There is a growing global trend for asset managers to consider climate change, sustainability and environmental, social and governance (ESG) factors in the investment process, and to offer green or ESG-related investment products. As the development of green and ESG-related investment products is gaining traction, authorities around the globe are adopting initiatives that require the enhanced disclosure of the sustainable features of those products. The aim is to enable investors to understand and assess whether green and ESG-related products will meet their investment needs.
In Hong Kong, several funds authorised by the Securities and Futures Commission (SFC) have a climate, green, environmental or sustainable development focus. An initial review by the SFC has revealed that the quality of the disclosure varies widely among these funds and that the majority do not specifically disclose how the management companies are incorporating their stated green or ESG factors into their investment selection process.
To narrow the disclosure gap among SFC-authorised green and ESG funds and for better comparison of disclosures among similar types of funds, the SFC has issued a circular: Circular to management companies of SFC-authorized unit trusts and mutual funds - Green or ESG funds. The circular, issued on 11 April 2019, focuses on enhancing the quality of disclosure in SFC-authorised green and ESG funds. It is the first step towards developing green guidelines that will support the growth of the green finance market in Hong Kong and enhance the credibility and transparency of the market.
Who needs to comply?
SFC-authorised funds must fulfil the following obligations in the circular if they integrate one or more of the globally recognised criteria and principles for green or ESG funds (see Chart 1) as their key investment focus, and reflect that in their name and their investment objective or strategy.
Name of the scheme
In line with the existing requirements set out in the Code on Unit Trusts and Mutual Funds (the UT Code), a green or ESG fund should invest primarily in investments that reflect the particular green or ESG investment focus of the fund.
Requirements for disclosure
The SFC expects the offering documents (including the product key fact statements) of SFC-authorised green or ESG funds to disclose, as a minimum, the following details so that investors can make an informed investment analysis and judgement:
1. The key investment focus and targeted objective of the green or ESG fund, and how that focus is considered to be green or ESG-related.
2. The investment strategies adopted by the green or ESG fund, including but not limited to:
- the relevant green or ESG criteria and principles considered;
- the expected exposure to securities or other investments that reflect the stated green or ESG investment focus; and
- the investment selection process and criteria adopted by the green or ESG fund (e.g. the assessment criteria of the underlying investments, the ESG analysis and evaluation methodology, and the characteristics and general composition of the benchmark).
3. The exclusion policy adopted by the green or ESG fund, and types of exclusion.
4. The risks associated with the green or ESG fund's investment theme.
5. Other information that the management company considers necessary.
The company that is managing the green or ESG fund must monitor and assess the underlying investments on a regular basis, in order to make sure the fund continues to meet its stated investment objective and the requirements set out in the circular.
1. Initial confirmation of compliance
For funds that need to meet the requirements of the circular (both existing SFC-authorised funds and new funds seeking SFC authorisation), the management company should:
- give the SFC either a self-confirmation of compliance or a confirmation supported by an independent third party certification or fund label; and
- demonstrate that the fund's primary investments focus, investment selection and ongoing monitoring process adheres to globally recognised criteria or principles for green or ESG funds.
2. For existing SFC-authorised funds
- The management company must review the fund's existing offering documents in the light of the disclosure requirements set out in the circular and make any necessary updates and revisions by 31 December 2019.
- If the offering documents require updates or revisions, the management company should assess whether prior approval from the SFC is needed under section 11.1 of the UT Code and the relevant post-authorisation application requirements.
3. For new funds seeking SFC authorisation
- The management company should meet the requirements set out in the circular in addition to the provisions that apply in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (including the UT Code) and the circulars, guidelines and any other requirements that are issued by the SFC.
- Any requisition by the SFC will be part of the SFC's process for authorising new fund applications. Newly authorised green and ESG funds will be posted on the SFC’s dedicated green and ESG fund webpage, which will be launched by the end of 2019.