Part E. Key Findings and Guidance

I. Types of funds covered in the Notice

The consideration of ESG factors in the investment process of a fund is a continuum that ranges from funds with an ESG focus to funds that do not consider ESG factors in their investment process.

The guidance in this Notice relating to disclosure and sales communication requirements sets out different disclosure expectations depending on whether a fund considers ESG factors as part of its investment process and the extent to which such factors are considered. Specifically, the guidance in this Notice differs for each of the following four types of funds, listed in descending order of how significant a role ESG factors play in their investment process:

• funds whose investment objectives reference ESG factors (ESG Objective 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 their investment process (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 limited role in their investment process (ESG Limited Consideration Funds, and together with ESG Objective Funds and ESG Strategy Funds, ESG-Related Funds)
• funds that do not consider ESG factors in their investment process (Non-ESG Funds).

For greater clarity, a fund that considers ESG factors as part of its investment process is considered to be using an ESG strategy.

The names and definitions of the four types of funds are only being used in this Notice to explain the different disclosure and sales communications requirements that apply to each type of fund and are not intended to be used as investor-facing labels or classifications in prospectuses, other disclosure documents, or sales communications.

Generally, the different levels of disclosure expectations set out in this Notice are based on the concept that the more significant a role that ESG factors play in the investment process, the more ESG-related disclosure a fund is expected to provide. Similarly, the guidance in this Notice around sale s communications is based on the principle that the more significant a role that ESG factors play in the investment process, the more ESG-related information a fund may include in its sales communications. Conversely, the guidance in this Notice reflects t he concept that the more limited a role that ESG factors play in the investment process, the less ESG-related information there should be in both the disclosure documents and sales communications of the fund, so as not to over-emphasize the role of ESG considerations in the fund’s investment process.

The general approach to determining whether a fund is an ESG Objective Fund, ESG Strategy Fund, ESG Limited Consideration Fund, or Non-ESG Fund is illustrated in Figure 1.

Figure 1.

The approach to determining whether a fund should reference ESG factors in its investment objectives (i.e. the question in Box 1 of Figure 1) is discussed below under “Investment objectives and fund names”.

The below guidance provides information to assist IFMs in determining whether: (a) ESG factors are considered as part of a fund’s investment process (i.e. the question in Box 2 of Figure 1); and (b) whether a fund’s consideration of ESG factors plays a significant role in its investment process (i.e. the question in Box 3 of Figure 1).

As set out in Figure 1 above, the distinction between an ESG-Related Fund and a Non-ESG Fund is whether a fund considers ESG factors as part of its investment process.

In most cases, it should not be difficult for an IFM to determine whether its fund considers ESG factors as part of its investment process. However, there are some types of funds that may appear to consider ESG factors but that, in staff’s view, may not ac tually consider ESG factors as part of their investment process, including the following:

• Funds that invest in an ESG-related asset class but that do not consider ESG factors: Staff’s view is that funds that invest in an asset class that is related to an ESG-related segment of the economy solely because of the financial value of the asset class, but that do not consider ESG factors as part of their investment process, are Non-ESG Funds and should therefore not be marketed as ESG-Related Funds. An example would be a fund that invests in carbon credit futures solely due to the financial value of c arbon credit futures, not due to ESG-related considerations.
• Funds that are subject to an exclusionary screen that has no impact on the investment selection process: In staff’s view, a fund that is subject to an exclusionary screening strategy (including a firm-wide exclusionary screen) that has no impact on its investment selection process does not consider ESG factors as part of its investment process and is theref ore a Non-ESG Fund. For example, some IFMs have a firm-wide exclusionary screen that excludes all issuers involved in landmines and cluster munitions, wh ich would likely have no impact on the majority of funds, given the limited number of companies involved in these industries, particularly for funds that primarily invest in companies that operate in countries that are signatories to bans on landmines and cluster munitions. Such funds would be Non-ESG Funds, unless they use other ESG strategies as part of their investment process.
• Funds that are subject to an IFM’s general proxy voting or engagement approach that addresses ESG matters: Some funds are managed by IFMs that have general proxy voting policies and procedures that are applicable to all or most of the IFM’s funds, which address how the funds generally vote proxies on various issues, including ESG issues, but the funds do not use ESG-focused proxy voting as a principal investment strategy. Similarly, some funds are managed by IFMs that have a general engagement approach that is applicable to all or most of the IFM’s funds, which covers a range of issues, including ESG issues, but the funds do not use ESG-focused engagement as a principal investment strategy. In both cases, the consideration of ESG factors usually plays a limi ted role, if any, in the investment process.

Where a fund that does not have ESG-related investment objectives is managed by an IFM that has general proxy voting policies and procedures that address ESG matters among other matters or has a general engagement approach that addresses ESG matters among other matters, but the fund does not use any other ESG strategies as part of its investment process, staff’s view is that the fund is not an ESG Strategy Fund.

Depending on whether the ESG factors addressed in the proxy voting policies and procedures or contemplated in the engagement approach have any impact on the proxy voting or engagement approach of the fund, this type of fund may be either a Non-ESG Fund or ESG Limited Consideration Fund.

The guidance in this Notice relating to funds that do not refer to ESG factors in their investment objectives but that use ES G strategies differs depending on, as set out in Figure 1 above, whether the consideration of ESG factors plays a significant r ole in the fund’s investment process – that is, whether the fund is an ESG Strategy Fund or ESG Limited Consideration Fund. This updated guidance is consistent with the principle from the 2022 Notice that both the prospectus and sales communications of a fund should be clear about the extent to which the fund is focused on ESG.

The need for different guidance for these two types of funds arose because of two key developments that occurred after the publication of the 2022 Notice:

1. Staff observed a considerable increase in the number of IFMs that included disclosure in their fund prospectuses about the consideration of ESG factors, often without being clear about the extent to which ESG factors are considered by the fund.
2. Staff also observed a significant number of statements on the websites of IFMs that suggested that all or most of the IFM’s funds consider ESG factors as part of their investment process despite the consideration of ESG factors not being referenced in the investment strategies disclosure in the prospectuses of those funds. Through the ESG-Focused Reviews, staff learned from IFMs that most such funds only consider ESG factors to a limited extent.

These developments raised greenwashing-related concerns about funds that only consider ESG factors to a limited extent being marketed as funds for whom the consideration of ESG factors plays a significant role in the investment process and about inconsistencies between sales communications and prospectuses regarding the role of ESG considerations in the investment process. The differences in disclosure expectations between an ESG Strategy Fund and an ESG Limited Consideration Fund set out later in this Notice are intended to address these greenwashing-related concerns.

While this Notice provides some questions for IFMs to consider when determining whether a specific fund is an ESG Strategy Fund or an ESG Limited Consideration Fund, staff’s view is that there is no single factor that can be universally used to make this determination. We believe that the IFM of a fund is best positioned to assess the significance of the role that ESG factors pl ay in the investment process of a fund.

The following questions may assist IFMs in determining whether the consideration of ESG factors plays a significant role in the funds’ investment process and therefore, whether the fund is an ESG Strategy Fund or an ESG Limited Consideration Fund:

• Are ESG factors routinely weighted heavily in the investment process of the fund? If so, it is more likely that the fund is an ESG Strategy Fund. If ESG factors are considered, but the weight attributed to those factors is relatively low and they are more secondary to other factors in the investment process, the fund is more likely to be an ESG Limited Consideration Fund.
• Are ESG factors likely to drive or impact an investment decision? If ESG factors are routinely a driving factor in investment decisions, the fund is more likely to be an ESG Strategy Fund. However, if ESG factors are generally considered to such a limited extent that ESG factors would rarely be driving factors behind an investment decision, the fund would more likely be an ESG Limited Consideration Fund.
• Are ESG factors always considered as part of the investment process? If a fund’s consideration of ESG factors is discretionary such that ESG factors may or may not be considered at any given time, the fund is more likely to be an ESG Limited Consideration Fund.
• What purpose does the consideration of ESG factors serve for the fund? If a fund considers ESG factors with the aim of trying to select issuers that possess certain types of positive ESG characteristics or attributes, is actively seeking to achieve a favourable ESG profile, or is aiming to achieve a specific ESG-related outcome, the fund is more likely to be an ESG Strategy Fund. In contrast, if ESG factors are solely being considered as one of many components in the fund’s broader risk assessment process, the fund is more likely to be an ESG Limited Consideration Fund.

The issue of whether a fund is an ESG Strategy Fund or an ESG Limited Consideration Fund most often arises in the context of funds that use an ESG integration strategy as part of their investment selection process. This is because there can be a significant range in the role, impact and weight that ESG factors may have when they are integrated alongside traditional financial factors into the investment process for different funds by different IFMs. However, this issue may also arise for funds that use other types of ESG strategies as part of their investment process.