Evolving ESG regulations raise challenges and opportunities for fund managers: BLG report

Growing investor interest is driving demand for environmental, social and governance investment products, while the evolving regulatory landscape is presenting growth opportunities for Canadian fund managers. The role of in-house counsel at investment firms has broadened as the focus on ESG is more critical than ever before.

A recent report by Borden Ladner Gervais LLP’s investment management group found that 64 percent of Canadian fund managers surveyed consider ESG factors in a material way in their investment process.

Meanwhile, the report entitled Navigating the currents of ESG expectations: Survey report on ESG perceptions and practices of Canadian Fund Managers also found that 63 percent of Canadian fund managers employ internal ESG metrics to supplement those from external data providers, signaling concerns about external data providers.

More than half of fund managers (53 percent) report that the Canadian Securities Administrators’ Staff Notice 81-334: ESG-related investment fund disclosure has created more complexity and uncertainty in ESG reporting, while 65 percent believe that it does not adequately address greenwashing concerns.

“One of the most interesting findings from this report was just how complicated it is for people to deal with the new regulations and to understand what it means for them and make sure they are following it,” says Lynn McGrade, a partner at BLG.

Fund managers should position themselves for success by examining their ESG offerings and making sure their disclosure lines up with their sales, investor communications and their continuous disclosure documents, according to McGrade. It is also important for the board to understand how the firm is positioning itself in the area of ESG investment processes, she adds.

ESG funds can raise regulatory and litigation risks so fund managers should use plain language to address investors.

“I think the real emphasis for fund managers should be to be as clear with their disclosure as possible,” says McGrade. “It’s also important for fund managers to step back and look at their disclosures and think about not just what they include, but what they may also need to include by way of context to make sure the disclosure is not misleading.”

McGrade notes that she is starting to see a lot more training within investment firms on how to communicate externally and internally about what controls and systems are in place to ensure the ESG story is properly presented to the marketplace.

Fund managers and their in-house legal teams should expect to see developments in ESG regulation in Canada in 2024, with the CSA preparing to publish new guidance by March.

“We have been seeing evolving guidance coming out on what the regulators are calling ESG considerations, where ESG is still a very significant part of the investment process but it may not be the determinative process,” says McGrade. “That is one area where we haven't had good guidance formally published yet, and I think one of the biggest areas that the industry will be looking at to see what the CSA has to say on that particular type of fund.”