An evolutionary force has built momentum in recent years within the global investment management industry and investors community – a greater focus on the power of capital for good and purpose. Beyond “green investing” to fight climate change, it goes from sustainable investing to ethical or impact investing, encompassing objectives to embrace broader responsibilities that take into account environmental, social and corporate governance (ESG) factors.
In the broader context, the investment industry and capital markets are responding to governmental policies and investors demand for capital allocation with these objectives. Yet, there are varying degrees and approaches to addressing ESG factors, with limited regulatory requirements that provide specific framework. What counts as green, or what specific environmental, social or governance issues are being addressed, and how?
With an increase in the offering of investment products or services with proposed green or ESG investment objectives or policies, there is an issue of clarity or sufficiency of disclosures. This makes it difficult for investors to compare and contrast the available choices of products – what exactly are the products purported to be or to what extent are the investment strategies or investment portfolios actually “green” or “ESG” compliant.
On 11 April 2019, the Hong Kong Securities and Futures Commission (“SFC”) issued its Circular to management companies of SFC-authorised unit trusts and mutual funds to address “Green” or “ESG” funds (Circular). The aim is to enhance disclosure comparability between similar types of SFC-authorised Green or ESG funds and their transparency and visibility in order to facilitate investors making informed investment decisions in this evolving investment areas.
The Circular would serve to require and obligate investment managers offering investment products with an expressed green or ESG focus or who intend to do so to carefully consider whether their fund would and is able to comply within the SFC’s expected framework for Green or ESG funds and become designated as such. An investment manager of Green or ESG funds would also be expected to have a proper and robust investment selection process and assessment criteria in line with its stated investment focus and green or ESG principles, and may seek to obtain a third party certification or fund labeling or would rely on its self-confirmation.
Our legal update outlines the background and context of the growth of Green or ESG funds, Hong Kong’s efforts and SFC’s issued framework for such funds as set out in the new Circular: