Response to Consultation Paper on the Development of the CFA Institute ESG Disclosure Standards for Investment Products
October 19, 2020
Via Electronic Submission
Senior Director, Global Industry Standards
915 E. High Street
Charlottesville, VA 22902
Re: Consultation Paper on the Development of the CFA Institute ESG Disclosure Standards for Investment Products
Dear Mr. Fidler:
The Investment Adviser Association (IAA) welcomes the opportunity to comment on the CFA Institutes (CFAs) Consultation Paper on the Development of ESG Disclosure Standards for Investment Products (Consultation Paper). The purpose of the ESG Disclosure Standards (Standard) is to provide greater transparency and comparability for investors by enabling asset managers to clearly communicate the ESG-related features of their investment products. While this goal is laudable and we appreciate the CFAs attention to ESG investing, we do not believe that a new standard is needed due to multiple regulators currently engaging in related activity in this area and the existence of multiple third-party standards. We are also concerned that a new standard would impose significant costs while increasing rather than reducing investor confusion. We strongly recommend that the CFA wait until regulators have completed their deliberations and then determine whether there is a need for ESG product disclosure standards. Our responses below to questions in the Consultation Paper focus on three areas: (i) the need for and scope of the Standard; (ii) our objection to the independent examination requirement; and (iii) ESG Integration and Proxy Voting, Engagement, and Stewardship as ESG-Related Features.
I. Need for and Scope of the Standard (Questions 1 and 3-6)
As we discuss below, there is significant ongoing regulatory activity regarding ESG investing and we are very concerned that a new CFA standard in this area could unnecessarily burden asset managers and create the potential for increased investor confusion. We also comment on the scope of the Standard.
Question 1: Do you agree that a standard is needed to help investors better understand and compare investment products with ESG-related features?
We appreciate the CFA’s focus on ESG investing. Many IAA members engage in ESG investing on behalf of their clients and sponsor ESG-focused funds. However, unlike when the CFA Institute first adopted the Global Investment Performance Standards, which filled a gap in the availability of standardized investment performance measurement, there is no similar lack of regulatory effort or third-party standards related to ESG disclosure. The SEC, the Commodity Futures Trading Commission (CFTC), and other regulators are either considering developing, or have developed, regulations regarding ESG disclosures. Given the strong and anticipated sustained policymaker focus on ESG disclosure issues, and to avoid inconsistencies with, or additional requirements on top of, these existing or potential regulations, we do not believe that a new standard in this area is needed. We strongly recommend that the CFA wait until regulators have completed their deliberations and then determine whether there is a need for ESG product disclosure standards. Below we describe recent regulatory activity in this area in greater detail.
In a request for comment earlier this year regarding the fund names rule (Fund Names Rule) under the Investment Company Act of 1940 (Investment Company Act), the SEC asked a number of questions regarding ESG funds, including whether the Fund Names Rule should apply to terms such as “ESG” or “sustainable,” and whether there should be other limits on a fund’s ability to characterize its investments as ESG or sustainable. In addition, the SEC’s recently-formed Asset Management Advisory Committee (AMAC) has an ESG Subcommittee which is developing recommendations that it plans to issue to the SEC in December. These recommendations will reportedly relate to several workstreams that the subcommittee has developed, including on performance management, ESG rating systems, and issuer disclosure. Issuer disclosure is a key concern for asset managers because consistent and comparable ESG issuer disclosures would better facilitate consistent and comparable ESG disclosures at the investment product level.
SEC Commissioners have also discussed the need for ESG disclosure standards. We strongly believe that the CFA should wait until after the SEC has reviewed responses to its request for comment, evaluated the AMAC recommendations, considered other related regulatory efforts, and completed its deliberations in this area. We also note that the CFTC is considering ESG issues as well. The Climate-Related Market Risk Subcommittee of the CFTC’s Market Risk Advisory Committee recently issued a report titled Managing Climate Risk in the U.S. Financial System, which discusses climate risk disclosure. In addition, the Department of Labor is also engaged in a rulemaking regarding ESG investing.
In Europe, as noted in the Consultation Paper, the EU has adopted several regulations in this area, including Regulation EU 2019/2088 Sustainable Finance Disclosure Regulation (SFDR). Many of our members are working diligently to implement these new regulations. In addition, the International Organization of Securities Commissions (IOSCO) has established a Task Force on Sustainable Finance and one of its goals is “to improve sustainability-related disclosures made by issuers and asset managers.”
We are concerned that, if the CFA proceeds with a standard before regulators have completed their consideration of the issues, that standard could become a de facto market requirement, with institutional investors and their consultants expecting asset managers to adopt it in the short term. Any standard adopted by the CFA could result in disclosures that are potentially inconsistent with and/or duplicative of regulatory requirements, which would increase costs and burdens for asset managers while likely exacerbating rather than reducing confusion for investors. We are also concerned that, with the large number of existing third-party standards noted by the CFA in the Consultation Paper, an additional standard will only further increase investor confusion.
Purpose and Scope
Question 3: In addition to the examples listed in Table 1, which regulations and standards, either in existence or in development, should be considered during the development of the Standard to avoid duplication or conflict and to ensure alignment and referencing if and when applicable?
As discussed in our response to Question 1, the SEC has issued a request for comment in connection with the Fund Names Rule that discusses ESG investing. Moreover, certain SEC Commissioners have signaled a strong interest in developing disclosure requirements in this area, and the AMAC’s ESG Subcommittee plans to issue recommendations to the SEC in December in connection with several related workstreams. In addition, the CFTC is also focused on climate risk. We are concerned that, if the CFA proceeds with a standard in advance of regulators completing their deliberations in this area, there could be inconsistent and duplicative standards and potential increased investor confusion.
Question 4: Do you agree that a disclosure-based approach would be more helpful to achieve the Standard’s goals of transparency and comparability than a prescriptive-based approach?
While we recommend that the CFA not proceed with the Standard at this time, should it do so, we agree that a principles-based disclosure approach would be more helpful than a prescriptive approach. We strongly support informed investor choice and object to actions that would limit the ability of investment advisers to pursue ESG investment strategies on behalf of their clients or otherwise substitute a regulator’s judgment about investment strategy for that of professional fiduciaries. We also believe that investment advisers should not be required to consider a particular set of ESG factors when making investment decisions, because the factors considered by advisers vary across firms. We are concerned by language in the Consultation Paper leading up to question 4 that a drawback of a disclosure-based approach is that “it does not provide assurance that an investment product will provide a minimum level of benefits or performance.” We do not believe that any approach would or should provide a minimum level of benefits or performance, due to the inability to predict future results.
Question 5: Do you agree that the Standard should focus only on product-level disclosures and not firm-level disclosures?
While we recommend that the CFA not proceed with the Standard at this time, should it do so, we believe that the Standard is designed for products, and therefore should be product-focused and not firm-focused.
Question 6: Do you agree that an asset manager should be permitted to choose the investment products to which they apply the Standard rather than be required to apply the Standard to all their investment products with ESG-related features?
While we recommend that the CFA not proceed with the Standard at this time, should it do so, we believe that asset managers should have the flexibility to choose the investment products to which they apply the Standard. We also have concerns about certain ESG-related features, as discussed in our responses to Questions 16 and 36 below.
II. Independent Examination Requirement (Question 11)
We are strongly opposed to any independent examination requirement for the reasons described below.
Question 11: Should independent examination be required, or should it be recommended as best practice but ultimately left to the discretion of the asset manager?
While we recommend that the CFA not proceed with the Standard at this time, should it do so, we do not believe that independent examination should be required. We are concerned that independent, third-party examinations would be costly and time consuming for investment advisers. Most investment advisers are small businesses that would be disproportionately affected, without significant benefits.
We note that investment advisers are not subject to independent third-party examinations with respect to other disclosures, including disclosures related to other types of investment strategies, and we do not believe that ESG investment strategies should be singled out in this regard. Investment advisers are subject to an overarching fiduciary duty and robust disclosure requirements under the Investment Advisers Act of 1940 that apply across investment strategies. Investment advisers are also subject to periodic SEC examinations. Advisers also must comply with product-level disclosure requirements under the Investment Company Act and other regulations and they have compliance policies and procedures in place to address these requirements. Accordingly, we do not believe that requiring third-party examinations would be warranted.
III. ESG-Related Features (Questions 16 and 36)
While we recommend that the CFA not proceed with the Standard at this time, should it do so, we do not believe that “ESG Integration” or “Proxy Voting, Engagement, and Stewardship” should be characterized as ESG-Related Features.
Question 16: Do you believe that “ESG Integration” is a clear and appropriate name for this feature? If not, please suggest an alternative and explain why it would be a better choice.
We do not believe that “ESG Integration” should be characterized as an ESG-Related Feature. The consideration of ESG factors is now widely considered to be a component of generally accepted investment principles (e.g., risk management) that apply across virtually all investment strategies. For example, it is common for investment advisers to consider as part of their evaluation of a portfolio company the company’s board of directors. Similarly, today, when investment advisers analyze portfolio companies’ risk management programs, they are likely considering how those companies are dealing with the COVID-19 pandemic, regardless of their investment strategy.
Question 36: Do you agree that “Proxy Voting, Engagement, and Stewardship” should be a distinct feature? If not, would you prefer that the types of issues to be addressed by disclosure requirements be redistributed to other features or to general disclosures?
We do not believe that “Proxy Voting, Engagement, and Stewardship” should be characterized as an ESG-Related Feature. Proxy voting applies across investment strategies, is not unique to ESG investment strategies, and both investment advisers and investment
companies are already subject to disclosure requirements regarding proxy voting. We note that the AMAC’s ESG Subcommittee initially had a proxy voting workstream, but it is not making recommendations to the SEC related to that workstream due to recent SEC actions in this area, including a rulemaking for proxy advisory firms and guidance for investment advisers that apply regardless of investment strategy. The subcommittee concluded that the SEC’s actions in this area “effectively improved investors [sic] ethical outcomes and in combination with [Form] 13F provide an adequate level of transparency with respect to proxy voting whether a fund is designed to include ESG considerations or not.”
We also do not believe that proxy voting needs to be addressed by the CFA in other disclosure requirements in a standard for SEC-registered investment advisers or investment companies, because they are already required to disclose information regarding proxy voting.
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We appreciate your consideration of our comments on the Consultation Paper and would be happy to provide any additional information that may be helpful. Please contact Sarah Buescher, IAA Associate General Counsel, or the undersigned at (202) 293-4222 if we can be of further assistance.
Gail C. Bernstein
 The IAA is the largest organization dedicated to advancing the interests of investment advisers registered with the Securities and Exchange Commission (SEC). For more than 80 years, the IAA has been advocating for advisers before Congress and U.S. and global regulators, promoting best practices and providing education and resources to empower advisers to effectively serve their clients, the capital markets, and the U.S. economy. The IAA’s member firms manage more than $25 trillion in assets for a wide variety of individual and institutional clients, including pension plans, trusts, mutual funds, private funds, endowments, foundations, and corporations. For more information, please visit www.investmentadviser.org.
 The Consultation Paper is available at https://www.cfainstitute.org/-/media/documents/code/esg-standards/consultation-paper-on-esg-disclosure-standards.ashx.
 See Request for Comments on Fund Names, Rel. No. IC-33809 (Mar. 2, 2020), available at https://www.sec.gov/rules/other/2020/ic-33809.pdf.
 Information on the SEC’s Asset Management Advisory Committee is available at https://www.sec.gov/page/asset-management-advisory-committee.
 See SEC Asset Management Advisory Committee, Update on Progress in ESG Subcommittee (Sept. 16, 2020), available at https://www.sec.gov/files/update-from-esg-subcommittee-09162020.pdf (AMAC ESG Update).
 See Commissioner Allison Herren Lee, Regulation S-K and ESG Disclosures: An Unsustainable Silence (Aug. 26, 2020), available at https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-26; Commissioner Caroline Crenshaw, Statement on the “Modernization” of Regulation S-K Items 101, 103, and 105 (Aug. 26, 2020), available at https://www.sec.gov/news/public-statement/crenshaw-statement-modernization-regulation-s-k; and Commissioner Elad Roisman, Keynote Speech at the Society for Corporate Governance National Conference (July 7, 2020), available at https://www.sec.gov/news/speech/roisman-keynote-society-corporate-governance-national-conference-2020.
 See Managing Climate Risk in the U.S. Financial System, Report of the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission (Sept. 9, 2020), available at https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf.
 See Financial Factors in Selecting Plan Investments, 85 FR 39113 (June 30, 2020), available at https://www.govinfo.gov/content/pkg/FR-2020-06-30/pdf/2020-13705.pdf.
 See Media Release, IOSCO steps up its efforts to address issues around sustainability and climate change (Apr. 14, 2020), available at https://www.iosco.org/news/pdf/IOSCONEWS564.pdf.
 See AMAC ESG Update. Form 13F is a quarterly report that institutional investment managers that exercise investment discretion over at least $100 million in Section 13(f) securities file with the SEC. Section 13(f) securities generally include U.S. exchange-traded stocks, shares of closed-end investment companies, shares of exchange-traded funds, and certain convertible debt securities, equity options, and warrants.
 For SEC-registered investment advisers, see Item 17 of Part 2A of Form ADV under the Investment Advisers Act, available at https://www.sec.gov/about/forms/formadv-part2.pdf. For SEC-registered investment companies, see, e.g., Item 17(f) of Form N-1A under the Investment Company Act, available at https://www.sec.gov/files/formn-1a.pdf.