The Securities and Futures Commission (SFC) released a circular updating guidance on the disclosure and reporting of ESG factors in SFC-authorised unit trusts and mutual funds, supplanting the previous 2019 Circular. The circular provides more nuanced guidance on how to conduct periodic assessments and disclose data, with additional emphasis placed on climate funds.

Scope of ESG funds

• The circular applies to SFC-authorised funds that implement ESG factors as their primary investment point.
• An ESG fund may use various investment techniques to fulfil their ESG standards. Examples of ESG funds are included in Annex 1 to the circular.

To increase the prominence of ESG funds, a centralised registry of all SFC-authorized ESG funds is now available through the SFC’s website.

Name of fund

To diminish the likelihood of confusion, the Guidelines on Unit Trusts and Mutual Funds’ Code states that a product’s primary investments and/or strategy must match the ESG emphasis represented by the fund’s marketing materials and name. The SFC cautions that a fund outside of ESG investing should not advertise nor name itself as an ESG fund, although exceptions may be acceptable on a case-by-case basis following a clear explanation of the fund’s name and proportionate comparisons of ESG factors.

Disclosure in offering documents

ESG funds should list their ESG investment criteria, record their ESG investment approach, details of ESG-related screening, administration of the investment process and the exclusion policies adopted in the offering documents. The SFC emphasises the importance of providing comprehensive risk/benefit assessments associated with a fund’s ESG focus.

Additional information reference

The ESG fund or index provider must disclose information beyond that in the offering documents to allow investors to assess the viability of investments. Additional information could include how an ESG focus is monitored, methodologies employed, requirements for due diligence, engagement policies and sources and processing of ESG data.

Periodic assessment and reporting

The SFC mandates that ESG funds conduct regular assessments, at a minimum, of how a fund attained its ESG targets. Information must be provided to investors covering the assessment period, such as actions taken by managers to attain an ESG focus, the actual proportion of investments that are consistent with the fund’s ESG emphasis, and the fund’s asset allocation.

Recommendations

Fund managers must keep track of their underpinning investments’ metrics and assess whether they meet the fund’s ESG criteria. Any changes to a fund’s ESG emphasis must be communicated to investors as soon as practical. The SFC warns fund managers that failure to do so may result in removal from the list of ESG funds and regulatory action.