The ESG disclosure standards that CFA Institute is working towards will be “broader” than the EU’s sustainable finance disclosure regulation (SFDR), the lead on the former’s project told journalists yesterday afternoon.

Chris Fidler, senior director, global industry standards at CFA Institute, was speaking during a media briefing about the launch of a consultation paper about the investment professionals association’s proposals for the scope, structure and design principles for the envisaged standard.

It is looking for feedback on these aspects by 19 October, with a plan to publish an initial version of the proposed disclosure requirements for the standard in May next year.

In pursuing the development of a standard, CFA Institute has taken the view that, despite a wealth of existing and developing ESG-related regulations, standards, labels, and initiatives, there was, according to Fidler, “still a place for CFA Institute to contribute, specifically in the establishment of specifications for investment product disclosures”.

It has identified two other regulations or initiatives in this category: the SFDR, which is one of the regulations that has resulted from the European Commission’s 2018 sustainable finance action plan, and the Eurosif European SRI Transparency Code.

Fidler explained that the CFA standard would be different to both. About the SFDR, he said its requirements were “geared to help investors understand the sustainability of investment products” but that the CFA Institute standard would be broader.

Chris Fidler, CFA Institute

“It aims to help investors understand how and why ESG factors are incorporated in a product and investment strategy and how that may suit their needs, whatever those needs may be, which may go beyond environmental sustainability,” he said.

With regard to the Eurosif code, Fidler said this was primarily for a retail audience while the CFA Institute standard was envisaged as being helpful for professional institutional investors and advisers as well.

“Additionally, our standard will contain procedures for testing and assurance,” he added.

ESG-related features, needs

The association intends that the standard it is working on apply to investment products, without extending to an asset manager’s organisation. This is arguably another difference with the SFDR, which foresees entity-level reporting for certain entities. 

A key concept of the envisaged standard is that of ESG-related features. CFA Institute said these were expected to serve as the backbone of the standard “in that they are a mechanism to connect investor needs and disclosure requirements”.

Six such features are being proposed: ESG integration; ESG-related exclusions; best-in-class; ESG-related thematic focus; impact objective; and proxy voting, engagement and stewardship.

The consultation paper sets out a proposed definition of each feature, which in turn consists of six components, including the feature’s function, the benefit, and “alignments” – how the feature’s definition aligns with other organisations’ definitions.

The consultation paper does not set out disclosure requirements themselves, but for each feature identifies “types of issues to be addressed by disclosure requirements”.

A series of questions are asked about each feature, such as whether the proposed definition is clear and, for certain suggested features, sufficiently distinct.

As concerns ESG-related investor needs, CFA Institute has identified five, also distinguishing them from the motivation behind them. It has also proposed a ”matrix” showing the relationship between ESG-related needs and features (see below).

Transparency, not ‘cheerleading’

The problem CFA Institute is seeking to address with its standard is the inconsistency and variation in ESG-related terms, investment approaches and disclosures.

“There is enormous confusion,” said Gary Baker, managing director of Europe, the Middle East and Africa (EMEA) at CFA Institute, during the media briefing. “The primary aim of what this standard is trying to do is bring a degree of order out of that chaos.”

The consultation paper emphasises that the forthcoming standard would not be about defining what constitutes an ESG or sustainable investment product or strategy, or pronounce on the relative strength of different approaches.

Instead, the intention is to provide greater transparency and comparability for investors by enabling asset managers to communicate more clearly communicate the ESG-related features of investment products with such features.

“We are not trying to be cheerleaders on any this, we’re trying to offer full, fair information to people that can then utilise it to make their own decisions,” said Baker.

In going for a disclosure-based standard CFA Institute is leaning on its experience with its Global Investment Performance Standards (GIPS). Fidler said the standard is “distinctly different from other standards that seek to establish disclosure requirements for corporate issuers, prescribe requirements for the labeling or rating of securities or investment products, or define best practice for a particular strategy or approach”.

The consultation paper was developed with input from 15 investment professionals working as volunteers in the context of an ESG working group that was formed in January year.

CFA Institute is now looking for volunteers to support the next phase of the standard’s development. It is looking to form two committes, a verification committee and a technical committee.

The consultation paper and response reform can be found here.

CFA Institute’s proposed ESG-related features-needs matrix

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