Analysis of responsible investment regulations
May 02, 2022 with Marie Brault
This episode explores the growing interest in responsible investing as well as the lack of standardization in the field. Greenwashing is a term that refers to the risk that some issuers, whether intentionally or unintentionally, mislead investors about environmental, social, and governance (ESG) issues. In a survey conducted by the Responsible Investment Association in 2021, 81% of advisors expressed concern about greenwashing, while 74% expressed concern about a lack of standards. Marie Brault, Vice President, Legal Services at National Bank Investments, breaks down the issue.
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Martin Lefebvre (ML) and Marie Brault (MB)
Hello everyone, this is Martin Lefebvre, Chief Investment Officer at National Bank. Welcome and thank you for joining us on this NBI Podcast. Today we are going to talk about the growing interest in ESG or more globally, responsible investing and more specifically the lack of standardization on the subject. We hear a lot about greenwashing, the risk that some issuers, whether voluntary or not, mislead investors about aspects related to ESG factors. In fact, there are a lot of statistics on this. 81% of advisors surveyed in 2021 by the Social Investment Organization were concerned about greenwashing and 74% were concerned about the lack of standards. To talk about this, my guest today is none other than Marie Brault, Vice President, Legal Services at National Bank Investments. Marie, thank you for joining us.
Hi, Martin, it’s a pleasure to be here.
My first question for you is, are the regulators responding to this need for standardization around responsible investing?
I would just like to start by saying that greenwashing is not the focus of most issuers. It’s more of a misunderstanding issue and not all responsible investment funds are created equal. Advisors play a big role in sorting this out. Regulators are responding to this need for standardization. It starts specifically with COP 21, in Paris in 2015, when most governments committed in the Paris Agreement to act. The European Union is a leader in this area. It has a very specific action plan, including the European Union Regulation on Sustainable Finance Reporting, better known as SFDR. Countries have set the tone and aim to regulate in this area. There is also IOSCO, the securities regulator, which reiterated in November 2021 the importance of mitigating greenwashing, doing what is required to create reliable information on sustainability impacts for investors. That led him to all the countries where investment is a major topic to act and publish various projects, various frameworks and we saw last January our Canadian securities regulators publish some nice guidelines as part of a notice in this regard.
It is well known that a notice is not a regulation. What is the difference and more concretely, what can it mean for asset managers, investment advisors or even investors?
A notice is not a regulation, but the good news is that the Canadian authorities have concluded after analysis that there are enough rules. They have chosen to talk to us in the form of a notice, that is, guidelines that will explain how the rules will apply to responsible investment. They have told us: you must do what you say and say what you do. That’s already the principle in securities law, but it’s even truer for responsible investing. What this means for those who invest: our authorities have greenwashing on their radar. They are working hard to hold issuers accountable. Consider what Canadian authorities have done with respect to closet indexing (investment strategies that were called active when they were passive, tracking only an index).
The practice was eradicated based on guidelines published by the authorities. They put it in their sights, cleaned it up. I suspect it will be the same with greenwashing: communicate their intent and hold issuers accountable. The tone was set in January to get it right. Authorities want more detailed, accurate information to better inform investment decisions. That will help investors and advisors know their products and their suitability. It will still be up to advisors to know their clients’ needs and interests in responsible investing to make the right fit.
How are investment advisors going to be able to navigate all these different approaches being put forward by these investment funds?
Obviously, it’s not a binary approach. Responsible investment funds are a spectrum. There are some funds that only do responsible investment and for which everything falls under this definition. For others, it’s just an afterthought. The regulation ensures that there will be accessible and clear information on all these issues so that advisors can take note and provide the right advice to investors with the information at hand. Many myths continue to exist. The survey you referred to in the introduction to the Responsible Investment Association in 2021 noted that most advisors were having difficulty distinguishing whether research shows that responsible investing works as well or better than traditional investing. One might think that responsible investing is the opposite of performance, but anyone familiar with the basic research could come to the opposite conclusion. Responsible investing goes hand in hand with performance. Similarly, the myth that a fossil fuel company is not suitable for inclusion in a responsible investment fund: not necessarily. If a company has an approach that stands out from its peers in making the shift to sustainability, it can be included in a portfolio. Some myths persist, but with increasingly clear and precise information, measurements, and follow-up on objectives and their achievement, we will be able to sort things out.
Until we get there, what about a consensus on these established standards. It seems like the language and terms differ from one ESG Fund to another…
You’re right. That’s the main challenge facing the whole world on responsible investing: the vocabulary is diverse and broad. Some trends are emerging in terms of regulation. The European approach differentiates between three types of investment: those whose investment objective defines responsible investment are the most likely to have a significant impact. A second category: those who promote responsible investment strategies and the others, covering a broad spectrum, from those who timidly start to think about, filter out, exclude certain segments, to those who will recognize that climate change is a risk for some issuers. There is a lot of variability, but we are seeing these three major pools of funds increasingly recognized around the world. Some things that will help: the CFA Institute has published global ESG disclosure standards for investment products. This was the first time we saw voluntary standards emerge in such a focused way to disclose how a product considers ESG issues in its
investment objectives, investment strategies and governance activities. The Investment Funds Standards Committee (IFSC) has proposed a framework for identifying responsible investment funds, based on disclosure standards. However, a small label could be applied to certain funds more specifically focused on responsible investment. We also see other standards starting to emerge as various authorities around the world publish their frameworks, their opinions, their rules. Let’s hope to arrive at something clear and unanimous over time. For now, we can leave room for creativity and innovation for the benefit of the investor. To arrive at elements that will allow for the emergence and multiplicity of investment solutions that put forward responsible investment in order to achieve this positive impact on the investor.
That’s all the time we had. Thank you Marie for shedding some light on that reality. Thanks to everyone for listening and we’ll see you soon for another NBI Podcast
Chief Investment Officer and Strategist, National Bank Investments
Martin is the Chief Investment Officer of National Bank Investments responsible for the development investment soclutions and the management of tactical asset allocation mandates. With over 20 years of experience in financial markets, Martin also managed the portfolio management team at Private Banking 1859.
Vice-President, Legal Services, National Bank Investments
Marie is Vice-President, Legal Services at National Bank Investments (NBI). She leads the legal and regulatory affairs team responsible for the creation, distribution and management of public and private mutual funds, exchange-traded funds and other managed investment solutions, working with investment fund managers, dealers and securities advisors.