On 29 June 2021, the Securities and Futures Commission (the “SFC”) published the “Circular to management companies of SFC-authorized unit trusts and mutual funds – ESG funds” (the “Circular”). The purpose of the Circular is to revise an earlier circular published in April 2019 (the “2019 Circular”) and to provide further guidance on enhanced disclosure including periodic assessment and reporting for ESG funds and with additional guidance for funds with a climate-related focus.
Key revisions as set out by the Circular are summarised below:-
- Name of the Fund
The Circular provides that the name of the ESG fund shall accurately reflect the fund’s primary investments and/or strategy.
- Disclosure in Offering Documents and of additional information
The SFC requires that the offering documents must provide information necessary for investors to be able to make an informed judgment of the investment. The information required to be disclosed includes: the ESG focus, ESG investment strategy, asset allocation, any reference benchmark and related risks.
Additional guidance was provided for funds with climate-related focus. Illustrative example includes: investing primarily in companies which engage in economic activities that contribute to climate change mitigation, seek lower carbon footprint as compared to reference benchmark, contribute to reduction of greenhouse gas emission, achieve positive impact to mitigate or adapt to climate change, and facilitate transition to a low carbon economy.
- Periodic Assessment and Reporting
The SFC requires that an ESG fund should conduct periodic assessment, at least annually, to assess how the fund has attained its ESG focus. The following information should be provided by the fund regarding its periodic assessment to investors in appropriate means (eg: annual reports):
- how the fund has attained its ESG focus during the assessment period;
- the basis of the assessment performed above, including any estimations and limitations; and
- where the fund has provided previous periodic assessment, a comparison between the current and at least the previous assessment period.
- Undertakings for the Collective Investment in Transferable Securities Funds (“UCITS Funds”)
Having considered the European regulation on sustainability-related disclosures in the financial services sector, the SFC will treat UCITS Funds as 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”). Fund managers are reminded that 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 as it may deem fit at any time.
- Ongoing Monitoring
Fund managers are reminded to regularly monitor and evaluate the underlying investments to ensure the ESG funds continue to meet the stated ESG focus and requirements set out in the Circular. If the ESG is no longer the focus of a fund, fund managers must inform the investors and the SFC as soon as reasonably practicable.
The Circular will take effect and will supersede the 2019 Circular on 1 January 2022 (the “Effective Date”). For any existing ESG funds listed on the SFC’s dedicated ESG funds webpage, fund managers should review the fund’s current disclosures in view of the requirements of the circular and make any necessary updates and revisions by the Effective Date. For new funds or existing funds which are not listed on the SFC’s dedicated ESG funds webpage, fund managers may continue to adopt the requirements in the 2019 Circular and make necessary updates and revisions by the Effective Date.
For assistance with setting up a ESG fund or to comply with the new disclosure requirements under the Circular, please contact us today.