CFA Institute, the global association of investment professionals, has launched the first voluntary global ESG disclosure standards for investment products in a bid to address the absence of standardized ESG definitions, provide a framework for disclosure of ESG investment approaches, and address greenwashing.

Mary Leung, CFA, head of advocacy, Asia-Pacific, at the CFA Institute, says: “In order for investors to know that the products that they are investing in can deliver some of these objectives, they need better information. On the other side, the investment managers are seeing a huge appetite for ESG or sustainable products but they’re also seeing scepticism, concerns over greenwashing; investors are asking increasingly savvy questions, and also demanding more transparency.”

The standards, which are designed to enable investors, consultants, advisers, and distributors to better understand, compare, and evaluate ESG investment products, follow an industry-wide consultation and apply to all types of investment vehicles, asset classes, and ESG approaches. They also aim to support investors with information that is complete, reliable, consistent, clear, and accessible.

“Right now, the information may exist but they can also exist in many different places, documents, websites, and it’s very difficult for an investor to look for that information.  Even if they find all that information, it’s very hard for them to compare that information with the similar information of a similar investment product,” Leung says.

Five criteria

The new ESG disclosure standards, which are non-mandatory or voluntary, can be used by asset owners and managers in evaluating the ESG or sustainability profile of their investment products, but are subject to third-party assurance procedures.

According to the CFA Institute standards, the sustainability disclosures for each investment product must adhere to five criteria, namely: completeness, reliability, consistency, clarity, and accessibility. The disclosure must also cover the product design, investment strategy, investment objectives, approach to ESG, screening criteria, indices and benchmarks, and decarbonization strategies, among others.

Unlike other similar standards, such as the European Union’s Sustainable Finance Disclosure Regulation ( SFDR ), the CFA Institute standards do not require ESG disclosure at the entity/firm level but only on the product level.

Verification procedures

Leung says the new standards were designed so as not to conflict with potential or existing ESG regulations. The standards also do not make it mandatory for asset owners and managers to disclose their specific asset holdings, and do not require periodic reporting.

“What we’re not trying to do is say that this is the definition of ESG, this is our definition, and if you want to use our standards you have to accept our definition. Also, we’re not saying you have to report your top 10 or top five holdings every six months in order to report our standards. We’re basically saying, if you have an ESG product and they have certain features, then here is what you have to tell your potential investors,” she says.

The CFA Institute is also developing a set of verification procedures for asset owners and managers who wish to use the ESG disclosure standards.

“What that means is that for those managers who prepare their disclosures in accordance with the CFA Institute standards, they can retain an independent verifier to make sure that these disclosures have been prepared in accordance with our standards. So it’s an extra step. Obviously, the design and stability are very important in any standards and we believe having this additional element will provide comfort to our investors,” Leung says.

Nick Pollard, managing director, Asia-Pacific, at CFA Institute, adds: “The complexities of the ESG investing landscape remain vast. While there are proven business benefits to sustainability reporting, we must identify ways to mitigate greenwashing and preserve the integrity of the information being shared about ESG investment products to make them more understandable and comparable to the end-investor. The release of the first edition of the standards marks a meaningful and important step forward in the broader efforts to make that a reality.”