When it comes to environmental, social, and governance (ESG) funds, do you feel like we are still comparing apples with oranges? Isn’t it time for a global voluntary standard?
“There’s been an explosion of interest in ESG investing, but the inconsistency in ESG-related disclosures could lead to an erosion of trust in the industry,” said Deborah Kidd, who is a director with the Global Industry Standards (GIPS). She was the first of two panelists who presented a consultation paper on “ESG Disclosure Standards for Investment Products” at a webinar titled “Improving Transparency and Comparability of Investment Products with ESG-related Features” on September 15, 2020. It was sponsored by the Chartered Financial Analysts Institute (CFAI).
While the audience watched the webinar, they also participated in three polls during the hour-long presentation. Of the respondents, 90 percent agreed that they have had confusing or frustrating experiences comparing ESG disclosures of financial products.
Kidd emphasized the financial industry needs transparency and comparability for ESG ratings. Her team is set to provide this. “We will define and classify ESG-disclosure requirements, but it’s outside our scope to say whether criteria are truly sustainable.”
“Global voluntary standards are a transmission mechanism for good ideas,” said Chris Fidler, who is a senior director in the GIPS team at the CFAI. “We see this already with accounting standards.”
He gave an overview of the landscape of ESG-related standards and regulations that currently exist around the world. These include bodies such as the EU Bond Standard; UK Stewardship program; and GSIA definitions. He noted the GIPS team has had conversations with regulators and “they appreciate our efforts.”
Fidler described how the consultation paper on ESG standards was developed. A quick audience poll revealed that 60 percent had not read the consultation paper yet.
Definitions
Deborah Kidd said the paper has proposed terminology for things such as “ESG-related feature.” To define each term, there are six components including name, function, examples. “It seems feature names will drive the comment and debate. It is the elephant in the room.”
Classification
“Proposed ESG-related needs will drive the classification,” said Chris Fidler. “It’s not enough to just disclose holdings – investors must know what a product intends to do” because that will drive future decisions.
They have created a matrix of proposed client needs versus product features. “We are seeking feedback on this matrix,” he said.
Requirements
The consultation paper contains “design principles for disclosure requirements,” said Kidd. There are general versus feature-specific requirements.
Procedure
“One of the principles,” said Fidler, “is independent examination. If a standard is not testable, it’s not a true standard.” There must be some procedure of running independent examination of ESG disclosures.
“We need to think about how the independent examination would occur,” he said. “Does it apply to the product or the implementation – or both?”
Fidler gave a hypothetical example of an institutional investor who comes in with a list of ESG-related needs. The financial advisor would have a matrix of Features versus Products and thus could direct the asset manager how to handle the portfolio.
“Our work has given us three insights,” he said. “Multiple standards are necessary; we need to focus on details, not names. And last, the ESG-related features must be clear and explicit.”
Kidd presented an aggressive timeline for the next three steps of the consultation paper. She asked that comments be submitted no later than October 19, 2020. “In the world of standards setting, it’s very important to have involvement of stakeholders, so please get involved.”
The final poll of the webinar audience revealed that 30 percent planned to submit a comment letter. ♠️
Click here to access the consultation paper ESG Disclosure Standards for Investment Products.
Click here to view the webinar of this presentation.