SFC Releases a Circular Enhancing Disclosure for Green or ESG Funds in Hong Kong

The Securities and Futures Commission (“SFC”) issued a circular titled “Circular to management companies of SFC-authorized unit trusts and mutual funds - Green or ESG funds” on 11 April 2019. The SFC has evaluated the disclosure quality of the existing SFC-authorised Green and Environmental, Social and Governance (“ESG”) funds, and found that most of the funds do not disclose the investment selection criteria with ESG elements or standards. The circular therefore provides a guidance on green funds disclosure to enhance the comparability between similar types of SFC-authorised green or ESG funds and thereby improving their transparency and visibility.

Green or ESG funds’ investment focuses are usually on green, environmental or sustainable development and related technology. There are currently over 20 green or ESG funds authorised by the SFC.  The circular sets out a few disclosure requirements for the fund offering documents in order to better inform investors. The requirements include descriptions of the key investment focus of the green or ESG fund, investment strategies with relevant green or ESG criteria and risks associated with green or ESG funds’ investment theme. To prove that they have met particular assessment criteria, the fund may provide reference to any ESG ratings or third-party certificates or labels.

In fact, not all the green or ESG funds necessarily generate net positive outcome for the environment and sustainability. Some investments of the green or ESG funds may even have potential negative impacts. For example, the solar power plants investments have positive environmental impacts but may have negative social impacts due to the operation process and use of space. Therefore, the detailed disclosure and the third-party certification can help to increase the transparency of the funds, and thus investors not only can understand the environmental aspect, but also the aspects on social and governance.

Many investors may still underestimate the impacts of environmental factors on the business operation and profitability. ESG development is a key for long-term business success. The market has already noticed the importance of ESG and initiated changes. This green fund disclosure guidance is a good example to show the market’s trend with increasing focus on ESG aspect. Not only the green or ESG funds, but all companies should reflect on their sustainable business strategy to ensure business success.