The increasing popularity of environmental, social, and governance (ESG) investment products has sparked the risk of greenwashing. Greenwashing occurs when an investment manager provides false or exaggerated claims about the ESG approaches, characteristics, and impacts of its products. Greenwashing contributes to the confusion investors currently face when it comes to ESG-related terminology and investment approaches. If not addressed, this confusion can diminish investors’ trust in the industry.  

As a result, many investment professionals have called for a global standard that can help investors better understand the various ESG approaches used in investment products so that they can evaluate how those products align with their needs and preferences. In November 2021, CFA Institute published the final version of its voluntary Global ESG Disclosure Standards for Investment Products (the “Standards”), which have been designed to improve transparency and consistency in investment product ESG disclosures. The Standards are the first global standards for investment product ESG disclosures.  

Developing the Standards 

In January 2020, CFA Institute created a volunteer ESG Working Group consisting of industry professionals to explore concepts for an ESG standard. The concepts proposed by the ESG Working Group were released in a consultation paper in August 2020, which garnered feedback from industry professionals across 30 countries, with 69% of respondents classified as either users or providers of disclosures. The remaining 31% of respondents includes CFA Institute member societies, standard setters, and non-governmental organizations (NGOs). 

In November 2020, CFA Institute formed two new volunteer bodies—the ESG Technical Committee and the ESG Verification Subcommittee. The ESG Technical Committee is composed of eighteen international volunteers with ESG expertise as well as experience as asset owners, asset managers, consultants, and service providers. The ESG Technical Committee is responsible for developing the Standards’ provisions—that is, their principles, requirements, and recommendations. The ESG Verification Subcommittee is responsible for developing procedures for independent assurance investment product ESG disclosures. 

Based on the feedback and issues raised by respondents, CFA Institute staff prepared an exposure draft of provisions that was reviewed and revised with the ESG Technical Committee. The exposure draft with the initial provisions was released in May 2021 to seek feedback from the wider investment community, which was subsequently incorporated in the final version of the Standards.

Addressing potential conflicts and duplication

CFA Institute identified potential conflicts with or duplication of regulations and other codes and standards as the most frequent concern expressed in comment letters. Existing ESG regulations and voluntary codes and standards focus on different parts of the global financial system. What makes the Standards unique is that they solely apply to investment product ESG disclosures produced for institutional, high-net-worth, and retail investors. They differ from the widely known Principles for Responsible Investment (PRI) Reporting Framework as the Standards do not apply to firm-level disclosures.

While there are other well-known frameworks that address both product- and firm-level disclosures, CFA Institute found that existing requirements for product-level ESG disclosures have two problems: fragmentation and gaps. Existing requirements can be fragmented given that there are multiple standards that narrowly focus on certain parts of the global investment product market. There are also gaps in terms of a lack of standards for certain types of investment products and in certain regions. To overcome these problems, the Standards were designed for all markets as well as to be applicable to all types of investment vehicles, asset classes, and ESG strategies. 

Given the increasing level of concern about greenwashing, the publication of the Standards is timely, as it aims to promote clearer communication about the ESG approaches used in investment products. As the first set of global standards for investment product ESG disclosures, the Standards also mitigate the risk of eroding investors’ trust in the industry. 

DISCLOSURE REQUIREMENTS

The purpose of the Standards is to facilitate fair representation and full disclosure of the ESG approaches used in an investment product. An ESG approach is any one of a variety of methods for considering ESG issues in an investment product’s objectives, investment process, or stewardship activities. The Standards can be applied to any investment product regardless of how it is named, labelled, or categorized. Investment managers are given the flexibility to apply the Standards on a product-to-product basis. The Standards’ disclosure requirements include, but are not limited to, the following elements of an investment product’s strategy: 

• Summary description of ESG approaches

• Summary description of specific ESG issues addressed by ESG approaches

• Labels and certifications

• Sources and types of ESG information

• Systematic consideration of financially material ESG information in investment decisions

• ESG index as an investment universe

• ESG screening criteria

• Targets for portfolio-level ESG characteristics 

• Portfolio-level allocation targets for investments that have specific ESG characteristics

• Stewardship activities

• Environmental and social impact objectives