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Business News›Markets›Stocks›News›Why ESG disclosures for investment products
need a holistic approach



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WHY ESG DISCLOSURES FOR INVESTMENT PRODUCTS NEED A HOLISTIC APPROACH

SECTIONS
Why ESG disclosures for investment products need a holistic approach
By Margaret Franklin, ET CONTRIBUTORSLast Updated: Feb 21, 2023, 03:27 PM IST
Synopsis


AS PART OF SFDR, FUNDS ARE CLASSIFIED INTO ARTICLES 6, 8, OR 9, DEPENDING ON
THEIR CHARACTERISTICS AND THEIR LEVEL OF SUSTAINABILITY. THE CFA INSTITUTE ESG
DISCLOSURE STANDARDS, IN CONTRAST, DO NOT AIM TO ACHIEVE POLICY OBJECTIVES, OR
LABEL ESG PRODUCTS, BUT FOCUS ON ACHIEVING PRODUCT TRANSPARENCY.

iStock
Environmental, social, and governance (ESG) factors are increasingly recognized
as integral components of investment analysis. While there is an array of
choices available when it comes to the metrics used to evaluate these factors,
investors usually apply different analytical approaches and data sources to
address their ESG considerations. Owing to the growing stakeholder capitalism
movement and its focus on the long-term impact of companies on society,
sustainable investments have grown rapidly, and are estimated to be around 2.5
trillion US dollars globally.1

At CoP26 held in Glasgow in 2021, India made ambitious commitments to combat
climate change, which will require several billion dollars of investments. At
the same time, Indian asset managers are recognizing the long-term benefits of
investing in ESG-oriented mutual fund assets. ESG-oriented mutual fund assets in
India increased from 336 million US dollars to 1.5 billion US dollars between
2020 and December 2021, according to the Association of Mutual Funds in India.3

Global Standard in ESG Disclosures
CFA Institute believes in fair representation and full disclosure of
environmental, social, and governance issues for investment products. In 2021,
we launched the global voluntary standards for disclosing how investment
products consider ESG issues in objectives, investment strategy, and
stewardship. Given that ESG considerations within the financial analysis and
investment decisions arena are subject to the investment style and approach of
the fund manager, a lack of clear, standardized disclosures not only results in
confusion among investors and advisors, but can also lead to concerns about
greenwashing. The Standards are designed to address this and include 10
fundamental requirements relating to how managers need to prepare disclosures
and make them available to investors.



Robust Standard-setting Process and Feedback from Global Stakeholders
During the development process of the Standards, we received comment letters
from global asset management firms and other key stakeholders that helped us
refine our approach. One area where the feedback influenced changes was in
categorization and labeling. We realized there currently is no agreement on
these features, or how managers think about these strategies. In addition,
regulators were framing rules for different labels and terminologies. Therefore,
in our final version of the Standards, we included a section on terminologies,
which provides recommendations, but not requirements. Most of the investment
firms appreciate our open architecture and the flexibility to frame disclosures,
and the guidance we provide to help them with the process.

The CFA Institute ESG Disclosure Standards are carefully designed to complement
existing regulations. For example, the European Union’s Sustainable Finance
Disclosure Regulations (SFDR) are designed to classify funds for sustainable
investment products by asking if the product has a sustainable investment
objective, what strategy the product pursues, and whether the product considers
adverse impacts. These high-level questions are addressed by specific sections
in the standard.

As part of SFDR, funds are classified into articles 6, 8, or 9, depending on
their characteristics and their level of sustainability. The CFA Institute ESG
Disclosure Standards, in contrast, do not aim to achieve policy objectives, or
label ESG products, but focus on achieving product transparency.



SEBI’s ESG Disclosure Rules for ESG Mutual Funds



In India, the Securities and Exchange Board of India (SEBI) made remarkable
efforts to streamline disclosures and processes for companies, fund managers,
and other intermediaries to improve market integrity. Following the mandate by
the Securities and Exchange Board of India around Business Responsibility &
Sustainability Reporting (BRSR), as many as 180 Indian companies have issued
voluntary disclosures this year. SEBI’s disclosures for ESG mutual fund schemes
cover both firm and investment product level disclosures, and general
obligations of the asset management company with respect to sustainable
investments.

The CFA Institute Standards complement SEBI’s disclosure rules. We published a
guidance document accompanying our Standards to help fund managers comply with
the disclosure rules for various investment approaches, ranging from negative /
positive screening, ESG integration, and impact investing. In addition, the
Standards provide additional disclosure criteria which investors will find
useful. For example, for an impact investment objective, our Standards require
managers to disclose the stakeholders who are expected to benefit, discuss any
trade-offs between impact and financial objectives, and explain how the impact
objectives contribute to Sustainable Development Goals (SDGs), if stated.

Along with the Right Regulations, Education is Key
As demand for sustainable investing grows, regulation that enables the
sustainable investment market to develop in an orderly fashion is important. But
bridging the skills gap is also a key part of the equation. Our 2020 review of
10,000+ LinkedIn investment professional job posts found that approximately 6%
mentioned sustainability-related skills, and the demand for sustainability
talent is rated as “very high.” However, our analysis of 1 million investment
professionals on LinkedIn found that <1% listed sustainability-related skills.
We expect educational offerings from credible global providers such as CFA
Institute will continue to play a key role in training a new generation of
investment professionals who can not only incorporate ESG factors in their
investment analysis, but also help retail investors select the right products
that align with their investment goals and values.

Conclusion
When we first described a scenario of Purposeful Capitalism in 2017 as part of
our Future State of the Investment Profession report, some observers dismissed
it as too aspirational, although we have seen this idea gain traction in the
years since and now society is expecting more from all companies, including
those in the investment industry. These expectations require that organizations
communicate their investment goals and strategies clearly to all stakeholders
and are forthright about the risks and benefits associated with ESG investing.
CFA Institute Disclosure Standards enables investment managers to provide
greater transparency and much needed clarity to the marketplace.

[The author is CFA (President and CEO, CFA Institute)]

(Disclaimer: Recommendations, suggestions, views and opinions given by the
experts are their own. These do not represent the views of Economic Times)



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(Disclaimer: The opinions expressed in this column are that of the writer. The
facts and opinions expressed here do not reflect the views of
www.economictimes.com.)



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