On March 7, 2024, the Canadian Securities Administrators (the "CSA") released CSA Staff Notice 81-334 (Revised): ESG-Related Investment Fund Disclosure (the "Revised Notice"). The Revised Notice updates and replaces the original CSA Staff Notice 81-334: ESG-Related Investment Fund Disclosure from January 2022 (the "Original Notice"). For a refresher on the CSA's guidance provided in the Original Notice, check out our previous legal update here.

Since the Original Notice, the CSA have conducted extensive reviews of retail investment funds in relation to environmental, social and governance ("ESG") matters. The Revised Notice has been issued in response to those reviews. The Revised Notice provides detailed guidance to investment fund managers ("IFMs") concerning the CSA's expectations for the disclosure and sales communication practices of investment funds as they relate to ESG matters. Unlike the Original Notice, the Revised Notice draws clear distinctions between the levels of disclosure expected of investment funds in which ESG factors play a significant role in the fund's investment process and those for which ESG factors do not play such a significant role. The CSA encourage IFMs to review the Revised Notice in its entirety and consider the CSA's guidance when preparing regulatory disclosure documents and sales communications.

The Revised Notice addresses key findings and guidance that build upon the Original Notice. Areas highlighted for specific comment include: (i) types of ESG-related funds; (ii) ESG-related terminology; (iii) investment objectives and fund names; (iv) fund types; (v) suitability; (vi) investment strategies disclosure; (vii) ESG-related changes to existing funds; (viii) proxy voting and engagement policies and procedures; (ix) risk disclosure; (x) continuous disclosure; (xi) sales communications; and (xii) commitments to ESG-related initiatives. Some highlights of the CSA's commentary are summarized below.

Types of ESG-Related Funds

The guidance provided in the Revised Notice is based upon the concept that the level of ESG-related disclosure expected of investment funds should reflect the role that ESG factors play in their investment process.

Accordingly, the Revised Notice emphasizes the importance of classifying investment funds according to the degree of significance to which the consideration of ESG factors is given in the fund's investment process. Investment funds can be classified into one of the four following categories:

  • ESG Objective Funds: Funds whose investment objectives reference ESG factors.
  • ESG Strategy Funds: Funds whose investment objectives do not reference ESG factors but that use ESG strategies, where the consideration of ESG factors plays a significant role in the fund's investment process.
  • ESG Limited Consideration Funds: Funds whose investment objectives do not reference ESG factors but that use ESG strategies, where the consideration of ESG factors plays a limited role in the fund's investment process.
  • Non-ESG Funds: Funds that do not consider ESG factors in the fund's investment process.

The Revised Notice indicates that IFMs are in the best position to determine which category their fund fits into. In determining whether a fund is an ESG Strategy Fund or an ESG Limited Consideration Fund, an IFM should consider how ESG factors are weighted in the investment process, whether the ESG factors are likely to drive an investment decision and the overall purpose that the consideration of ESG factors serves in the fund.

Investment Objectives and Fund Names

The guidance on investment objectives and fund names is most applicable to funds classified as ESG Objective Funds.

A fund that primarily invests or intends to primarily invest in ESG-related industries or issuers, or whose name implies such focus, is required to reflect this focus in its investment objectives as well as its Fund Facts or ETF Facts, as applicable. Conversely, if a fund is permitted to primarily invest in assets that do not meet the fund's ESG-related criteria, the fund should not reference ESG in its name or investment objectives.

With respect to investment objectives and fund names, the Revised Notice also provides the following guidance which applies specifically to certain types of funds and funds in certain circumstances:

  • Funds that track the performance of an ESG-related index: Where an ESG Objective Fund references ESG in its name and its investment objectives indicate that the fund tracks the performance of an ESG-related index, the ESG focuses of that index should be consistent with those indicated in the fund's name. The fund's investment objectives and/or investment strategies disclosure should also indicate that the fund's portfolio will be comprised primarily of issuers that reflect the ESG focuses identified in the fund's name and investment objectives.
  • Funds that invest in underlying funds: ESG Objective Funds that invest in underlying funds should ensure that the focus of the underlying fund is consistent with that of the ESG Objective Fund. Further, if the ESG Objective Fund's investment objectives indicate that it invests in a single, named underlying fund and the ESG focus of that underlying fund changes or is removed, such change will be considered material and should be disclosed.
  • Funds that intend to generate a measurable ESG outcome: Where an ESG Objective Fund intends to generate a measurable ESG outcome, such fund should clearly state the intended outcome as part of its investment objectives.
  • Funds with carbon offset series: Some ESG Objective Funds will have a series with a carbon offsetting feature. Where such fund's series name refers to carbon offsetting, the investment objectives of that series should refer to and explain the carbon offsetting feature of the series. Included in this disclosure should be a note that securityholder approval will be obtained before any change is made to the carbon offsetting feature.
  • Funds that obtain exposure to ESG-related investments indirectly: Where an ESG Objective Fund is permitted to meet its investment objectives through indirect investment, the investment strategies disclosure should explain the nature of the indirect investments.

Suitability

ESG Objective Funds may state that they are particularly suitable for investors who have ESG-related investment objectives; however, statements as to the suitability of investments must be limited to the particular aspect of ESG that the fund focuses on.

Conversely, funds that are not classified as ESG Objective Funds should not reference ESG in their suitability statements.

Investment Strategies Disclosure

Investment funds are required to disclose all strategies employed as principal investment strategies or part thereof in their prospectuses. Both ESG Objective Funds and ESG Strategy Funds are expected to identify any ESG factors used and explain the meaning of such ESG factors in their disclosure.

An ESG Objective Fund should provide disclosure about the ESG-related aspects of its investment selection process and investment strategies. Additionally, where an ESG Objective Fund is not permitted to hold certain investments that appear to be inconsistent with ESG values, IFMs are encouraged to disclose this in the fund's investment strategies disclosure, along with the monitoring process used by the fund to screen out such investments. Similarly, an ESG Strategy Fund should disclose the ESG-related aspects of their investment strategies.

In contrast, ESG Limited Consideration Funds are not required to provide this disclosure; however, where such disclosure is voluntarily provided it should outline the limited role that the consideration of ESG factors and ESG strategies plays in the fund's investment processes.

With respect to investment strategies disclosure, the Revised Notice also provides the following guidance which applies specifically to certain types of funds and funds in certain circumstances:

  • Funds that use proxy voting or engagement in relation to ESG matters as a principal investment strategy: A fund is required to disclose when it uses proxy voting or engagement approaches in relation to ESG matters as a principal investment strategy.
    • ESG Objective Funds must include in their disclosure an explanation of how the voting rights attached to the fund's portfolio securities will be used to further the fund's ESG-related investment strategies.
    • ESG Strategy Funds must include in their disclosure an explanation of how the ESG-related proxy voting strategy is implemented.
  • Funds that are subject to IFMs' general proxy voting or engagement approaches that address ESG matters: Where a fund uses general proxy voting policies and procedures that address ESG matters, but the fund does not use ESG-focused proxy voting or shareholder/issuer engagement as a principal investment strategy, the fund is likely to be categorized as either an ESG Limited Consideration Fund or a Non-ESG Fund.
    • ESG Limited Consideration Funds can include disclosure about the consideration of ESG factors as part of their proxy voting or engagement approach. This disclosure must be careful not to overstate the role the consideration of ESG factors plays.
    • Non-ESG Funds should not include in their disclosure information about the consideration of ESG factors as part of the proxy voting or engagement approach.
  • IFMs that apply an ESG strategy to more than one of their funds: Where there is disclosure about overall investment strategies used by an IFM, this disclosure must clearly outline to which funds the ESG strategy applies.
  • Funds that use targets for specific ESG-related metrics: Funds are encouraged to disclose those targets as part of their investment strategies and identify if those targets may evolve or change over time.
  • Funds that invest in underlying funds: ESG Objective Funds and ESG Strategy Funds must describe the process and/or criteria used to select the underlying funds. To the extent possible, the investment strategies used by the underlying funds should also be disclosed.
  • Funds that use multiple ESG strategies: Where ESG Objective Funds and ESG Strategy Funds use multiple ESG strategies, such strategies should be disclosed along with an explanation of how and in what order the various strategies are applied.
  • Funds that use ESG ratings, scores, indices or benchmarks: ESG Objective Funds and ESG Strategy Funds that use internal or third-party company-level ESG ratings or scores or ESG-related indices or benchmarks as part of their principal investment strategies should disclose such use and identify the specific index or benchmark used.
  • Funds that may not always use ESG strategies or that use them on a discretionary basis: These funds should explain, to the extent possible, when and in accordance with what parameters the ESG strategy will be used, as part of its disclosure.
  • Funds whose names and/or investment objectives include the term "impact": Where a fund's name or investment objectives include the word "impact", the investment strategies disclosure should explain what type of impact the fund is aiming to achieve.

ESG-Related Changes to Existing Funds

Where a fund intends to change its name to add, revise or remove a reference to ESG, the fund should consider whether it should also change its fundamental investment objectives. Similarly, where a fund intends to change its fundamental investment objectives to add, revise or remove a reference to ESG, the fund should consider whether it should also change its name. IFMs should be aware that many changes, such as adding or removing references to ESG in a fund's fundamental investment objectives, require prior securityholder approval.

Risk Disclosure

ESG-related investment funds should consider whether there are any material risk factors associated with the fund's ESG-related investment objectives or ESG strategies. Where such material risk factors exist, they should be disclosed.

Continuous Disclosure

An ESG-related investment fund is required to disclose in its management reports of fund performance how the composition of the investment portfolio and changes thereto relate to the fund's ESG-related investment objectives or ESG strategies.

Sales Communications

The expectations of investment funds in respect of sales communications are similarly dictated by the degree to which ESG-factors play an important role in investment decisions. The Revised Notice provides the following guidance:

  • ESG Objective Funds: An ESG Objective Fund may include statements in sales communications that accurately reflect the extent to which the fund is focused on ESG, as well as the aspects of ESG that the fund is focused on.
  • ESG Strategy Funds: An ESG Strategy Fund may include statements in sales communications that accurately reflect the types of ESG strategies used by the fund and the extent to which the fund uses ESG strategies.
  • ESG Limited Consideration Funds: An ESG Limited Consideration Fund may include statements in sales communications regarding the fund's use of ESG strategies as part of its investment process, but such statements should: (a) be clear about the limited role that the consideration of ESG factors plays in the fund's investment process; and (b) only be included if disclosure relating to the limited role that the consideration of ESG factors plays in the fund's investment process is included in the prospectus.
  • Non-ESG Funds: A Non-ESG Fund should not refer to ESG in sales communications, with the exception of factual information about the ESG characteristics of the fund's portfolio (such as fund-level ESG ratings, scores or rankings or ESG metrics). However, the factual information about the ESG characteristics of the Non-ESG Fund's portfolio should not be framed in a way that suggests that it is aiming to achieve any ESG-related goals or is trying to create a portfolio that meets certain ESG-related criteria.
  • Sales communications that include fund-level ESG ratings, scores or rankings: Any sales communications that include fund-level ESG ratings, scores or rankings must not be misleading. A fund must not select ratings, scores or rankings that are not representative of the ESG characteristics or performance of the fund.
  • Commitments to ESG-related initiatives: Where IFMs are signatories to, or participants in, ESG-related initiatives that are at the entity level and that do not relate to the investment strategies of the funds managed by the IFM, any disclosure of their signatory status or commitment to these initiatives should make clear that the commitment is at the entity level rather than at the fund level.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.