The EU’s sustainable finance disclosures regulation (SFDR) has probably contributed to reducing greenwashing risks, staff at CFA Institute have judged.

Based on an analysis of 60 North American and EU funds that are marketed to retail investors and incorporate ESG factors in the investment process, asset managers appear to be mostly “appropriately disclosing their ESG approaches”, the researchers said in a new report.

They found five instances of ESG-related information that they said would likely confuse an investor and may create a perception of greenwashing. Three cases were from North American funds and two from EU funds.

Inconsistency of disclosures – discrepancies in the presentation of funds’ screening criteria – was the primary issue the CFA Institute staff encountered in the sample.

In their report, ‘An Exploration of Greenwashing Risks in Investment Fund Disclosures: An Investor Perspective’, CFA Institute’s Nicole Gehrig and Alex Moreno said that “the different regulatory environments in North America and the EU were associated with a difference in the types of potentially confusing information we documented”.

“The SFDR in the EU jurisdiction has likely helped mitigate potentially confusing information because the regulation requires additional ESG disclosures to describe the fund’s environ- mental and social objectives, characteristics, methodologies, data sources, engagement policy, and due diligence/limitations to the data.”

Chris Fidler, head of global industry standards at CFA Institute and contributor to the report, told IPE: “It is quite possible that SFDR made certain aspects of funds clearer while creating confusion in other areas. Our conclusion reflects our overall impression of the effect of SFDR vis-à-vis the US, which does not yet have specific disclosure requirements. Our conclusion should not be taken to mean that we agree with all of SFDR’s requirements.”

Chris Fidler, CFA Institute

”Our conclusion should not be taken to mean that we agree with all of SFDR’s requirements”

Chris Fidler, CFA Institute

In their report, Fidler and his colleagues noted that the Canadian Securities Administrators Staff Notice, which explains how existing securities regulatory requirements apply to ESG-related investment fund disclosures, may have also helped to reduce the risk of greenwashing.

They also said that although added disclosures could be beneficial, “complex regulatory frameworks can increase costs and compliance burdens, especially in the short term”.

“We did find some EU funds that downplayed their sustainable investment objectives owing to the complexity of the SFDR and EU Taxonomy regulatory landscape.”

According to CFA Institute, further clarification and guidance from regulators will help asset managers as they create and promote their sustainable funds. In the report, the staff recommended that regulators also work to harmonise terms and definitions “so that there is a common understanding of these issues across jurisdictions”.

Despite managers, for the most part, appearing to do a decent job of disclosing their ESG approaches there is room for improvement, according to the CFA Institute researchers,

“The review and analysis of each fund’s publicly available product disclosures was time consuming and, in some cases, caused us confusion and a lack of under-standing on how ESG issues were considered in the investment process, decision making, and stewardship activities,” wrote the report authors.

“Although our findings indicate a relatively low prevalence of problematic disclosures, investors and regulators should be vigilant regarding other greenwashing risks.”

Greenwashing has been increasingly under the spotlight, but as noted in the CFA Institute report, it ”is a complicated, contextual, and nuanced issue, and the review of documentation alone might not evidence its existence”. As noted by regulators and others, it can also be intentional or accidental

CFA Institute has developed voluntary, global ESG disclosure standards for investment products that are designed to show how a fund or strategy incorporates ESG information or issues into its objectives, investment process, and stewardship activities.

The standards, which are designed to complement rather than conflict with rules such as the SFDR, can be applied to any fund or strategy that incorporates ESG information irrespective of how the fund or strategy is named, labelled, or categorised.

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