With industry standards for sustainable investing still in the nascent stages, “greenwashing” of investment products is a major issue for Canadian investors, CIBC’s sustainable investment head says.
“There’s not currently a clearly defined taxonomy or agreed-upon product classification system that can help Canadian investors navigate this challenging space,” said Aaron White, vice-president of sustainable investments at CIBC Asset Management.
Various organizations have demonstrated an interest in developing standards for disclosing environmental, social and governance (ESG) investing processes, White said. He pointed to regulators such as the Ontario Securities Commission and the Office of the Superintendent of Financial Institutions, and the federal government’s Sustainable Finance Action Council.
The CFA Institute is further along with proposed global standards, which are in a second phase of consultation.
But as more products are released, White said there are questions about “the authenticity of some firms’ approaches of integrating ESG risk and also the authenticity of ESG strategies that underpin dedicated products.”
For now, it’s up to investment managers to address the greenwashing challenge by being as transparent as possible about their processes and what their funds do and don’t do.
But asset managers have their own hurdles related to individual company disclosures, as there isn’t a standardized mechanism for reporting. Many investment managers and advisors rely on third parties for ratings.
“When we look to rating agencies — companies like Sustainalytics, MSCI, S&P, some of the leaders in terms of creating ESG ratings and disclosing ESG-related company issues — there is no standard methodology,” White said.
“One of the major challenges we face within the industry is having an understanding of key disclosure measures as it relates to companies and issuers, how we can take that information — take estimates — and ultimately integrate them into our investment process.”
As a result, White said more asset managers are developing a proprietary approach to ESG data rather than relying on sell-side research from third parties.
While North American investors await regulations for ESG disclosures, Europe can serve as a guide for how to approach standards.
“Their sustainable finance disclosure framework sets robust rules that create a more transparent market and is a great step in preventing greenwashing,” White said.
The classification system, which labels investment strategies based on the degree of sustainability, “is easily accessible to European investors and advisors, simplifying the due diligence process when looking for sustainable investments,” White said.
That framework should help shape Canada’s regulatory approach, he said.
“I believe this will inevitably be the guide for global regulators focused on developing transparency and accountability within their domestic markets, and we can likely expect a similar classification system to be adopted within the Canadian market.”
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.