If you’ve recently considered the idea of investing sustainably, you’re not alone. Over the 2021 calendar year, investments in sustainable mutual funds and ETFs from Canadian fund manufacturers effectively doubled, showcasing continued enthusiasm from investors and fund companies who continue to launch new products that invest through a sustainable lens.
But as the array of options continues to grow, so too does the need for governing bodies to provide guidance and ensure transparency.
The good news is, Canadian regulators seem to be up to the task. Over the past six months, three significant actions from our regulators and self-regulatory organizations have surfaced, shining a light on issuers, advisers and fund manufacturers.
Stock and bond disclosures
Last October, the Canadian Securities Administrators (CSA) requested comment on proposed changes to National Instrument 51-107. The proposal homes in on the requirement for Canadian-listed issuers (of stocks and bonds) to begin reporting climate-related risks and opportunities per a standardized framework, as well as their greenhouse gas emissions. If passed, this would result in far greater transparency for investors who wish to invest sustainably. Moreover, it would encourage issuers to report their progress toward climate-related goals.
This will undoubtedly translate to existing fund managers getting higher-quality disclosures from the Canadian companies they hold, which in turn might spur the creation of higher-quality climate-focused investment funds.
Canada is not alone in this move. Britain’s Financial Conduct Authority and the U.S. Securities and Exchange Commission have also pointed to something similar for their public issuers.
There’s a three-year runway on the issuer proposal, so some time will need to pass before we see an actual impact on filings.
Investor preferences
In December, the Investment Industry Regulatory Organization of Canada – one of the self-regulatory bodies in Canada governing advisers – updated its guidance for advisers around collecting client information such that it includes investor preferences for investing sustainably. This means advisers are being urged to ask clients not only about how much risk they are able to take on, but also the manner in which they wish to invest as it relates to personal values.
Though it makes an adviser’s job a bit more difficult, it might be argued that clients who hold investments in line with their personal values stay invested longer and are more likely to hold investments through choppy market periods.
After speaking with various industry participants, I believe firms are thinking seriously about how to do this. In some cases, it’s already happening.
Fund disclosures
Finally, in January, the CSA issued guidance around how fund companies should disclose their investment approach related to environmental, social and governance issues. Here, the regulator provides clarity on how funds should be named and how investment approaches should be written in regulatory filings to support this. In other words, the CSA does not want a fund to have sustainability-related terms in its name unless it is clearly supported within the investment objective and investment strategy sections of the prospectus.
The same guidance also provided clarity on how ESG ratings (like those from Morningstar Sustainalytics) are to be displayed on fund marketing material, providing additional transparency to investors.
What’s clear at this point is that, while net inflows into ESG funds can vary along with the rest of the market, the once-fringe idea of sustainable investing is now clearly in the mainstream and here to stay. As proposed regulation and guidance makes its way into documents and processes, the hope is that more Canadians find it easier to find investments in line with their personal values.
Ian Tam, CFA, is the director of investment research for Morningstar Canada, a wholly owned subsidiary of Chicago-based Morningstar Inc. He also currently serves as chair of the Canadian Investment Funds Standards Committee.
Ian Tam, CFA