Part E. Key Findings and Guidance

III. Investment objectives and fund names

Staff identified very few issues relating to fund names, while a significant number of the issues raised during the ESG Prospectus Reviews relating to investment objectives involved revising the investment objectives to provide greater clarity around the ESG focus of the fund, including being consistent with the name of the fund. Many of the comments relating to investment objectives involved revising the investment strategies to clarify the meaning of certain ESG-related terms or concepts relating to the ESG focus of the fund as identified in the investment objectives, such as “sustainable issuers”, “environmental economy”, and “clean energy-related companies”.

There were also some specific issues raised in relation to index-tracking funds, funds that invest in underlying funds, and funds with carbon offset series, which are discussed in the guidance below.

An investment fund is required to disclose, in its prospectus, the fundamental investment objectives of the fund, including information that describes the fundamental nature or fundamental features of the fund that distinguish it from other funds.⁷  Similarly, an investment fund is required to include, in its Fund Facts or ETF Facts, as applicable, a description of the fundamental nature or fundamental features of the fund that distinguish it from other funds.⁸

A fund’s name and investment objectives play key roles in identifying the primary focus of the fund and distinguishing it from other funds. To prevent greenwashing, the name and investment objectives of a fund should accurately reflect the extent to which the fund is focused on ESG, where applicable, including the particular aspect(s) of ESG that the fund is focused on.

A fund that uses one or more ESG strategies as a material or essential aspect of the fund, as evidenced by the name of the fund or the manner in which it is marketed, is required to disclose such ESG strategies as an investment objective in its prospectus⁹ and in its Fund Facts or ETF Facts, as applicable.¹⁰

⁷ Item 4(1) of Part B of Form 81-101F1 Contents of Simplified Prospectus (Form 81-101F1); Item 5.1(1) of Form 41-101F2
⁸ Item 3(1) of Part I of Form 81-101F3 Contents of Fund Facts Document (Form 81-101F3); Item 3(1) of Part I of Form 41-101F4 Information Required in an ETF Facts Document (Form 41-101F4).
⁹ Instruction (3) to Item 4 of Part B of Form 81-101F1 states that if a particular investment strategy is a material aspect of the fund, as evidenced by the name of the fund or the manner in which it is marketed, this strategy must be disclosed as an investment objective. Similarly, Instruction (3) to Item 5 of Form 41-101F2 states that if a particular investment strategy is an essential aspect of the fund, as evidenced by the name of the fund or t he manner in which it is marketed, this strategy must be disclosed as an investment objective.
¹⁰ Instruction (2) to Item 3 of Part I of Form 81-101F3; Instruction (2) to Item 3 of Part I of Form 41-101F4.

A fund that primarily invests or intends to primarily invest, or whose name implies that it will primarily invest, in a type of issuer or industry segment associated with ESG is required to indicate this in its fundamental investment objectives,¹¹ as well as in its Fund Facts or ETF Facts, as applicable.¹² For example, this may include a fund that intends to primarily invest in companies that are transitioning to a low-carbon economy or a fund whose name implies that it will primarily invest in the water conservation industry.

Staff note that the existing requirements draw a link between a fund’s name and its investment objectives in order to ensure that there is consistency between them, given the importance of a fund’s name in distinguishing it from other funds. Accordingly, in staff’s view, where a fund’s name references ESG or other related terms (e.g. sustainability, social responsibility, impact), the fundamental investment objectives of the fund should reference the aspect of ESG included in the name of the fund. This is illustrated in Figure 2 below.

Figure 2.

In staff’s view, a fund that references ESG in its name should primarily invest in assets that meet the fund’s ESG-related criteria.

If a fund is permitted to primarily invest in assets that do not meet the fund’s ESG-related criteria, the fund should not reference ESG in its name or investment objectives, as the name or investment objectives would not accurately reflect the primary focus of the fund and would therefore be misleading.

While the above guidance relating to fund names and investment objectives is intended to apply to all investment funds, the following guidance applies specifically to certain types of funds and funds in certain circumstances.

¹¹ Instruction (2) to Item 4 of Part B of Form 81-101F1 states that a mutual fund’s fundamental investment objectives must indicate if the mutual fund primarily invests, or intends to primarily invest, or if its name implies that it will primarily invest, in a particular type of issuer or industry segment. Similarly, Instruction (2) to Item 5 of Form 41-101F2 states that if a fund primarily invests, or intends to primarily invest, or if its name implies that it will primarily invest, in a particular type of issuer or particular industry segment, the fundamental investment objectives should so indicate.
¹² Instruction (1) to Item 3 of Part I of Form 81-101F3; Instruction (1) to Item 3 of Part I of Form 41-101F4.

(a)   Funds that track the performance of an ESG-related index

For ESG Objective Funds that reference any aspect of ESG in their name and whose investment objectives indicate that the fund tracks the performance of an ESG-related index, staff’s view is that: (a) the ESG focus(es) of the index should be consistent with the ESG focus(es) indicated in the fund’s name; and (b) the fund’s investment objectives and/or investment strategies disclosure should indicate that the fund’s portfolio will be comprised primarily of issuers that reflect the ESG focus(es) identified in the fund’s name and investment objectives.

Unnamed ESG-related index: For ESG Objective Funds whose investment objectives state that the fund will track the performance of an ESG-related index in order to meet its ESG-related investment objectives, but that does not name the specific ESG-related index in the investment objectives, staff’s view is that the investment objectives should clearly identify the ESG-related characteristics of any ESG-related index that the fund will track.

Investments in issuers that are not index constituents: Where an ESG Objective Fund’s investment objectives indicate that the fund tracks the performance of an ESG-related index but the fund is permitted to track the index by investing in issuers that are not constituents of the index (including by using a sampling strategy), staff’s view is that such issuers should have ESG characteristics that are similar to the constituents of the index, particularly in relation to the ESG characteristics that are relevant to the ESG focus of the fund. For example, if a fund whose investment objectives indicate that the fund will be tracking an index that is focused on environmental sustainability invests in issuers that are not index constituents, such issuers should share similar environmental characteristics to the index constituents.

(b) Funds that invest in underlying funds

For ESG Objective Funds that invest in underlying funds in order to meet their investment objectives, the ESG focus(es) of the underlying funds should be consistent with the ESG focus(es) of the fund.

In addition, staff remind IFMs that the holdings of any underlying funds held by a top fund, including any ESG-Related Fund, should be consistent with the investment objectives and strategies of the top fund, including, for example, any exclusionary screening criteria used by the top fund.

(c) Funds that intend to generate a measurable ESG outcome

Where an ESG Objective Fund intends to generate a measurable ESG outcome, staff encourage such funds to clearly state the intended outcome as part of their investment objectives in order to allow investors to identify funds that match their own ESG-related goals. For example, staff encourage funds that aim to reduce carbon emissions to disclose a measurable carbon emissions reduction target in their investment objectives. The inclusion of a measurable ESG outcome in a fund’s investment objectives would also allow funds to provide meaningful continuous disclosure that reports on whether the fund is achieving its intended ESG outcome.

(d) Funds with carbon offset series

There are some funds, including crypto asset funds, that have a series whose distinguishing feature is that there is a carbon offsetting feature. These series generally reference carbon offsetting in their name. Staff’s view is that, if the name of the series refers to carbon offsetting, the investment objectives of the series should refer to, and explain, the carbon offsetting feature of the series and state that prior approval of securityholders of the series will be obtained before the carbon offset feature of the series is changed.¹³

This is consistent with staff’s view on funds that have a currency hedged series, which is that the investment objectives of a fund that has a currency hedged series should disclose that prior approval of securityholders of the currency hedged series will be obtained before the currency hedging strategy of the series is changed.

¹³ See the guidance below on the prior securityholder approval requirement for changes to the fundamental investment objectives of a fund under “ESG-related changes to existing funds”.