideration Funds: funds whose investment objectives do not reference ESG factors but that use ESG strategies, where the consideration of ESG factors plays a limited role in their investment process (and together with ESG Objective Funds and ESG Strategy Funds, “ESG-Related Funds”); and
• Non-ESG Funds: funds that do not consider ESG factors in their investment process.

Staff note that these names and definitions should not be used as investor-facing labels; rather, they are used solely for the purposes of the Notice, to discuss the requirements that apply to each type of fund. Generally, the more significant a role that ESG factors play in the investment process of a fund, the more ESG-related disclosure the fund is expected to provide and the more ESG-related information it may include in its sales communications.

Role of ESG factors

As ESG Strategy Funds and ESG Limited Consideration Funds may appear to be similar but attract different disclosure expectations, Staff express concerns about ESG Limited Consideration Funds being marketed as ESG Strategy Funds and about inconsistencies between sales communications and prospectuses regarding the role of ESG considerations in a fund’s investment process.

Staff are of the view that IFMs are best positioned to assess the significance of ESG factors in a fund’s investment process. While Staff believe that there is no universal factor that might be used to determine whether a fund is an ESG Strategy Fund or an ESG Limited Consideration Fund, they suggest that IFMs consider the following questions:

• Are ESG factors routinely weighted heavily in the investment process of the fund?
• Are ESG factors likely to drive or impact an investment decision?
• Are ESG factors always considered as part of the investment process?
• What purpose does the consideration of ESG factors serve for the fund?

Investment objectives

A significant number of issues raised during Staff’s review of prospectuses related to investment objectives, and Staff requested various revisions to clarify funds’ ESG focus. As Staff also encountered issues specific to funds that track the performance of an ESG-related index, invest in underlying funds or have a carbon offset series, the Notice now includes additional guidance for such funds.

Investment strategies

Most of the issues raised during Staff’s review of prospectuses related to investment strategies. These concerned investment strategies disclosure that Staff considered to be unclear or inaccurate, including disclosure about the types of ESG strategies used, the specific ESG factors considered and how such factors are evaluated and monitored by the portfolio manager. Staff also observed a trend of IFMs including disclosure about the consideration of ESG factors in the investment process of the IFM’s funds that was inconsistent with the limited extent to which ESG factors are considered by many of the funds.

At a more granular level, Staff noted unclear or inadequate disclosure about specific elements of ESG strategies, including a fund’s use of proxy voting and shareholder engagement, company-level ESG ratings and scores, ESG-related indices and benchmarks, discretionary negative screening and ESG-related targets. There were also issues specific to funds that track the performance of an ESG-related index, funds that invest in underlying funds and IFMs that did not have ESG-related policies and procedures for their funds. These topics now receive further attention in the Notice.

Proxy voting policies and procedures

Most of the issues raised in relation to the summary of proxy voting policies and procedures in prospectuses or annual information forms involved the need for explanation where a prospectus identified ESG-related proxy voting as an investment strategy of the fund. There were also inconsistencies in how such strategies were described across different sections of a fund’s offering documents.

Continuous disclosure

Most of the funds reviewed met the continuous disclosure expectations that had been set in the previous version of the Notice. Staff, however, observed that most funds did not follow best practices that had been suggested and that, in some cases, funds had inadvertently held investments that should have been screened out according to the investment strategies of the fund.

Sales communications

Staff encountered many issues relating to misleading or inaccurate ESG-related statements or statements that otherwise conflicted with prospectus disclosure. The most common examples described in the Notice include:

• statements regarding ESG-related investment objectives and strategies;
• statements regarding the applicability of an IFM’s ESG approach to its fund line-up;
• statements regarding the consideration of ESG factors throughout the investment process;
• statements regarding ESG-related outcomes; and
• the incorporation of fund-level ESG ratings, scores or rankings.

The Notice also provides further clarification on whether certain ESG-related communications are sales communications and on the use of disclaimers or explanatory language in sales communications.

What’s Next?

The CSA encourage IFMs to consider the Notice as they prepare disclosure documents and sales communications for their funds. Staff note that they continue to monitor the disclosure of funds that are or market themselves as being ESG-Related Funds and will consider future policy work as needed.

For more information, see CSA Staff Notice 81-334 (Revised) ESG-Related Investment Fund Disclosure.

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