funds not promoted as sustainable;
‘responsible’ funds that have some sustainable investments;
‘sustainable – transitioning’: sustainable characteristics, themes or objectives and a low allocation to sustainable activities as defined by the UK’s green taxonomy;
‘sustainable – aligned’: as above but with a high allocation to sustainable activities;
‘sustainable – impact’ for funds that have the objective of delivering positive environmental or social impact.
Country: UK
Will Robins in London
Brexit tempts UK to devise rival to SFDR system
In May, the Securities and Exchange Commission proposed a rule update that will require funds with ESG in their names to demonstrate that 80% or more of their assets are invested in a way that justifies the name. The proposal highlights the use of the word ‘integration’ as being problematic, where ESG integration is a factor in stock selection, alongside non-ESG factors, and not a more significant one.
The regulator has also put out another proposal that will require ESG funds to adhere to a standardised set of disclosures about what kind of fund they are – in effect, light, medium or dark green – and give more information to prove they match up to their billing.
Country: USA
The SEC won’t let
ESG be…
Alex Steger in New York
The UK’s Financial Conduct Authority has said poor labelling standards risked confusing customers and undermining confidence in the market.
Its consultation is due in September, almost a year after COP26, where it set out plans to create five new categories of funds. These are:
Post-Brexit, The UK can diverge completely from EU rules if it wishes. But many UK firms are subject to the Sustainable Finance Disclosure Regulation in respect of EU business and have classified funds as such.
when no such strategy is pursued;
when the investment policy allows for a significant proportion of non-sustainable investments to be un-aligned with the approach or even be inconsistent with it;
when the investment strategy is only deemed to be sustainable because of exclusionary criteria that are already widespread, without a specific sustainability component beyond this;
by using terms such as ‘impact’ without the stated impact, or ‘zero carbon’ without being able to measure or verify carbon dioxide savings;
or where fund documents do not provide, or only provide very general information about, the corresponding investment strategy or policy, or the selection of permitted investments.
In 2021, the Swiss Financial Market Supervisory Authority published guidelines on what it considers to be greenwashing in collective investment schemes. These include referring to sustainability:
The regulator said it would pay particular attention to the information provided about the advertised sustainability characteristics when approving and supervising them, but acknowledges this is not an easy task.
Country: Switzerland
Switzerland strives to add science to ‘sustainable’
Camilla Giannoni in Zurich
75% as minimum investment ratio; incorporate a list of exclusions that guarantee that the fund’s investments contribute significantly to one or more ecological or social goals; respect governance standards; and avoid impairing significantly ecological or social goals;
have an explicitly sustainable strategy (eg, best-in-class) and include rules to make sure that the investments don’t impair significantly ecological or social goals and respects governance standards;
or, for passive products, follow a sustainable index.
In August 2021, the German regulator BaFin published provisional guidelines for how funds bearing ESG-type names must behave. German-domiciled investment funds with a sustainability-related name (ESG, sustainable, green, etc) or funds that are marketed as sustainable need to follow certain criteria:
But given BaFin does not define terms such as ESG, sustainable and green, there is still much room left for interpretation.
Country: Germany
Germany wants home-grown funds to be greener
Serge Debrebant in Munich
In 2016, the French ministry of finance and economy created the social and responsible investment (ISR) Label. This label allows investors to know when a fund is using ESG criteria in its investment strategy.
There are now 1,035 funds labelled, from 174 different asset management companies representing €624bn of assets under management as of 20 June.
The label has mixed reviews among the industry in France. Most asset managers try to get the label whenever possible, while at the same time consider it not enough.
The main criticism is that the label only focuses on the investment process, not what ends up in the portfolio. A fund manager can present a perfect ESG investment strategy but won’t be held accountable for what is in the final portfolio.
SFDR regulation in 2021 has rendered the ISR label pretty much useless – requirements for article 8 or 9 funds are now higher. This is one of the reasons why the ISR label is currently under revision and should have a new version in the months to come.
Country: FRANCE
‘Proof in the portfolio not the process’ say French fund firms
Jérémie Gatignol in Paris
Italy’s regulator has not stated any additional expectations beyond existing SFDR rules. But a latent aspect of some existing EU regulation, Mifid II, has yet to hit an important part of the value chain: intermediaries.
From 2 August, advisers and wealth managers have to include sustainability in the MiFid II suitability assessment. This integration of the European directive aims to spread an ESG culture among savers for their investments. Advisers will therefore have a greater educational role for clients
Country: ITALY
Don’t forget the role of promotori finanziari
Daniele Barzaghi in Milan
Industry association Anbima (whose members include banks, asset managers and investment advisers) has published a way to define what funds are sustainable. This is already in force.
The funds that pass the rules can use the suffix ‘IS’ in their names. To be approved, the manager must disclose, on its website, a document with guidelines, rules, procedures, criteria and controls regarding ESG practices. It must also have a more robust governance structure, among other requirements. It will only be applied for equity, fixed income funds and FIDCs – a local type of credit fund. Under discussion is how this can be applied to multimercado (hedge) funds that account for about 30% of the market.
The new definition has gone down well but challenges remain. It can be tough for managers to demonstrate what they are targeting, as it will be based more on the managers’ own formula for ESG due diligence.
Country: brazil
Ambitious industry association fast-forwards with approved list
Patricia Valle in Sao Paolo
The area’s Securities and Futures Commission’s (SFC) enhanced disclosure guidelines came into effect at the start of this year. Superseding its 2019 equivalent, the rules apply to management companies of SFC-authorised unit trusts and mutual funds. In a nutshell:
Country: Hong Kong
Regulator turns
the screw on ESG labelling
Rupert Walker, editor, Citywire Asia
The name of the fund should not be misleading. Out went a requirement for an ESG fund to allocate at least 70% of its value to investments reflecting the ESG investment focus. Instead, funds must state the expected or minimum asset allocation ‘commensurate with the fund’s ESG focus’.
Disclosure in offering documents must now provide guidance for funds with a climate-related focus, for example, using climate-related indicators such as carbon footprint, or revenue generated from activities with a positive impact on climate change. A climate fund should also disclose clearly how it measures climate indicators.
There is finer detail on disclosure, measuring and monitoring ESG throughout the lifecycle of the fund, and related internal or external control mechanisms.
There are also more stringent requirements for periodic monitoring of a fund’s ESG compliance.
The Monetary Authority of Singapore (MAS) recently issued new disclosure and reporting guidelines, applying to any fund that represents itself as ESG-focused.
A scheme’s name should be appropriate and not misleading. If a fund uses ESG-related or similar terms (‘sustainable’, ‘green’) this should reflect an ESG focus in its portfolio or strategy ‘in a substantial manner’ and comply with the guidelines.
If there’s a theme deemed by the MAS to be ESG-related but does not comply with guidelines, the name will be deemed inappropriate. The main test – is the fund’s net asset value primarily invested (at least two-thirds) following its investment strategy? There can be exceptions but it will be up to the manager to explain.
Among a raft of reporting and disclosure requirements is a note on Ucits schemes. Ucits will be deemed to have complied if they are classified as Article 8 or 9 of the EU’s SFDR. ‘For the avoidance of doubt, the name of the Ucits scheme should still comply with the requirements,’ it adds.
Country: Singapore
MAS reserves
right to reject
fund naming
Rupert Walker in Singapore
Australia currently has no convention on the naming of ESG funds, with the local industry very much looking to developments in the EU.
In Australia, the term ‘ESG’ has become interchangeable with ‘ethical and ‘impact’ investing but there are no regulatory criteria in place so far to differentiate between them.
Regulators Australian Securities and Investment Commission (ASIC) and Australian Competition Consumer Commission recently moved to crack down on ‘greenwashing’. The ASIC released an information memorandum which sought to clarify expectations on the marketing of funds.
The ASIC’s sheet described it as ‘fundamental’ that sustainable labels ‘reflect the substance’ of funds.
‘Given the current lack of standardised labelling for sustainability-related products, you need to be particularly careful to ensure that product labels are not misleading,’ it said. Adding asset managers ‘should think carefully about using absolute terms in a product label’.
Country: Australia
Free-roaming terminology badly needs wrangling in ESG outback
Lachlan Colquhoun in Sydney