“Although most funds [evaluated] have named the green or ESG factors in their investment objective or strategy, a majority of these funds do not specifically disclose how the management companies incorporate such green or ESG factors in their investment selection process,” according to a circular issued by the Securities and Futures Commission (SFC) on 11 April.
The SFC’s goal is to enhance disclosure comparability between similar types of SFC-authorised green or ESG funds and thereby help investors make better informed decisions.
To substantiate claims to “invest primarily” in such assets, a fund adopting screening strategies or thematic investment strategies, should demonstrate that at least 70% of its total net asset value is invested in securities or other investments reflecting the ESG-related investment focus.
A fund adopting other strategies, such as ESG integration or impact investing, should show to the SFC, on a case-by-case basis, how the fund could comply with this requirement.
In addition, offering documents of new SFC-authorised funds should include the following descriptions: the key investment focus (for example, climate change, green, low carbon footprint, sustainability) and targeted objective (for example, financial return, mitigating climate change or environmental damage); the investment strategies, including the relevant green or ESG criteria, the expected exposure to these types of securities, and the selection process, criteria, methodology and benchmarks used; and the associated risks.
The SFC recognises a laundry list of several widely-acknowledged green or ESG principles that a fund can align itself with. These include: the United Nations Global Compact Principles, the United Nations Sustainable Development Goals, the Common Principles for Climate Mitigation Finance Tracking, the Green Bond Principles of the International Capital Market Association, and the Climate Bonds Taxonomy of the Climate Bonds Initiative. it will also consider other criteria on a case-by-case basis.
The SFC said its disclosure requirements were a response to the pick-up in development of green/ESG-related investment products globally. The regulator intends to launch a webpage by the end of this year that will provide access to a central database of compliant green or ESG funds.