Interview: CFA Institute positive about ESG disclosure standard

CFA Institute is looking forward to the next steps on its proposed ESG disclosure standard for investment products following strong support of the organisation’s thinking on critical points, according to its lead on the project.

The standard is intended to help investors better understand and compare investment products with ESG-related features – not to be confused with a labelling initiative or with a disclosure standard for ESG investment products.

The consultation on the proposed standard closed in mid-October. Some 70 public comment letters were submitted from a range of stakeholder groups and entities – advisers in Latin America, service providers in Asia-Pacific, PensionDanmark, BlackRock, and multiple industry and interest groups.

Further feedback was provided but specified as confidential. This amounted to about 30% of all comments, according to Chris Fidler, senior director, global industry standards at CFA Institute.

The public feedback includes some eye-catching comments, such as a “No, we do not agree” from US-based Investment Company Institute (ICI) in response to CFA Institute’s opening question, which was about whether a standard is needed.

Fidler cautions against reading a conflict into the fact there was some critical feedback, which the Institute welcomes anyway, and says there was a broad-based level of support for CFA Institute’s proposal.

About 70% of total responses were fully supportive of CFA Institute on what Fidler says were two critical questions in the consultation: the opening one about whether a standard is needed, and the question ‘do you agree that a disclosure-based approach would be more helpful to achieve the standard’s goals of transparency and comparability than a prescriptive-based approach?’.

Another 18% of responses were supportive but expressed some concerns, according to Fidler. Only six letters were critical of the effort overall.

He is keen to emphasise the distinction between a disclosure-based standard and a labelling or naming standard for what makes a product sustainable or responsible.

The latter can be a very valid approach, he says, “but it’s very difficult to establish a label like that on a global basis because people in different regions truly do have different values”.

That CFA Institute is aiming for a global standard with its ESG disclosure initiative is underappreciated, he says.

Another issue that CFA Institute runs up against, says Fidler, is people confusing its ESG disclosure initiative with what is happening on the side of SASB, the GRI, IIRC, TCFD, NFRD, and IFRS.

“We’re talking apples and oranges,” he says. “Because what those are trying to do is develop a standard for how companies disclose to investors and the public at large.”

The communication CFA is worried about, however, says Fidler, is that between investment professionals, as consumers of information from companies or issuers, and investors, retail or institutional.

“The place we’re coming from is a place of ethics and investment professionalism,” he says. “What is the ethical and professional duty of the investment professional, when they construct a strategy and then offer that to other people, to disclose the decisions that they’ve made?”.

Matching investor needs

A possible limit to CFA Institute’s ESG disclosure standard for investment products may be investor education and investors’ understanding of their needs in relation to the disclosures made.

One respondent to the consultation, Ryujiro Miki, chair of the advocacy committee of CFA Society Japan, appeared to challenge the CFA Institute on the notion of investor ESG-related needs, saying that “in Japan, I do not think it is common to find retail investors who are aware of their ‘needs’”.

He said he disagreed with the classification of ESG-related features according to ESG-related needs in the consultation paper, and that “it should be improved by the global survey to find out if there are such ESG-related needs”.

In its consultation paper CFA Institute proposed a universe of potential ESG-related needs, setting them out in a matrix that linked them to different ESG “features,” such as ESG integration, or ESG-related exclusions.

Fidler says many of the ESG-related needs correspond to cultural and individual beliefs and that CFA Institute therefore expects their prevalence to vary regionally, in aggregate, as well from client to client.

Also, it is not unusual for people to have “unstated needs and preferences,” he tells IPE, adding that this is a familiar issue in many different types of product and service offerings.

“For example, some people may initially say they care only about risk and return, but later, when faced with a specific investment decision, they say that they don’t want to invest in businesses that sell a certain type of product,” he says.

As to the proposed ESG needs-features classification in the consultation, Fidler says the simple matrix isn’t enough to show people how to match up their needs with investment products.

CFA Institute is thefore considering developing a separate investor user guide to give them the knowledge they need to understand their needs and what is available in the marketplace.

“I think we could do that more in a guide on how to use the standard if you’re an investor versus in the standard itself,” he says, emphasising this is a tentative idea.

Feedback to the consultation is due to help shape an initial version of the standard, planned for release in May 2021.

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