Introduction

On 29 June 2021, the Securities and Futures Commission (the “SFC”) issued the Circular to Management Companies of SFC-authorised Unit Trusts and Mutual Funds – ESG Funds (the “Circular”) to provide guidelines on enhanced disclosures for funds which incorporate environmental, social and governance (“ESG”) factors as a key investment focus (“ESG Funds”). The Circular includes a new requirement for ESG Funds to conduct and disclose periodic assessment and reporting of how they incorporate ESG factors. It will take effect on 1 January 2022 (the “Effective Date”) and supersede the Circular to Management Companies of SFC-authorized Unit Trusts and Mutual Funds – Green or ESG Funds dated 11 April 2019 (the “Previous Circular”).

Scope of ESG Funds

The Circular applies to SFC-authorised funds which incorporate ESG factors as their key investment focus and reflect the same in the investment objective and/or strategy. The SFC maintains a publicly accessible central database of all SFC-authorised ESG Funds on its dedicated ESG Funds webpage (the “Dedicated Webpage”). After the Circular takes effect on the Effective Date, this database will also list the key features of the SFC-authorised ESG Funds with a view to enhance transparency of such funds.

Name of ESG Funds

Management companies should be cautious when naming an ESG Fund. According to paragraph 5.1 of the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products, a product’s name shall not be misleading. An ESG Fund’s primary investments and/or strategy should reflect the particular ESG focus represented by the name of the fund. Any reference to ESG or similar terms in the name of the fund and its marketing materials should accurately and proportionately reflect the ESG features against the other features of the fund.

Disclosure in offering documents

Pursuant to paragraph 6.1 of the Code on Unit Trusts and Mutual Funds, offering documents must be up-to-date and contain information necessary for investors to be able to make an informed judgment of the investment. Based on the Circular, the SFC sets out six categories of information that should be disclosed by an ESG Fund in its offering documents:

1. The ESG focus of the fund:

a.    a description of the ESG focus of the fund, such as climate change, green, low carbon footprint, sustainability, etc.; and

b.     a list of ESG criteria for measuring the attainment of the fund’s ESG focus.

2. The ESG investment strategy: 

a.    a description of the investment strategy(ies) adopted by the ESG Fund, the binding elements and significance of that strategy(ies) in the investment process, and how the strategy(ies) is(are) implemented in the investment process on a continuous basis;

b.    a summary of the process of consideration of ESG criteria which may include the measuring methodologies, their sequencing relative to the investment strategies, and examples of the most important ESG criteria considered (if any); and

c.     a description of whether an exclusion policy is adopted by the ESG Fund and the types of exclusion. 

3. Asset allocation: in terms of net asset value of the ESG Fund, the expected or minimum proportion of securities or other investments that commensurate with the fund’s ESG focus.

4. Reference benchmark: where an index is designated as a reference benchmark for the purpose of attaining the ESG focus of an ESG Fund:

a.      where the fund is tracking an ESG benchmark, such as an index fund, details of the benchmark being tracked including the characteristics and its general composition; or

b.     where the fund seeks to measure its ESG focus against a designated reference benchmark, an explanation of how the designated reference benchmark is relevant to the fund. 

5. Additional information reference: an indication of where investors can find additional information about an ESG Fund, such as the fund’s website. The section “Disclosure of additional information” below elaborates on what the required additional information is.

6. Risks: a description of risks or limitations associated with the fund’s ESG focus and the associated investment strategies, such as limitation of methodology and data, lack of standardised taxonomy, subjective judgment in investment selection, reliance on third party sources, concentration in investments with the particular ESG focus, etc.

Disclosure of additional information

An ESG Fund should disclose additional information of the ESG Fund or the fund manager or the index provider (where the ESG Fund tracks an ESG benchmark), as appropriate, to investors to complement the disclosures in the offering documents. Such additional information includes a description of how the ESG focus is measured and monitored, and a description of due diligence carried out in respect of the ESG-related attributes of the fund’s underlying assets.

Periodic assessment and reporting

An ESG Fund should conduct periodic assessment, at least annually, to assess how the fund has attained its ESG focus. The fund should disclose information about its periodic assessment to investors in appropriate means (e.g. annual reports).

Application of the Circular on UCITS funds

Undertakings for Collective Investment in Transferable Securities (“UCITS”) funds will be 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”).

Notwithstanding the above, fund managers are reminded that, where appropriate, 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.

Losing ESG Fund status and regulatory action

Where an ESG Fund no longer wishes to pursue its stated ESG focus, the fund manager is expected to inform investors and the SFC as soon as reasonably practicable. An ESG Fund which is no longer able to meet the requirements in the Circular will be removed from the list of ESG Funds on the Dedicated Webpage. In addition to removal of the fund from the SFC’s list of ESG Funds, the SFC may take appropriate regulatory action for compliance breaches such as failure to meet the stated investment objective and/or strategy in the offering documents.

Conclusion

For an existing SFC-authorised ESG fund that is on the Dedicated Webpage, fund managers should review the fund’s current disclosures in view of the requirements in the Circular, and make necessary updates and revisions by the Effective Date. For new funds or existing funds which are not on the Dedicated Webpage, fund managers may continue to adopt the requirements in the Previous Circular and make necessary updates and revisions by the Effective Date.