Views on improving the integrity of global capital markets
11 January 2021

CFA Institute Reaffirms Position on Environmental, Social and Governance Integration

Posted In: ESG

CFA Institute has published its most recent statement on its position concerning on environmental, social and governance (ESG) integration in the investment process. The previous statement was published in 2019 as CFA Institute continued to integrate ESG readings into the CFA Institute curriculum, and continued to produce content to educate investors about how to best integrate ESG analysis into the investment process.

ESG Is Fast Moving and Much Has Changed

In Europe, the EU has proposed a taxonomy for sustainable activities. The EU’s Non-Financial Reporting Directive (NFRD) requires many EU companies to publish data on the impact their activities have on ESG factors. The Taxonomy Regulation introduces a sustainability classification system through which investment firms must classify investments based on NFRD data. The Sustainable Finance Disclosure Regulation SFDR requires investment firms to disclose the following:

  • environmental sustainability of an investment and the provenance of any ESG claims made;
  • risks investments present to ESG factors; and
  • risks ESG factors present to investments.

According to a recent research report by PwC, in a best-case scenario, ESG funds will experience a more than threefold jump in assets by 2025, increasing their share of the European fund sector from 15 to 57 percent. In a less optimistic “base-case” scenario, PwC still sees ESG funds capturing more than 40 percent of the market by 2025.

In the United States, interest in ESG or sustainable investing is growing at a similar rate. A report released by the Forum for Sustainable and Responsible Investment (USSIF) in the fall of 2020 showed that the total US-domiciled assets under management using sustainable investing strategies grew from $12.0 trillion at the start of 2018 to $17.1 trillion at the start of 2020, an increase of 42 percent.

In the time since we first published our statement on ESG integration, international ESG disclosure regimes like the Sustainability Accounting Standards board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD) have gained traction with investors, including endorsements in Larry Fink’s 2020 letter to company CEOs. CFA Institute has also published a report Climate Change Analysis in the Investment Process.

Just to Be Clear

In light of the increased interest in ESG integration and ESG investing, it is prudent to further clarify our views on ESG integration and ESG investing. The main points of our statement have not changed much, but have we added wording to clarify our positions and to avoid confusion about exactly where CFA Institute stands on ESG integration.

In our educational and advocacy work, we focus on integrating material ESG information into the investment process, while calling for improvements in ESG reporting and standards, recognizing the progress that has been made in this area in recent years.

Some of the key points of emphasis from our statement are as follows:

  1. CFA Institute does not believe the integration of material ESG factors into the investment process is a violation of fiduciary duty.
  2. CFA Institute Code of Ethics Standards of Professional Conduct require CFA® charterholders to conduct appropriate research and investigation of all material information relevant to their investment analyses and portfolio management decisions. This of course, can include material ESG data.
  3. CFA supports mandated disclosures of investment managers regarding if, and how, a manager covers integration of ESG. (just explain what you do, if anything).
  4. CFA does not support mandated integration, nor should regulators, that every regulated investment manager must integrate ESG factors.
  5. CFA Institute favors a comply – or -explain model for disclosure requirements around material ESG data.

CFA Institute does not believe that ESG integration should be mandated by any regulatory authority, but rather that policy and regulation should leave things open for asset managers to determine for themselves and their client the method of ESG integration that works for them. Indeed, we may face honest disagreement among analysts and portfolio managers about which factors are material and to what level certain ESG factors are material. This contest of ideas on any investment topic (including materiality of ESG factors) is what makes a market and should not be stifled by overly prescriptive policy.

Disclosure Standards Are Key

Investors are looking for a much more consistent and coordinated effort around corporate ESG/sustainability reporting frameworks. CFA supports the efforts of organizations like the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD) for focusing on disclosure and engagement standards around material ESG metrics. We are also encouraged by the recent moves by the International Financial Reporting Standards (IFRS) Foundation to wade into the debate on creating sustainability related accounting standards.

As Are Standards for ESG Products

To promote better disclosures concerning ESG financial products, CFA Institute is developing standards for such disclosures. CFA Institute recently developed a consultation paper seeking feedback on the proposed scope, structure and design of such a standard. CFA Institute plans to issue the exposure draft on the standard in May 2021.   

Watch This Space

CFA Institute consistently monitors key debates and evolving issues concerning the role and application of ESG information in the investment management process. Our experience, research and conversations with our members and investment professionals leads us to believe that investment professionals can improve the fundamental analysis they undertake and ultimately the investment choices they make for the benefit of their clients through the use of material ESG data.

CFA Institute is specifically focused on the quality and comparability of the ESG information provided by corporate issuers as well as how investors can best integrate material ESG factors into the investment selection process.


Photo credit @ Getty Images / ipopba

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a director of capital markets policy at CFA Institute, where he focuses on corporate governance issues. He was named one of the 2008 “Rising Stars of Corporate Governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

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