Asset managers complain CFA’s proposed ESG standards will sow confusion, not clarity

CFA Institute’s plan to create a global ESG standard has triggered concern among some US and European asset managers already juggling overlapping regulations and rising costs in a crowded space.

Virginia-based CFA Institute, which offers chartered financial analyst certification globally, is forging ahead with its consultation, gathering feedback on its proposed principles of voluntary ESG disclosure standards for investment products. It aims to issue a draft voluntary standard in six months.

‘It is very difficult for investors to find products that are suitable for their needs and preferences,’ Chris Fidler, CFA’s senior director of global industry standards, tells IR Magazine. ‘Once you start evaluating products it gets really confusing, really quickly. That is the problem in the marketplace we’re trying to solve.’

While some support CFA Institute’s aims – including Aegon Asset Management, which advises on $408 bn in assets – not everyone is convinced that another ESG standard is the solution.

Voluntary for how long?

‘We strongly object to implementing requirements that will inevitably put asset managers in an untenable position as they navigate an increasingly crowded field of duplicative, overlapping or conflicting legal requirements coupled with CFA Institute’s voluntary standards,’ says the Investment Company Institute (ICI), a Washington, DC-based association of regulated funds that manage global assets valued in September at $26 tn.

ICI’s written comments, in response to the CFA consultation, details the initiatives already in place in the US, Europe and Hong Kong.

Candriam, which manages about €125 bn ($150 bn) in assets through its offices in Luxembourg, London, Paris and Brussels, urges CFA to wait at least 18 months because the Eurosif Transparency Code template is, in many parts of Europe, already the de facto standard for reporting information about ESG-related features of sustainable funds, and because several regulatory and semi-regulatory initiatives are in progress.

‘We believe such an initiative by CFA Institute risks becoming counterproductive, and where it sought to bring more market effectiveness and clarity, [will] instead create additional costs and sow more confusion,’ Candriam says. It also questions how long the voluntary standards will remain voluntary.

The asset management group of the Securities Industry and Financial Markets Association (Sifma) says the matter should be left to national regulators. Sifma’s members represent independent and broker-dealer-affiliated asset management firms with combined assets under management of $45 tn.

‘Any industry-led ESG disclosure standards such as CFA’s standard would be premature until US regulatory thinking has been further developed,’ Sifma’s submission notes. ‘In our members’ view, CFA is not the most appropriate body to develop such a standard … Our members therefore encourage CFA to contribute to the thinking of national regulators in this area, or to the global standards being developed by the International Organization of Securities Commissions (IOSCO), rather than creating its own ESG standard that will sit alongside and duplicate the myriad of existing and upcoming ESG frameworks.’

Neither IOSCO nor Eurosift commented on CFA’s proposal when contacted by IR Magazine. Erik Thedéen, chair of the IOSCO sustainable finance task force developing its own global standards, released an open letter in October stressing that ESG initiatives should head toward convergence.

Mitigating risk

Fidler says Eurosif standards, targeted at retail investors, are a ‘good start’, as are Europe’s Securities Financing Transactions Regulation and initiatives by French regulator the Autorité des marchés financiers (AMF) and others. But he describes CFA’s proposal as a ‘concrete solution’ offering an ‘internally consistent approach’ in a way that can be adopted across a variety of markets.

‘Our standard is aimed at transparency and disclosure as well, so there’s no reason [for] conflicts in that,’ he says. ‘I think we are all trying to solve the same problem. It is just that there may be differences in jurisdictions. There might be slight differences in the types of information requested. But if we can harmonize those things and bring them together in a global standard it will actually make it easier for asset managers to understand what information investors are looking for.’

France's Association Française de la Gestion financière supports CFA’s initiative. ‘As there are many different ways to integrate ESG features, the retained approach has to be similar for all investors or asset managers,’ it says. ‘Furthermore, with regards to the exponential growth of ESG investment products, we believe a standard is necessary to provide greater transparency [and help] investors to better understand the different ESG approaches used in order to be able to compare them.’

Crowded field

The rise in regulatory or semi-regulatory proposals reflects the desire of companies that are keen to integrate ESG to improve long-term returns and mitigate risks, according to a series of snap polls held at the Truvalue Labs ESG Investing Forum.

BlackRock, with $7.43 tn in assets under management, says work being done to coalesce around a standard ESG product disclosure framework is essential for improving the sustainable finance ecosystem. ‘A robust and widely accepted disclosure framework is critical as investor interest in sustainable investing increases and concerns about greenwashing – the practice by which products’ actual sustainability characteristics are confusing or outright misleading – are also on the rise,’ it writes in its submission.

‘We encourage CFA Institute to carefully monitor the changing regulatory landscape globally for sustainability-related investment product disclosure, as any final standard will need to align and avoid duplication with regulatory standards, such as those of the AMF and the EU Sustainable Finance Disclosure Regulation (SFDR).’

In addition to the initiatives already mentioned, plenty more are under way. In the US, the SEC reviews documents to ensure ESG-related fund names are not misleading and that investors are offered accurate, clear disclosures. The commission’s Office of Compliance Inspections and Examinations conducts ESG-focused oversight with specific document requests, and the regulator has established an asset management advisory committee with an ESG subcommittee to draft recommendations by December for SEC action.

Meanwhile, the EU is imposing extensive new disclosure requirements on ESG funds with an eye toward future minimum standards or labels. Both the EU’s SFDR and its Taxonomy Regulation provide detailed disclosure requirements for ESG-focused financial products, and the European Commission is completing amendments to Mifid II that will define when an ESG fund can be used to meet a client’s sustainability preferences in the context of a suitability assessment.

The AMF has imposed minimum standards for marketing retail ESG funds and Hong Kong’s Securities and Futures Commission released guidance in April 2019 requiring specific disclosures for ESG and green funds.