Canada's lax regulation of ESG funds raises greenwashing concerns

Market experts warn absence of clear regulations poses danger of undermining consumer trust in the sector

Canada's lax regulation of ESG funds raises greenwashing concerns

Despite recent claims of "greenwashing" elsewhere, which have prompted other authorities, including the U.S., to look at tightening their rules, Canada is continuing with its relatively liberal approach to policing funds claiming environmental, social, and governance (ESG) credentials.

Early in the year, the Canadian Securities Administrators (CSA) released guidelines for ESG funds that merely highlighted how the rules already in place apply to them.

This guidance, according to a CSA spokeswoman who spoke to Reuters, is sufficient, but market analysts warn that the absence of clear regulations runs the danger of undermining business confidence.

Furthermore, Reuters reported that according to Refinitiv data, the assets under management of Canadian responsible equity funds increased by 24 percent from a year earlier to C$22.4 billion ($17.3 billion) in May. Assets held by these funds totaled $3.3 trillion globally.

The CSA has noted the possibility for "greenwashing," or overstating an organization's commitment to ESG, has increased with the industry's expansion.

Given the spike in interest, regulators in the U.S. and Europe are thinking about imposing new disclosure rules for ESG funds.

A fund's name and investment objectives must coincide, investing methods must be disclosed, and how ESG elements are assessed and tracked must be explained, according to the CSA's guidelines.

According to Murray Gold, partner at the law firm Koskie Minsky, it doesn't expressly define ESG or demand measurable ESG outcomes, allowing funds to brand themselves as such even when they don't significantly move the needle on ESG objectives.

"The essential greenwashing problem is that people are buying into these funds because they believe they're going to improve something," Gold said. When regulators allow funds to use words "as they wish," they look "embarrassingly weak," he added.

According to the CSA representative, the current disclosure rules are sufficiently comprehensive to cover ESG-related funds, and the regulator would take any necessary future legislative measures into consideration.

If the SEC's plan is implemented, which is anticipated in fiscal 2023, Canadian funds will find it simpler to call themselves ESG than U.S. funds, which might damage the reputation of the Canadian ESG funds market, according to Dustyn Lanz, senior advisor at ESG Global Advisors.

Contrary to the SEC's recommendation, Canadian funds making these claims are not required to reveal any quantified ESG impact, which might result in "impact washing," the analyst continued.

Before releasing the guidance, the CSA examined the regulatory disclosures made by ESG-related funds and discovered shortcomings, such as the failure to explain how ESG elements were assessed and holdings that did not align with fund names or objectives.

To assist with investment decisions, the CSA has also proposed reporting standards for businesses that address climate change. According to CFA Societies Canada Managing Director Michael Thom, these criteria would be an "essential building component" for fund disclosures.