Periodic assessment and reporting requirements
The Circular requires an ESG Fund to conduct periodic assessment of the attainment of its ESG focus at least annually and disclose the result of such assessment to its investors through appropriate means, for example in its annual report. The disclosure should cover how it has attained its ESG focus during the assessment period, the basis of the assessment performed (including any estimations and limitations), and comparison between the current and at least the previous assessment period.
Fund managers’ duty to monitor ESG Funds on an ongoing basis
The Circular requires the fund manager of an ESG Fund to monitor and evaluate investments made by the ESG Fund to ensure that its ESG focus is achieved and the Circular is complied with. If an ESG Fund ceases to pursue an ESG focus, the fund manager must inform investors and the SFC as soon as practicable.
Additional guidance for climate funds
The Circular provides additional guidance for ESG Funds with a climate-related focus. The following economic activities are given as examples of a climate-related focus:
- contribute to climate change mitigation or adaptation;
- 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; or
- facilitate transition to a low carbon economy.
The Circular also gives examples on climate-related indicators, disclosures of designated climate benchmarks, and methodologies of measuring climate indicators.
Consequence of failing to comply with the Circular
If an ESG Fund fails to meet the requirements imposed under the Circular, it will be removed from the Database. More importantly, the SFC may take appropriate regulatory actions against it for compliance breaches, such as failure to meet the investment objective and/or strategy stated in its offering documents.
The Circular will take effect and supersede the 2019 Circular on 1 January 2022 (the “Effective Date”). Existing ESG Funds (i.e. those that are already listed on the Database) should review their current disclosures and make any necessary updates and revisions by the Effective Date. Applications for new ESG Funds should comply with the requirements under the Circular from the Effective Date, including the submission of a confirmation of compliance.
Going forward, ESG will gain increasing attention. It is likely that more applications for ESG Funds will be made in the future. However, fund managers should ensure its staff and management receive the necessary training for understanding the enhanced disclosure requirements set out in the Circular. The SFC may take any breach of the Circular by an ESG Fund seriously in order to combat greenwashing.