On 29 June 2021, the Securities and Futures Commission (SFC) published a revised circular (Revised Circular) to provide guidance to managers on enhanced disclosures for authorised funds which incorporate environmental, social and governance (ESG) or climate change or green or sustainability factors (together, ESG factors) as a key investment focus (ESG funds). The Revised Circular will come into effect on 1 January 2022 (Effective Date) and supersedes the previous version issued in 2019 (2019 Circular).
The key requirements of the Revised Circular are summarised below.
Name of ESG funds
The name of an ESG fund must appropriately reflect the ESG factors set out in the investment objective and/or strategy. A fund other than an ESG fund should not name or market itself as an ESG fund unless an exception is permitted by the SFC.
Similar to the 2019 Circular, the Revised Circular requires an ESG fund to disclose its key features in its offering documents, such as its ESG focus and the portion of ESG-focused investments, the list of ESG criteria and the strategies adopted.
The Revised Circular further requires an ESG fund to disclose (through a website) how its ESG focus is measured and monitored throughout its lifecycle, the ESG-related due diligence conducted, the engagement policies (if any), and the ESG data or assumptions relied on.
Periodic assessment and reporting
The Revised Circular imposes a new requirement for ESG funds to conduct an assessment at least annually, demonstrating how the fund has attained its ESG focus during the assessment period and a comparison between the current and at least the previous assessment period (if any). Such information should be disclosed to investors by appropriate means (e.g. annual reports).
The Revised Circular provides additional guidance for ESG funds with a climate-related focus (Climate Funds), such as illustrative examples of climate-related focuses and indicators, and guidance on disclosures relating to a climate benchmark if the fund has designated one.
Application to UCITS funds
UCITS funds will be ESG funds in Hong Kong if they incorporate ESG factors as their key investment focus (UCITS ESG funds). UCITS ESG funds which meet the disclosure and reporting requirements for Article 8 or Article 9 funds under the European regulation on sustainability-related disclosures in the financial services sector will be deemed to have generally complied with the above requirements, subject to the SFC’s discretion.
Similar to the 2019 Circular, managers are required to regularly monitor and evaluate the underlying investments to ensure the ESG funds continue to meet the stated ESG focus and requirements set out in the Revised Circular. If an ESG fund no longer wishes to pursue its stated ESG focus, the manager should inform investors and the SFC as soon as reasonably practicable.
Implementation of the Revised Circular
Managers of existing SFC-authorised ESG funds should make any necessary updates and revisions to their offering documents by the Effective Date. For new ESG funds, managers may continue to adopt the requirements in the 2019 Circular and make any necessary updates and revisions by the Effective Date.
Managers of funds seeking SFC authorisation for ESG funds after the Effective Date will need to provide a confirmation of compliance in the form annexed to the Revised Circular.
SFC-authorised funds which qualify as ESG funds will continue to be listed on the SFC’s dedicated ESG funds webpage.