Legal Updates

On January 19, 2022, the Canadian Securities Administrators (the “CSA”) released Staff Notice 81-334 (the “Notice”), which provides guidance on the disclosure practices of investment funds as they relate to environmental, social and governance (“ESG”) considerations. The Notice states that the guidance is particularly directed to retail investment funds whose investment objectives reference ESG factors, however it can be expected that this guidance will impact prospectus exempt investment fund offerings and offerings by non-investment funds with similar ESG considerations (for example, private equity and debt fund offerings). The Notice states that the guidance is based on existing regulatory requirements but is in response to a lack of quality of, and general confusion surrounding, ESG-related disclosure and sales communications. The Notice provides a useful summary of ESG-related terms and strategies as well as an update on recent international and domestic developments.

The guidance provided in the Notice is based on existing securities regulatory requirements and does not create nor does it modify any existing laws and regulations.

The following are key takeaways from the Notice.

1. Investment Objectives and Fund Names – No More “Greenwashing”

If an investment fund’s name references ESG or other related terms such as “sustainability,” “green,” “social responsibility,” the fund’s investment objectives are required to include the ESG aspect. Conversely, if the investment fund’s investment objectives reference ESG, the fund’s name may reference the ESG aspect.

2. Fund Types – When to Categorize as ESG

An investment fund that includes ESG in its investment objectives may characterize itself in its prospectus as a fund that is focused on ESG as its primary fund type. An investment fund that does not include ESG in its fundamental investment objectives should not so characterize itself when describing its primary fund type.

3. Investment Strategies Disclosure – Full, True and Plain Disclosure

An investment fund is required to disclose the investment strategies it employs to achieve its investment objectives. The Notice suggests that an investment fund which utilizes ESG-related investment strategies must provide clarity to investors in at least the following:

• identifying any ESG factors used in a fund’s investment strategy and how the ESG factors are evaluated and monitored;
• if relevant, identifying the use of targets for ESG-related metrics (e.g., carbon emissions) and how these targets may shift over time;
• disclosing whether at any point, the fund may invest in companies that appear to be inconsistent with ESG values, what those holdings would include and how such holdings meet the fund’s investment objectives; and
• disclosing any holdings that are not permitted, including the fund’s screening process for investments.

The Notice provides guidance applicable to all ESG-related investment funds in respect of the following:

• proxy voting or shareholder engagement as an ESG strategy – investment funds are required to disclose how they are used by the fund;
• multiple ESG strategies – disclosure should include the order in which strategies are applied, if the strategies are not applied simultaneously; and
• ESG rating, scores, indices or benchmarks – investment funds should explain how ratings, scores, indices or benchmarks are used, the methodology behind them and identify the index or benchmark used or the provider of the ratings or scores.

4. Posting Proxy Voting and Shareholder Engagement Policies and Procedures Online

To provide investors with greater transparency, investment funds are encouraged to make the most recent copy of their proxy voting policies and procedures available online. Investment funds that use shareholder engagement as an ESG strategy are also encouraged to make their shareholder engagement policies and procedures publicly available to provide investors with greater transparency.

5. Describing All Material Risks Including ESG-Related Risks

Investment funds should consider if there are any material risk factors related to their ESG investment objectives, such as (i) concentration risk, (ii) over-reliance on third-party ESG ratings in assessing performance, and (iii) risk of underperformance due to the fund’s ESG focus. Generally, all investment funds should consider if any ESG risks are material, such as climate change risks, and bribery and corruption risks.

6. Suitability of the Fund for Particular Investors

Investment funds must include in their “Fund Facts” or “ETF Facts,” as applicable, a brief description of the suitability of the fund for particular investors, including the portfolios for which the fund is and is not suited. If an investment fund only uses ESG-related investment strategies but does not use ESG-related investment objectives, it should not disclose that the fund is particularly suitable for investors who have ESG-related investment objectives.

7. Continuous Disclosure – Providing Investors with Periodic Updates on ESG-Related Objectives

Investment funds that intend to generate a measurable ESG outcome are encouraged to report in their annual and interim management reports of fund performance (“MRFP”) whether the fund is achieving that outcome. Investment funds are also encouraged to provide investors with additional periodic information on how they are meeting their ESG-related investment objectives.

The Notice also provides guidance specific to:

• investment funds that used proxy voting as an ESG strategy – investment funds are encouraged to include in the MRFP, disclosure about how the past proxy voting record during that period aligns with the ESG-related investment objectives or strategies of the fund; and
• investment funds that use shareholder engagement as an ESG strategy – investment funds are encouraged to provide online and in their MFRP, disclosure about their past shareholder engagement activities and how such engagements during that period align with the ESG-related investment objectives or strategies of the fund.

8. Sales Communications – Avoid Vagueness or Misleading Statements

An investment fund should not include statements in its sales communications that indicates it is focused on ESG unless the fund references ESG in its investment objectives. An investment fund that does not reference ESG in its investment objectives but uses ESG-related strategies may include statements in its sales communications that accurately reflect the extent to which that strategy is used. An investment fund which does not reference ESG in its investment objectives or strategies should not make any ESG-related claims in any sales communications.

9. Adding or Removing ESG-Related References in Names or Investment Objectives

Where an investment fund intends to change its name to add or remove a reference to ESG, the fund should consider whether it is also required to change its fundamental investment objectives. The addition or removal of references to ESG in the fundamental investment objectives of an investment fund is subject to the requirement to obtain prior securityholder approval.

10. ESG-Related Terminology – Lack of Consistency

Industry participants are encouraged to develop common ESG-related terms and definitions, which would enable investors to better understand ESG-related investment funds and make informed investment decisions about such offerings.

11. Investment Fund Manager-Level Commitments to ESG-Related Initiatives

For investment fund managers that are signatories to international or regional ESG-related entity-level initiatives (e.g., the United National Principles for Responsible Investment and Task Force on Climate-related Financial Disclosures), it is important to disclose their signatory status or commitment to these initiatives to be clear that the commitment is at the manager-level rather than at the fund-level and, where applicable, that the investment funds managed by the investment fund manager may not be focused on ESG.

If you have any question with respect to the matters discussed above, please contact Ron Schwass by email at rschwass@wildlaw.ca, Natalie Tershakowec by email at ntershakowec@wildlaw.ca or any other member of our Asset Management & Investment Funds practice group. The authors gratefully acknowledge the assistance of articling student Kassidy Doherty in the preparation of this update.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.