SFC Issues Updated Disclosure Guidance for ESG Funds

The Securities and Futures Commission (“SFC”) issued a circular providing guidance to management companies of SFC-authorized unit trusts and mutual funds on enhanced disclosures for funds that incorporate environmental, social and governance (“ESG”) factors into their key investment focus (“ESG funds”) on 29 June 2021.

As a replacement for the previous version released in 2019, the circular includes an additional requirement that ESG funds should conduct and disclose periodic assessments concerning how ESG factors are integrated and provide guidance for climate-oriented ESG funds.

According to SFC, the number of ESG funds offered to the public in Hong Kong has more than doubled since 2019. Increasing awareness regarding ESG investing has led to a need for asset managers to clearly explain their ESG focus, helping investors determine if the products meet their investment goals.

The circular outlines the requirements for ESG funds to disclose in their offering documents, including a description of the ESG focus and a list of ESG criteria used to measure the fund’s ESG focus, such as filters, indicators, ratings, third party certificates, etc. ESG funds should also disclose their investment strategies, asset allocations, benchmarks and risks associated with their ESG focus. Furthermore, there are new requirements outlined in the updated circular, requiring ESG funds to make periodic assessments and reports on attaining the ESG focus, and specific guidance for ESG funds that focus on climate change.

"Making sustainability-related disclosures more transparent, comparable and consistent will help investors identify suitable ESG funds and reduce opportunities for greenwashing," said Mr Ashley Alder, the SFC's Chief Executive Officer. “Hong Kong’s financial market is where global capital connects with Mainland enterprises, so what we do here can have an outsized influence on global developments in green and sustainable finance.”

Currently, there are about 60 SFC-authorised funds with an investment focus on climate change, green, ESG or sustainable development in the SFC database on authorised ESG funds. To enhance transparency for these funds, their key features will also be listed in the database after the new circular takes effect on 1 January 2022.

As the ESG landscape is still developing rapidly, the SFC will continue to monitor the market developments and may provide further guidance or impose additional requirements for ESG funds, where appropriate.

Click here to read the full circular.

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