The Canadian Securities Administrators (CSA) have published
guidance for investment fund issuers with respect to disclosure
related to environmental, social and governance (ESG)
considerations, particularly funds whose investment objectives
reference ESG factors (ESG Funds) and other funds that use ESG
strategies (ESG Strategy Funds, and together with ESG Funds,
ESG-Related Funds). The CSA guidance was published in response to
the growing interest in ESG investing and increased potential for
"greenwashing", whereby a fund's disclosure or
marketing intentionally or inadvertently misleads investors about
the ESG-related aspects of the fund.
The guidance provided by the CSA does not create new legal
requirements, or modify existing ones, but seeks to clarify and
explain how, in staff's view, the current securities regulatory
requirements should be applied to ESG-related investment fund
disclosure. The guidance also includes best practices that staff
believe would enhance ESG-related disclosure and sales
communication, and that managers should consider
enabling investors to make more informed investment
decisions.
CSA Staff Notice 81-334 – ESG-Related
Investment Fund Disclosure, published by the CSA on January 19,
2022 (Staff Notice) provides an overview of ESG-themes and
strategies, and a brief summary of key international and domestic
developments in the area including the recently published report of
the International Organization of Securities Commissions (IOSCO)
which sets out recommendations for securities regulators and
policymakers to improve sustainability-related practices, policies,
procedures and disclosure in the asset management industry. The
Staff Notice also includes ESG-related guidance (summarized below)
in the following areas: (i) investment objectives and fund names;
(ii) fund types; (iii) investment strategies disclosure; (iv) proxy
voting and shareholder engagement policies and procedures; (v) risk
disclosure; (vi) suitability; (vii) continuous disclosure; (viii)
sales communications; (ix) ESG-related changes to existing funds;
and (x) ESG-related terminology.
The Staff Notice is based on a recently completed continuous
disclosure review of public disclosure documents and communications
of ESG-Related Funds which was carried out to assess the quality of
ESG-related aspects of disclosure. Based on its review, staff
concluded that ESG-Related Funds in general would "benefit
from greater detail about the ESG-related aspects of the fund,
particularly regarding investment strategies disclosure, proxy
voting disclosure and continuous disclosure." Managers
are encouraged to review their fund disclosure documents and sales
communications in light of the Staff Notice as regulators will
continue to monitor the regulatory disclosure of ESG-Related Funds
to ensure that the disclosure satisfies the relevant requirements
and provides investors with balanced and accurate information about
the funds and their investment strategies. The Ontario Securities
Commission noted that it will review fund documents in accordance
with the guidance provided in the Staff Notice and may request
copies of all sales communications relating to ESG-Related Funds as
part of the reviews.
Investment Objective and Fund Names
A fund's name and investment objectives help investors identify the primary focus of the fund and should accurately reflect the extent to which the fund is focused on ESG. The Staff Notice outlines the link between a reference to ESG in the fund's name and a reference to ESG in the fund's investment objectives, as follows:
- If the fund's name references ESG, the fund's investment objectives are required to reference the ESG aspect included in the fund name.
- If the fund's name does not reference ESG, the fund's investment objectives may reference a relevant ESG aspect of the fund.
- If the fund's fundamental investment objectives reference ESG, the fund's name may reference the ESG aspect included in its investment objectives.
- If the fund's fundamental investment objectives do not reference ESG, the fund's name should not reference ESG.
Fund Types
A mutual fund that is not an exchange traded fund is required under Form 81-101F1 - Contents of a Simplified Prospectus to identify the type of mutual fund that the fund is best characterized as. A mutual fund that includes ESG in its fundamental investment objectives may include ESG as an element of its fund type, in addition to its primary fund type. The Staff Notice states that a fund that does not include ESG in its fundamental investment objectives should not characterize itself as a fund that is focused on ESG as it would not be an accurate identification of the fund type.
Investment Strategies Disclosure
The Staff Notice goes into detail regarding appropriate
disclosure of a fund's investment strategies. In particular,
the Staff Notice highlights the importance of full, true and plain
ESG-related investment strategies disclosure in order to enable
investors to understand the ways in which the fund will meet its
ESG-related investment objectives (if the fund is an ESG Fund) and
the types of investments that the fund may make.
A fund that uses one or more ESG strategies, either as principal
investment strategies or as part of its investment selection
process, is required to provide disclosure about the ESG-related
aspects of its investment selection process and strategies. For
both funds that use one or more ESG strategies as part of their
principal investment strategies and those that use one or more ESG
strategies as part of their investment selection process, the
description of these ESG strategies must be written using plain
language in order to ensure that investors are able to understand
the fund's investment strategies. In addition, the investment
strategies disclosure should include descriptions of any ESG
factors used, explain the meaning of each ESG factor and identify
how the ESG factors are evaluated and monitored.
The Staff Notice also notes that if a fund's use of one or more
ESG strategies includes the use of targets for specific ESG-related
metrics, such as carbon emissions, such funds are encouraged to
disclose those targets as part of their investment strategies and
identify if those targets may evolve or change over time in
response to changing circumstances.
The Staff Notice provides additional guidance specifically to funds
that use: (a) proxy voting or shareholder engagement as an ESG
strategy; (b) multiple ESG strategies; and (c) ESG ratings, scores,
indices or benchmarks.
Proxy Voting and Shareholder Engagement Policies and Procedures
The Staff Notice outlines the requirement of funds to include
disclosure of a fund's proxy voting policies and procedures. If
a fund uses proxy voting as an ESG investment strategy, the
prospectus and/or annual information form, as applicable, is
required to include a summary of the ESG aspects of the fund's
proxy voting policies and procedures. This summary would provide
clarity about how the voting rights attached to the fund's
portfolio securities will be used to further the fund's
ESG-related investment objectives, or in the case of a fund that
does not have ESG-related investment objectives but that uses proxy
voting as an ESG strategy, how the ESG-related proxy voting
strategy is implemented.
The Staff Notice notes that, while not required, funds that use
shareholder engagement as an ESG strategy are encouraged to make
their shareholder engagement policies and procedures publicly
available in order to provide investors with greater transparency
into the scope and nature of the fund's use of shareholder
engagement as an ESG strategy.
Risk Disclosure
The Staff Notice highlights the importance of risk disclosure by
ESG-Related Funds in order to enable investors to better understand
the potential challenges faced by the fund in meeting its
ESG-related investment objectives and/or using its ESG strategies,
as applicable.
The Staff Notice also notes more generally that all funds should
consider whether there are any material ESG-related risk factors
that are applicable to the fund and disclose such risk factors
where applicable.
Suitability
The Staff Notice clarifies situations when a fund should include ESG-related factors in describing the suitability of the fund for particular investors. The CSA states that if the fund is only focused on a particular aspect of ESG, such as gender diversity in leadership or the reduction of carbon emissions, any suitability statement that indicates that the fund is particularly suitable for investors who have ESG-related investment objectives should accurately reflect the particular aspect of ESG that the fund is focused on. Additionally, an ESG Strategy Fund should not state that the fund is particularly suitable for investors who have ESG-related investment objectives, as the fund does not have ESG-related investment objectives.
Continuous Disclosure
The Staff Notice highlights the importance of an ESG-Related
Fund's continuous disclosure in helping to prevent greenwashing
by allowing investors to monitor the fund's ESG performance and
evaluate the fund's progress in terms of meeting its
ESG-related investment objectives.
Funds with ESG-related investment objectives, unlike other types of
funds, typically aim to achieve ESG-related outcomes in addition to
financial performance. In order to provide investors with
meaningful disclosure about those ESG-related outcomes, funds that
have ESG-related investment objectives are encouraged to disclose,
as part of the summary of the results of the fund's operations,
the ESG-related aspects of those operations, including the
fund's progress or status with respect to meeting its
ESG-related investment objectives. Funds that intend to generate a
measurable ESG outcome are also encouraged to report on whether the
fund is achieving that outcome.
The Staff Notice acknowledges that websites and non-regulatory
documents are being increasingly used to provide ongoing
information about the ESG performance and metrics of funds, as well
as other ESG-related information, and encourages funds to provide
investors with additional periodic information on how they are
meeting their ESG-related investment objectives.
Sales Communications
The Staff Notice notes that sales communication pertaining to an
investment fund should accurately reflect the extent to which the
fund is focused on ESG, as well as the particular aspect(s) of ESG
that the fund is focused on. A fund should not include statements
in its sales communications that indicate that it is focused on ESG
unless the fund references ESG in its investment objectives.
A fund that does not reference ESG in its investment objectives but
is otherwise an ESG Strategy Fund may include statements in its
sales communications that accurately reflect the extent to which
that strategy is used. However, such funds should not exaggerate
the extent of the fund's focus on ESG in their sales
communications.
In contrast, while a fund that does not reference ESG in either its
investment objectives or investment strategies may provide factual
information about the ESG characteristics of its portfolio (such as
fund-level ESG ratings, scores or rankings), it should not include
any ESG-related claims about what the fund is trying to
achieve.
The Staff Notice provides additional guidance on how to avoid
certain issues surrounding including fund-level ESG ratings, scores
or rankings.
ESG-Related Changes to Existing Funds
The Staff Notice provides guidance to existing funds who wish to add or remove ESG references from its name, fundamental investment objectives or investment strategies, as follows:
- If the fund is adding a reference to ESG to its name, the fund is required to change its investment objectives to reference the ESG aspect included in the fund name.
- If the fund is removing a reference to ESG from its name, the fund may change its investment objectives to remove reference to the ESG aspect removed from the fund name.
- If the fund is adding a reference to ESG to its investment objectives, the fund may change its name to reference the ESG aspect included in the investment objectives.
- If the fund is removing a reference to ESG from its investment objectives, the fund is required to change its name to remove the reference to ESG.
A fund that wishes to change its fundamental investment objectives must obtain the prior approval of its securityholders, as per National Instrument 81-102 - Investment Funds. Where an ESG strategy is not a material or essential aspect of a fund and is therefore not included in the fund's fundamental investment objectives, a fund that adds or removes disclosure about the ESG strategy in its investment strategies disclosure is not subject to the securityholder approval requirement.
ESG-Related Terminology
The Staff Notice highlights a lack of consistency in ESG-related terminology used throughout the investment fund industry and encourages industry participants to develop common ESG-related terms in order to help investors better understand ESG-Related Funds.
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