Responsible Investment Identification Framework

CIFSC Responsible Investment Identification Framework

In broad terms, RI, ESG investing, or sustainable investing mean that some combination of environmental, social, governance, and sustainability factors are incorporated into the investment process. 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.

The CIFSC RI Identification framework was developed in collaboration with Canadian industry stakeholders including research firms, data providers, asset managers, and industry bodies as a way for Canadian investors to find investment products that have disclosed they use a responsible investment approach. The approaches defined in the framework are complementary to the CSA’s recent guidance on ESG fund disclosures, as well as the CFA Institute’s Global ESG Disclosure Standards for Investment Products.

Responsible Investment Approaches

Each Responsible Investment Approach is broken down into two parts:

  • 1. Definition: a description of the criteria for fund identification under the RI approach and some insight as to how the approach is typically implemented.
  • 2. Fund Universe: some examples of the types of funds that might be identified under the
    approach, and some of the common terminology that these funds are using.

The Responsible Investment Approaches below are not meant to be mutually exclusive. Investment products can be identified as using more than one of the approaches.

ESG Integration and Evaluation

The fund uses Environmental, Social and Governance (ESG) criteria as an essential component of the evaluation method for security selection alongside traditional financial factors, such that all securities in a portfolio have been evaluated based on ESG factors and the ESG factors are significant and influential in the buying and selling of securities in the portfolio.

Fund Universe
Funds with the following strategies and terminology may be identified under this approach: socially responsible investing, ESG factor investing, ESG rules based, passive ESG index investing and others.

ESG Thematic Investing

In general, thematic funds identify disruptive themes and seek to invest in companies that stand to benefit from them through products and services. ESG Thematic funds have a specific focus on themes that fit into one or more of the Environmental, Social or Governance buckets but does not focus on all the elements of the ESG spectrum. For example, this includes funds with a particular environmental focus that evaluate companies based on environmental factors. The ESG Theme must be the primary evaluation method for security selection, such that at the overall portfolio level, the degree to which the theme is integrated is well documented and measurable.

Fund Universe
Funds with the following strategies and terminology may be identified under this approach: environment leaders, board diversity, cleantech, women in leadership, low carbon, and others.

ESG Exclusions

The fund has specific sectors, industries, materials, or companies that will be excluded from the investible universe based on ESG criteria or other specific ethical considerations and can also be referred to as norms-based screening. As examples, these funds cannot hold securities issued by companies or governments that receive revenue from the sale or production of excluded materials or operate in excluded sectors or industries. Exclusions based on legal requirements, or exclusions that would result naturally from the investment mandate will not be considered. Portfolio exclusions should be clearly stated in regulatory or disclosure documents.

Fund Universe
Funds with the following strategies and terminology may be identified under this approach: exclusions, negative screening, and others.

Impact Investing

The fund invests in companies or projects that intend to have a measurable positive environmental and or social impact as well as the intent to generate a positive financial return. Funds must have a stated impact measurement and management policy.

Fund Universe
Funds with the following strategies and terminology may be identified under this approach: impact, positive change, and others. Additionally, funds that invest primarily in green bonds or sustainability-linked bonds with a stated impact objective will generally be considered impact funds.

ESG Related Engagement and Stewardship Activities

The fund’s managers use the fund’s position of ownership to influence the company to make decisions that increase the company’s positive impact on the ESG factors. This can include collaborative efforts with peers and/or informing the board and management of specific ESG issues. The goals of the engagements, including the ESG issues that are addressed and the process for monitoring the issues, should be documented, clear and should be reflected in formal dialogue with the company’s board and management and/or by voting on shareholder proposals. Engagements and Stewardship Activities are considered at the fund level.

Fund Universe
Funds with the following strategies and terminology may be identified under this approach: funds with any of the approaches outlined in this document may be considered provided they meet the definition for ESG Related Engagement and Stewardship.

ESG Best in Class

Also referred to as positive screening, these funds generally invest in securities that meet specified criteria related to ESG factors. The criteria usually include thresholds related to ESG performance or scoring on ESG factors where only securities that meet the selected thresholds are considered for investment. Thresholds should be set such that the investable universe or portfolio is comprised of securities that perform at least better than average in the ESG factors.

Fund Universe
Funds with the following strategies and terminology may be identified under this approach: best in class, ESG leaders, sustainability leaders, ESG index tracking, environmental leaders and others.