Part E. Key Findings and Guidance

X. Continuous disclosure

Most of the funds that were reviewed as part of the ESG-Focused Reviews met the continuous disclosure expectations set out in the 2022 Notice. However, there were two notable observations from the ESG-Focused Reviews pertaining to best practices and portfo lio holdings.

Firstly, most funds did not follow the best practices relating to continuous disclosure that were set out in the 2022 Notice, including those related to MRFP disclosure about the fund’s progress or status with regard to meeting the fund’s ESG-related inves tment objectives and disclosure about past proxy voting records and shareholder engagements.

Secondly, during the course of the ESG-Focused Reviews, staff became aware of instances in which a fund had inadvertently held investments that should have been screened out based on the negative screens set out in the investment strategies of the fund.

An investment fund must include, in its MRFP, a summary of the results of operations of the investment fund for the financial year to which the MRFP pertains, including a discussion of how the composition and changes to the composition of the investment portfolio relate to the fund’s fundamental investment objective and strategies.³⁶ Staff note, however, that funds are only required to disclose information that is material.³⁷

Continuous disclosure, including the MRFP, enables investors to monitor a fund’s performance and evaluate its ability to meet its objectives on an ongoing basis. For funds that have ESG-related investment objectives, continuous disclosure can help prevent greenwashing by allowing investors to monitor the fund’s ESG performance and therefore evaluate the fund’s progress in terms of meeting its ESG-related investment objectives.

³⁶ Items 2.3(1) of Part B and 2.1 of Part C of Form 81-106F1 Contents of Annual and Interim Management Report of Fund Performance (Form 81-106F1).
³⁷ Item 1(d) of Part A of Form 81-106F1.

An ESG-Related Fund is required to disclose in its MRFP how the composition and changes to the composition of the investment portfolio relate to the fund’s ESG-related investment objectives and/or strategies where such information is material.³⁸ For example, if a fund that excludes companies that are involved in gambling divests its holdings in a company because it has recently become involved in the gambling industry, the fund must disclose its divestment and the reason for the divestment in the MRFP, where such information is material.

ESG Limited Consideration Funds: While an ESG Limited Consideration Fund is less likely than an ESG Objective Fund and ESG Strategy Fund to change the composition of its investment portfolio due to its ESG investment strategies, there may be circumstances in which an ESG Limited Consideration Fund changes the composition of its investment portfolio due to its consideration of ESG factors. Where such information is material, an ESG Limited Consideration Fund is required to disclose this in its MRFP.³⁹

Prohibited portfolio holdings: For an ESG-Related Fund whose investment strategies include negative screens, staff’s view is that if the fund, at any point, holds any investments that should have been screened out in accordance with the negative screens set out in the prospectus, the fund should disclose the holding and information about the fund’s divestment of the holding in its MRFP.

³⁸ See Footnote 36 above.
³⁹ See Footnote 36 above.

In order to provide investors with meaningful disclosure about the ESG-related outcomes of a fund, staff encourage ESG Objective Funds to disclose, as part of the summary of the results of the fund’s operations in the MRFP, the ESG-related aspects of those operations, including the fund’s progress or status with regard to meeting its ESG-related investment objectives. For example, in the case of a fund whose investment objectives state that the fund will invest in companies that contribute to the fight against climate change, staff are of the view that investors would benefit from continuous disclosure that explains which companies the fund has invested in during the relevant period and how they have contributed to the fight against climate change.

Staff are of the view that all ESG Objective Funds, not just impact funds, funds with a measurable ESG-related outcome, or funds that use certain ESG-related metrics or key performance indicators, should be able to report on whether they’re achieving their ESG-related investment objectives. An ESG Objective Fund that uses any ESG strategies as part of its investment selection process in order to meet its ESG-related investment objectives, including a best-in-class strategy or negative screening strategy, can report on whether its portfolio composition is meeting its ESG-related investment objectives and whether the ESG strategies have been successfully applied during the time period covered by the MRFP.

As part of the summary of the results of the fund’s operations in the MRFP, staff encourage both ESG Objective Funds and ESG Strategy Funds to disclose any key quantitative metrics used by the IFM to assess whether the fund has satisfied any ESG considerations included in its investment objectives and/or investment strategies.

Reporting for funds that generate a measurable ESG outcome: Staff encourage ESG Objective Funds that intend to generate a measurable ESG outcome to report in their MRFPs on whether the fund is achieving that outcome. For example, where a fund’s investment objectives refer to the reduction of carbon emissions, staff are of the view that investors would benefit from disclosure in the fund’s MRFP that includes the quantitative key performance indicators for carbon emissions.

Reporting outside of the MRFP: In addition to the required disclosure in the MRFP, staff encourage ESG Objective Funds to provide investors with additional periodic information on how they are meeting their ESG-related investment objectives. We remind IFMs that websites and such non-regulatory documents are considered to be sales communications under NI 81-102, which is discussed further below under “Definition of sales communication”.

Assessment, measurement and monitoring: In order to be able to provide useful disclosure about the fund’s progress or status with regard to meeting its ESG-related investment objectives, staff encourage IFMs to regularly assess, measure and monitor the

ESG performance of the ESG-Related Funds that they manage.

Unless otherwise noted, the above guidance relating to continuous disclosure applies to all ESG-Related Funds. The following guidance applies specifically to funds that use certain types of ESG strategies.

(a) Funds that use proxy voting as an ESG strategy

Past proxy voting records on websites: An investment fund is required to maintain a proxy voting record⁴⁰ and make its most recent annual proxy voting record available on its designated website, as well as promptly send it to any securityholder upon request.⁴¹ While these requirements only apply to a fund’s most recent annual proxy voting record, staff encourage all funds, particularly ESG Objective Funds and ESG Strategy Funds that use proxy voting in relation to ESG matters as a principal investment strategy, to make all of their annual proxy voting records, including historical records from previous years, available on their designated websites. In staff’s view, such disclosure would provide greater transparency into how the fund’s ESG-focused proxy voting strategy has historically been implemented, and in the case of an ESG Objective Fund, how the fund has historically used proxy voting to meet its ESG-related investment objectives.

MRFP disclosure: Staff encourage all ESG Objective Funds and ESG Strategy Funds that use proxy voting in relation to ESG matters as a principal investment strategy to include, as part of the summary of the results of the fund’s operations in the MRFP, disclosure about how the past proxy voting records during that period align with the ESG-related investment objectives and/or strategies of the fund.

⁴⁰ Section 10.3 of NI 81-106.
⁴¹ Section 10.4 of NI 81-106.

(b) Funds that use engagement as an ESG strategy

Staff encourage all ESG Objective Funds and ESG Strategy Funds that use engagement in relation to ESG matters as a principal investment strategy to provide disclosure about: (a) past engagement activities on their designated websites; and (b) how the fund’s past engagement activities align with the ESG-related investment objectives and/or strategies of the fund as part of the summary of the results of the fun d’s operations in the MRFP.