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Wide Disparity Exists in Investment Approaches and Transparency for Canadian ESG Funds

DBRS Morningstar published a commentary discussing the wide disparity in investment approaches and transparency for Canadian environmental, social, and governance (ESG) funds.

Key highlights include the following:

-- Responsible, or ESG, funds in Canada differ greatly from each other; some have a much more thorough approach to how ESG considerations are incorporated and a higher level of transparency regarding their investment process.

-- Nearly all funds employ some sort of exclusionary approach whereby companies in unsustainable or unethical industries are excluded from the fund. Shareholder engagement is also commonly used, with the fund taking an active role in improving the ESG practices in the companies it has invested in. Funds focused on specific ESG concerns or ones that quantify their positive impact are less common.

-- For an asset manager, having a suite of ESG product offerings may allow it to meet evolving customer needs and generate higher sales and earnings. However, for DBRS Morningstar, the quality and breadth of an ESG fund lineup remains secondary to other credit rating considerations. Moreover, it is important that the ESG funds be robust in their investment approach lest greenwashing concerns and reputational damage arise.

“Currently, Canadian asset managers have wide discretion as to how ESG funds should be composed and what ESG approach they wish to follow, which can result in a lack of comparability and confusion for investors,” said Komal Rizvi, Vice President, Financial Institutions Group. “Consequently, it becomes important that an asset manager stands behind the robustness of its ESG investing approach and is able to communicate the validity thereof; otherwise, there may be risk of greenwashing claims being brought against it, which, in the worst-case scenario, may result in reputational damage and/or negatively affect earnings.”