Still early days in quest for Canadian ESG disclosure framework

Newly named CIFSC chair Ian Tam lauds CSA's recent guidance, but highlights ongoing challenges

Still early days in quest for Canadian ESG disclosure framework

With its recent announcement of guidelines around ESG fund disclosures, the Canadian Securities Administrators (CSA) has signalled exactly how serious it is about preventing deceptive or misleading communications around responsible investment products. But according to Ian Tam, it remains to be seen whether securities regulators will get tougher with respect to ESG disclosures.

“The CSA is using guidance to steer fund companies in the right direction. But none of this is required,” Tam, Morningstar Canada’s Director of Investment Research and the new Chair at the Canadian Investment Funds Standards Committee (CIFSC), told Wealth Professional. “It seems the CSA is taking a more cautious and arguably softer approach compared to the European Commission and their SFDR framework, which might work in well given the rapidly developing landscape that is frankly tough to navigate.”

As tough as it might be, it’s a problem that regulators are having to grapple with. Given the dramatic growth of sustainable funds in Canada, Tam says regulators are keeping a close eye on the space. But given the diversity in approaches, it’ll be hard for the CSA to draw thresholds and bright lines around ESG impact, let alone define the specific thresholds for fund providers to avoid being subject to more intense regulatory actions.

All in all, Tam argues that the expectations that the CSA expressed in their recent guidance were reasonable and also very helpful in promoting transparency and consistency. He commended the regulators’ guidance for highlighting some commonly used terms in the sustainable investing space. Its language is in also line with what’s being developed as part of CIFSC’s responsible investment identification framework, as well as the CFA Institute’s voluntary standards for ESG investment disclosures.

“The word ‘sustainable’ could mean different things to different people, so it's important that they define those terms,” he says. “The guidance provides reasonable examples of common terms and approaches, which will be useful for investors to find the product that suits their needs.”

‘It’s going to take time’

While he argues that the landscape for ESG disclosures is more established than many might believe, Tam acknowledges that Canada is still in the very early stages of effectively preventing greenwashing, social washing, and other similar practices.

As the CSA doesn’t have any known plans to develop their own framework for identifying responsible investment funds, he says advisors are finding it challenging to select a sustainable or responsible fund that aligns with the objective of the investor. To help with this, CIFSC is developing its own Canada-wide framework that can be applied regardless of data provider, which Tam believes will significantly help the cause.

“It’s going to take time for fund companies to start to disclose in the way that the CSA has recommended,” he says. “We have to give them that time … it’s not so easy to suddenly change your regulatory documents.”

Without a common language or framework, Tam says, advisor and investor education regarding ESG remains a frustrating area. For the advisor, that lack of clarity also makes the already-demanding task of finding suitable investment recommendations all the more challenging.

Because it’s so rich and multifaceted, Tam says the universe of sustainable investing strategies needs a proper taxonomy or framework for advisors to properly find the ones that fit their clients’ needs. Without that map to guide them, investment professionals might end up abandoning the search all together, though Tam encourages them to avoid “throwing the baby out with the bathwater.

“I think the intent to promote better ESG performance or more positive impact is definitely there, and investors or advisors need to have a little bit of patience as these frameworks are being developed,” he said. “It’s worth waiting it out. I think there’s a lot of good that could come out of this.”