Investment professionals want to end “confusion” surrounding ESG investments and they hope that proposed disclosure standards will help.
CFA Institute is attempting to bring more transparency to ESG-related features of investment products so investors can better compare them.
The Institute has issued consultation on six definitions that could form a common, shared standard for ESG products. The organisation has asked for volunteers to take the project forward.
Chris Fidler, senior director for global industry standards at the CFA Institute, said: “[The proposed standard is] distinctly different from other standards that seek to establish disclosure requirements for corporate issuers, prescribe requirements for the labeling or rating of securities or investment products, or define best practice for a particular strategy or approach.”
The aim is to mainly focus on disclosure requirements for investment products with ESG-related features. The Institute says this would mean investors could “more comprehensively evaluate whether or not an investment product will meet their needs”, Fidler said.
ESG-related features are defined in the consultation paper as components or capabilities of investment products that can be combined in different ways to meet different investor needs, and the proposed definitions for six ESG-related features – which are expected to serve as a “backbone” of the overall standard – are:
1. ESG Integration: Explicitly considers ESG-related factors that are material to the risk and return of the investment, alongside traditional financial factors, when making investment decisions.
2. ESG-Related Exclusions: Excludes securities, issuers, or companies from the investment product based on certain ESG-related activities, business practices, or business segments.
3. Best-in-Class: Aims to invest in companies and issuers that perform better than peers on one or more performance metrics related to ESG matters.
4. ESG-Related Thematic Focus: Aims to invest in sectors, industries, or companies that are expected to benefit from long-term macro or structural ESG-related trends.
5. Impact Objective: Seeks to generate a positive, measurable social or environmental impact alongside a financial return.
6. Proxy voting, Engagement and Stewardship: Uses rights and position of ownership to influence issuers’ or companies’ activities or behaviors.
Margaret Franklin, president and CEO of CFA Institute, said: “In the face of growing interest in ESG investing, we found widespread support from the investment community for the development of a standard to reduce confusion and facilitate better alignment of investor objectives with product intent.”
The consultation ends on October 19.
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