CFA Institute tweaks ‘architecture’ in draft ESG disclosure standards

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CFA Institute has decided against trying to define ESG or sustainability terms for its forthcoming global ESG disclosure standards for investment products and to instead use “plain language”, according to an overview of the draft standards released for consultation.

The decision was taken based on feedback to its consultation on the proposed development of the standards. The association said responses indicated that “no clear consensus exists on the definitions of ESG or sustainability terms”.

The decision means that the draft standards do not follow the same “architecture” presented in last year’s consultation paper.

This set out six ESG-related features, such as ESG integration, best-in-class, and ESG-related thematic focus, and a proposed definition of each feature. The thinking was that classification of ESG-related features should trigger certain related disclosure requirements.

Now, however, the CFA Institute has said the draft considers an ESG-related feature to be “any aspect of an investment product’s strategy that uses ESG information or addresses ESG issues”.

As a result, the disclosure requirements are organised primarily by components of an investment strategy: objectives, benchmarks, constraints, security selection, financial analysis and valuation, portfolio construction, and stewardship.

“These are common to all investment products and all investment professionals should recognise that that’s really the framework for a strategy, and that ESG information or issues could be considered along any one or more of those points,” said Chris Fidler, senior director, global industry standards at CFA Institute.

He suggested the standards had potential to serve as somewhat of a “universal translator” but said that “at the very least the standards provide a more granular and plain language-way to talk about some of these features instead of using buzzwords nobody can agree on”.

Investment managers can apply the standards regardless of how their investment products are named, labelled or categorised.

Paul Andrews, managing director of research, advocacy and standards at CFA Institute, said: “What sets the standards apart from others is that they are suitable for all types of investment vehicles, all asset classes, all ESG strategies, and all markets.

“They harmonise many of the product-level ESG disclosure requirements found in existing regulations and other more narrowly-focused voluntary standards, as well as address gaps where no standards exist. The standards will become the first global standards for product-level ESG disclosures.”

SFDR-aligned path, but with a difference

CFA Institute’s standards are similar to the EU sustainable finance disclosures regulation (SFDR) in that they aim to foster transparency in investment products, but there are many differences.

These include that the CFA Institute standards do not have the additional goals that the SFDR has, such as reorienting capital flows towards sustainable investment.

There are also differences in the scope of disclosures, with the standards for example only requiring product-level disclosures as opposed to also entity-level disclosures, and only requiring one set of disclosures, as opposed to the SFDR’s disclosure requirements for pre-contractual documents and for websites.

Fidler said the standards “provide a path forward for the rest of the world to move in the direction of SFDR and come closer to it without maybe some of the more aggressive parts of SFDR”.

“This is one of the benefits we’re shooting for of a global standard,” he said. “It’s more aggressive than what you see in the US now and other parts of the world, but it’s not quite where Europe is, but it gives people something to shoot for.”

CFA Institute said it offered a path forward that was aligned with the SFDR in terms of transparency “but is completely independent of any specific legal and regulatory framework and wholly impartial to investors’ or policymakers’ objectives”.

“And because the standards are voluntary, they offer a solution that can be implemented more quickly than what is typically possible through legislative and regulatory processes.”

Fidler said complying with the standards may be of less “incremental benefit” in Europe than in other parts of the world, and that this was not a problem.

“That’s always going to be the case. Different markets are at different places of development.”

He suggested the standards could help asset managers write their disclosures to meet the SFDR requirements.

“Maybe at the end of the day they use the standard to do that and don’t claim compliance formally, and we’re OK with that,” he said. ”This isn’t about chalking up how many people we can get to comply with our standards, this is us as CFA Institute fulfilling our mission about setting best standards, about advancing investment professionalism.”

The consultation runs until mid-July. The draft standards can be found here.