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It has been a year and a half since the Canadian Investment Funds Standards Committee (CIFSC) launched the Responsible Investment Identification Framework (RI Framework) in January, 2023. The RI Framework seeks to identify investment funds that apply one or more RI approaches. But responsible investment continues to evolve at a rapid pace in Canada and globally, and so the committee reviews the framework annually to ensure that it is broadly in alignment with current standards.
The CIFSC began its 2024 review of the RI Framework and, among other minor changes to language, identified a potential inconsistency with the “Environment, Social, and Governance (ESG) Integration and Evaluation” approach, which ultimately led to its removal.
ESG Integration is, per the CIFSC definition, the use of “ESG criteria as an essential component of the evaluation method for security selection alongside traditional financial factors, such that all securities in a portfolio have been evaluated based on ESG factors and the ESG factors are significant and influential in the buying and selling of securities in the portfolio.”
What stands out from this definition – which mirrors those of the Canadian security regulator’s (CSA) Staff Notice 81-334 and the CFA/GSIA/PRI responsible investment definitions – is that apart from the other identified approaches, ESG Integration is a process. A process does not have an objective, or a measurable endpoint.
In addition, the wording that ESG Integration is used “alongside traditional financial factors” indicates that it may not be more important than those factors, and that the primary purpose of integration may be to enhance risk-adjusted returns. In contrast, funds identified under the other approaches specifically seek to have a measurable impact on one or more ESG factors, independent of financial return.
These two points are inconsistent with the intent of the RI Framework and the other five recognized approaches (ESG Best in Class, ESG Exclusions, ESG Related Engagement and Stewardship Activities, ESG Thematic Investing, and Impact Investing).
A summary of each RI approach and the changes to them is shown in the accompanying table.
After careful consideration and consultation with industry participants and stakeholders, the CIFSC voted to remove ESG Integration and Evaluation as an identified RI approach as of September 1, 2024.
The CIFSC recognizes that ESG Integration is a valid investment strategy. However, in the context of an objective-based RI Framework, a fund that integrates ESG in its investment process but does not seek a specific ESG outcome is not eligible to be flagged as an ESG objective fund.
Although this change may appear to be inconsistent with current definitions, given that both the CFA/GSIA/PRI definitions and CSA Staff Notice recognize Integration as a distinct RI approach, it is worth noting that CFA Institute recently published an update stating that their Global Industry Standards Team is developing a white paper that will address issues with ESG fund classification including the “lack of well-defined boundaries” such as “the difference between Integration Funds and ESG Focused Funds.”
There is certainly more to come on this topic as regulators, investors, fund managers, and other industry participants continue to develop and refine their understanding of responsible investment. For its part, the CIFSC believes that limiting the RI Framework to objective-focused ESG approaches provides investors with a clear and consistent standard to identify funds where ESG factors are the primary investment selection criteria.
John Krisko, CFA, BBA, is Vice President, Investment Analytics at Fundata Canada Inc. and is Vice Chair of the Canadian Investment Funds Standards Committee (CIFSC).
Notes and Disclaimers
© 2024 by Fundata Canada Inc. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.
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