The CFA Institute has launched a consultation on ESG disclosure standards for investment products, seeking to enhance transparency and comparability between ESG products.

By Paul A. Davies and Michael D. Green

On 19 August 2020, the CFA Institute — the largest organisation representing investment professionals — released a consultation concerning ESG disclosures (the Consultation). Recognising the significant growth in ESG financial products, the CFA Institute is looking to establish a standard in describing and understanding the ESG financial products on the market. In doing so, the CFA Institute joins several organisations, including the Global Investors for Sustainable Development Alliance (previously covered in this blog post), working to harmonise ESG disclosure standards.

The CFA Institute noted that several market participants were concerned with the consistency and variation in use of ESG terms, approaches to ESG investing, and ESG disclosures. The growth in ESG financial products placed on the market has exacerbated this market concern. As such, the CFA Institute established an ESG Working Group to develop proposals for a voluntary global standard described as the ESG Disclosure Standards for Investment Products (the Standard).

The CFA Institute is clear in the Consultation that the CFA Institute is not seeking to define in the Standard what constitutes an ESG or a sustainable investment product or strategy. Instead, the Standard would allow investors to understand the features offered by a particular product, and to make comparisons between products.

The Standard would not necessarily apply to all ESG products. Instead, the Consultation envisages that asset managers would be able to choose the investment product to which the Standard would apply. The Consultation also envisages that a third party would be able to take an independent third party examination in order to provide assurance to investors that an ESG product has the features claimed by the asset manager.

In the Consultation, the CFA Institute identifies six ESG-related features for investment products:

  • ESG integration
  • ESG-related exclusions
  • Best-in-class
  • ESG-related thematic focus
  • Impact objective
  • Proxy voting, engagement, and stewardship

For each of the six ESG-related features, the Consultation sets out the feature’s name and function, the benefits typically expected of the feature, the alignment between the feature’s definitions and the definitions of other organizations, additional notes, and examples.

The deadline for comments on the Consultation is 19 October 2020. The CFA Institute expects to issue the Standard in May 2021.

Latham & Watkins will continue to monitor developments in this area.