The CFA Institute, Global Sustainable Investment Alliance (GSIA), and Principles for Responsible Investment (PRI) have issued the Definitions for Responsible Investment Approaches guidance. The collaboration responds to calls from regulators and investor groups for common terms and definitions for the global asset and wealth management industries to develop common responsible investment (RI) terms and definitions to give consistency in the asset management industry.
The guidance includes definitions across screening, environment, social and corporate governance (ESG) integration, thematic investing, stewardship and impact investing, with the intention to form a worldwide standard. The definitions are a building block that can be used along with other sustainable finance initiatives such as the CFA Institute’s Global ESG Disclosure Standards for Investment Products. These common standards will help to build a professional, transparent, and sustainable financial system, in which investors can have trust.
One of the main objectives is that greenwashing will be reduced. The risk of greenwashing has been exacerbated given that terms used in RI investment are largely unregulated by governments in Australia or elsewhere; until now, there has been no agreed set of definitions or a taxonomy of what is “sustainable”, “responsible”, or “ESG” in Australia and most other developed nations. This has created fertile ground for confusing product labels and misunderstanding about the methodology underpinning RI products, which has threatened to undermine consumers’ trust in asset managers.
ESG approaches, for example, have varied widely among product issuers, including the definition and application of positive and negative screens. Inconsistency of disclosures between asset managers and discrepancies in the presentation of funds’ screening criteria have sometimes confused investors and created a perception of greenwashing.
Greenwashing has been a major concern in the investment management industry. In 2021, 59 per cent of institutional investors identified greenwashing as a challenge in the ESG investment process, according to the Schroders Institutional Investor Study. Additionally, in a global 2020 CFA Institute member survey, 78 per cent of investment professional respondents believed that there was a need for improved standards around ESG products to diminish greenwashing.
Promoting the consistent and precise use of terminology in responsible investment will help to introduce greater consistency among asset managers in developing and marketing RI products. So, for example, for terms like screen, ESG integration, impact investing, the CFA Institute, GSIA, and PRI have outlined a definition, detailed explanation, and a list of definitions that have served as the primary inputs for using the terms in practice. These definitions will create a consistent foundation for the continued professionalisation of responsible investment.
In its report Sustainable Finance and the Role of Securities Regulators and IOSCO, the International Organization of Securities Commissions (IOSCO) found that the majority of the market participants it consulted suggested greenwashing was an important issue. One of the challenges identified by IOSCO was the lack of standardisation and clear guidance on disclosures, taxonomies, and differing regulatory approaches to sustainable finance. The IOSCO identified recommendations for regulators with the aim of improving sustainability-related practices, policies, procedures, and disclosures in the asset management industry.
Importantly, this new guidance clarifies existing terms and definitions but does not create new terms. It also recognises important shifts that have taken place in responsible investment, with strategies now being applied to a wide range of investment styles and asset classes in both public and private markets. Prior versions of RI definitions were, in some cases, limited to investments in listed companies.
The mission of the CFA Institute is to lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. As such, our aim is to help promote best practices for the sake of market integrity. This new guidance provides clear definitions to the investment industry so that there is a common understanding of RI terms across jurisdictions, which is a significant step forward in boosting market integrity and transparency for investors globally.
Lisa Carroll, CEO, CFA Societies Australia