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The Art of Dispute: Key case law and recent developments in dispute resolution
Our newsletter provides practical advice and a concise analysis of key case law and recent developments in dispute resolution.
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Canada | Publication | January 28, 2022
In an effort to help avoid “greenwashing” in the ESG-related funds industry, on January 19, 2022, the Canadian Securities Administrators (CSA) published guidance for funds and their managers in CSA Staff Notice 81-334 ESG-Related Investment Fund Disclosure (the Notice). The guidance provided in the Notice does not create any new legal requirements or modify existing ones. Rather, it clarifies and explains how existing regulatory requirements apply to ESG disclosure and sets out best practices that CSA staff believe should enhance disclosure as well as sales communications with respect to ESG-related funds. The Notice was published following a review of the prospectus and continuous disclosure record of 32 funds managed by 23 different managers.
ESG as a concept can quite reasonably mean different things to different people. ESG investors often consider personal or moral beliefs when making investment decisions. Accordingly, it is essential that investors in ESG-related funds fully understand the potential financial and actual implications of their investments. For funds and fund managers this boils down to making every effort to ensure communications about ESG matters are delivered in language that is unambiguous, plain, clear and consistent.
The guidance is broad and covers 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. Certain key guidance set out in the Notice is summarized below.
If an ESG-related fund includes a term such as “sustainability,” “green” or “social responsibility” in its name (an important tool for funds to differentiate themselves in the market and for investors to identify appropriate investments), then the fundamental investment objectives of the fund must reference that specific aspect of ESG. It will not be sufficient to refer to general ESG objectives while ignoring the specific aspect set out in the name.
The continuous disclosure review of ESG-related funds indicated that there may be room for improvement when it comes to clearly laying out investment strategies. The Notice includes the following guidance:
In some circumstances, funds are required to make available their policies and procedures on proxy voting and shareholder engagement. Regardless of whether there is any regulatory obligation to do so, the CSA encourages funds to make copies of their proxy voting and shareholder engagement policies and procedures available on their websites.
Almost half of the ESG funds considered as part of the continuous disclosure review disclosed ESG-specific risks in their prospectuses. The other half did not, despite the requirement to disclose risks associated with “any particular aspect” of the funds’ investment objectives and strategies. The Notice includes a reminder of fund risk disclosure obligations and provides some guidance as to how those obligations relate to ESG issues.
The Notice goes into some detail setting out continuous disclosure obligations and providing guidance with respect to its preparation. The guidance provided aims to address two key issues identified by the CSA as part of its continuous disclosure review, namely, the general lack of reporting regarding:
A significant portion of the Notice is devoted to guidance on sales communications related to ESG funds, the details of which are beyond the scope of this legal update. The guidance provided appears to be addressing additional concerns identified in the continuous disclosure review, namely, concerns regarding inconsistencies in information between a fund’s offering documents, name or fund classification and its sales communications and concerns that disclosure of ESG matters may not be as clear, precise and detailed as it might be. Guidance is offered with respect to funds that are simply focused on ESG investing, funds that reference their own ESG performance, and funds that include fund-level ESG ratings, scores or rankings.
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