Hong Kong’s Securities and Futures Commission (SFC) has issued new guidelines on enhanced disclosures required for Hong Kong-authorised funds incorporating environmental, social and governance factors as their key investment focus (ESG funds).
The new guidance, announced on 29 June 2021 via a circular (the Circular), will take effect from 1 January 2022, supplanting existing guidelines last updated in April 2019.
Status of ESG Funds
While ESG funds may adopt different investment strategies, the latest SFC Circular keeps pace with a rapidly-developing ESG investment landscape, clarifying that merely claiming a fund takes ESG factors into consideration along with other financial factors in its investment strategy will not alone qualify as having ESG focus.
In such circumstances, the fund will not be allowed to name or market itself as an ESG fund.
To enhance transparency, the SFC’s webpage dedicated to Green and ESG funds will be updated to include the key features of an ESG fund – including its ESG focus and investment strategies – required of SFC-authorised ESG funds when the Circular takes effect.
An ESG fund no longer wishing to pursue its stated ESG focus, or meet new requirements under the Circular will be removed from the SFC’s list of ESG funds.
New Enhanced Disclosure Specifications
The SFC Circular requires a fund’s offering documents to provide necessary information for investors to be able to make an informed judgement of the investment. This includes the ESG focus, ESG investment strategy, expected proportion of ESG investment (in terms of net asset value), any reference benchmark, and related risks.
The Circular also sets out the following additional information disclosure requirements, on the fund manager’s website or by other means:
- How ESG focus is measured and monitored throughout the fund’s lifecycle;
- Methodologies adopted to measure ESG focus and its attainment;
- Due diligence carried out in respect of ESG-related attributes of the fund’s assets;
- Any engagement (including proxy voting) policies; and
- Sources and processing of ESG data or, where relevant data is not available, the assumptions made.
This information is required to be reviewed and updated from time to time to ensure accuracy.
The Circular additionally includes a new requirement for ESG funds to conduct and disclose periodic assessments of how it incorporates ESG factors – and how the fund has attained its ESG focus. The basis of assessments and comparison between the current and previous assessment period should also be disclosed to investors.
Extra guidance for ESG funds with climate-related focus is also set out in the Circular. Examples of climate-related focus include: investing primarily in companies which engage in economic activities that contribute to climate change mitigation or adoption, seek a lower carbon footprint compared to reference benchmark, contribute to reduction of greenhouse gas emission, achieve a positive impact to mitigate or adapt to climate change, and facilitate transition to a low carbon economy.
The SFC has considered the European Commission’s Sustainable Finance Disclosure Regulation (SFDR) which imposes mandatory ESG disclosures in the financial services sectors, and UCITS funds will be acceptable ESG funds in Hong Kong if they incorporate ESG factors as their key investment focus, and reflect such in the investment objective and/or strategy (UCITS ESG funds).
UCITS ESG funds which meet the disclosure and reporting requirements for Article 8 or Article 9 funds under the SFDR will be deemed to generally comply in substance with the disclosure requirements set out in the Circular – although the SFC may request enhanced disclosure in respect of the fund’s specific strategies and risks, and impose or vary the requirements in respect of UCITS ESG funds.
The application of the Circular to UCITS funds is subject to review and update by the SFC from time to time.