ANALYSIS-Canada’s Light ESG Funds Regulation Risks ‘Greenwashing’

Band Nicholas Saminather

TORONTO, July 3 (Reuters)Canada persists in its fairly relaxed approach to regulating funds claiming environmental, social and governance (ESG) credentials despite recent “greenwashing” allegations elsewhere that have prompted other regulators, including the Securities and Exchange United States Commission, to consider tightening the rules.

The Canadian Securities Administrators (CSA) issued guidance for ESG funds earlier this year that simply clarified how existing regulations applied to them. A CSA spokesman told Reuters the guidelines were adequate, but market experts say the lack of strict rules risks eroding confidence in the industry.

canadian responsible Equity fund assets under management rose 24% from a year earlier to C$22.4 billion ($17.3 billion) in May, according to data from Refinitiv. Globally, the assets of these funds amounted to $3.3 trillion.

The ASC acknowledged that growth has increased the potential for “greenwashing,” an overstatement of ESG benchmarks by companies or funds.

Recent “greenwashing” allegations at Bank of New York Mellon BK.NDeutsche Bank DBKGn.DE DWS Group and Goldman Sachs GS.N have prompted further scrutiny of ESG funds.

Regulators in the US and Europe are considering introducing mandatory disclosure requirements for ESG funds, given the renewed interest.

CSA guidelines advocate alignment between a fund’s name and investment objectives; disclosure of the investment strategies used to achieve the objectives; and explanations of how ESG factors are assessed and monitored.

It does not explicitly define ESG, nor does it require measurable ESG outcomes, allowing funds to qualify as such even when they do not materially pursue ESG objectives, said Murray Gold, partner at law firm Koskie. Minsky.

“The main problem with greenwashing is that people buy these funds because they think they’re going to improve something,” Gold said. When regulators allow funds to use words “as they wish” they look “embarrassingly weak”, he added.

The CSA spokesperson said the current disclosure requirements were broad enough to cover ESG-related funds and that the regulator would consider future policy initiatives if necessary.

ESG Global Advisors senior adviser Dustyn Lanz said if the SEC’s proposal passes, due in fiscal year 2023, it would be easier for Canadian funds to qualify as ESG than for US funds. and it could damage the credibility of the Canadian ESG funds industry.

The lack of a requirement to disclose quantifiable ESG impact for funds making such claims in Canada, contrary to the SEC’s proposal, could also lead to “impact washing”, he added.

A CSA review of ESG-related fund regulatory disclosures before issuing the guidance found shortcomings, including a lack of disclosure of how ESG factors were assessed and holdings that did not match names or fund objectives.

“It just means they haven’t followed the new guidelines yet,” Lanz said. “But it begs the question: when will the CSA start enforcing its guidelines?”

But the guidelines are a good first step, allowing the regulator to determine whether rules are needed, said Michael Thom, managing director of CFA Societies Canada.

The CSA has also separately proposed climate-related reporting requirements for companies to help inform investment decisions, which Thom said would be an “essential element” for fund disclosures.

The CSA spokesperson said staff are reviewing comments received and proposals from their counterparts, including the SEC and the International Sustainability Stands Board, to help inform their recommendations to regulators.

“Improving corporate disclosure around ESG…would be a big step forward to then enable disclosure of investment products,” Thom said.

($1 = 1.2915 Canadian dollars)

(Reporting by Nichola Saminather Editing by Denny Thomas and Diane Craft)

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