The Canadian Investment Funds Standards Committee (CIFSC) has recently proposed that it will adopt a framework to identify funds that sufficiently practice responsible investing. Morningstar was actively involved in the formulation of this new identification structure, participating in roundtable discussions with industry experts, as well as provided feedback on wording and structure.
We think this is important because now there is a way for Canadian investors to identify responsible investments that they could consider, to invest according to their values. As Morningstar’s director of investment research Ian Tam says, “Once implemented, this will give an unbiased framework to all Canadian fund investors to help identify which funds are considered 'sustainable' and how they are sustainable.”
CIFSC’s proposed framework lines up largely with Morningstar’s own intentionality framework for identifying sustainable investments. There will be a 60-day comment period, received through the CIFSC website.
New funds will be reviewed monthly as they are launched. Regulatory documents will be reviewed to determine if the fund fits into one or more of the responsible investment approaches. Fund companies can request to have funds added or removed from the list, and these requests will be reviewed every month.
The CIFSC notes that as part of the review, the committee will ask for reasoning and evidence supporting the request.
Five Approaches
The proposed framework would identify the responsible investment approach(es) used by the fund. The approaches below are not meant to be mutually exclusive. There are five identifiable approaches:
- Environmental, Social and Governance (ESG) Evaluation and Integration
- Thematic Investing
- Exclusionary Investing
- Impact Investing
- Shareholder Engagement.
Here’s how they would be identified:
ESG Evaluation and Integration
The fund uses Environmental, Social and Governance (ESG) criteria as the primary evaluation method for security selection. Environmental criteria measure the impact that a company has on the environment or the impact that the environment has on the company. Social criteria measure how well a company treats its employees and customers, deals with human rights, avoids corruption and the impact a company has on the community where it operates or the impact the community has on the company. Governance criteria evaluate the leadership of a company, executive compensation, board oversight, board diversity, internal controls and shareholder rights.
Thematic Investing
The fund has a specific focus on a theme that fits into one of either the Environmental, Social or Governance buckets but does not focus on all the elements of the ESG spectrum. For example, this includes funds with an environmental focus that only invests in companies that have a positive environmental impact.
Exclusionary Investing
Also referred to as negative screening, the fund has specific sectors, industries or companies that will be excluded from the investible universe based on ESG criteria or other specific ethical considerations. Exclusions based on legal requirements or exclusions that would result naturally from the investment mandate will not be considered.
Impact Investing
The fund invests in companies or projects that have a measurable positive environmental and or social impact with the intent of generating a positive financial return.
Shareholder Engagement
The fund’s administrators use their position as shareholders to influence the company to make decisions that increase the company’s positive impact on the ESG factors. The goals of the engagements should be clear and should be reflected in formal dialogue with the company’s board and/or by voting on shareholder proposals.
The Rules of Responsible Investing
Understand how ESG regulations affect investors and managers in our latest report
