The European Union’s (EU’s) Sustainable Finance Disclosure Regulation (SFDR) imposes disclosure obligations on fund managers and other EU regulated firms regarding environment, social or governance (ESG) issues. The SFDR disclosure obligations came into effect on 10 March 2021.
I was recently approached by Ignites Asia – a Financial Times service – for an interview on how the SFDR may impact Hong Kong fund managers. Below is an extract.
UCITS funds which are approved for retail distribution in multiple jurisdictions outside of Europe, including with the SFC in Hong Kong, have faced the usual timetable challenges involved in coordinating multiple regulatory approvals and filings as result of the update of their offering documents. The regulatory impact in Hong Kong has largely been dictated by whether the SFDR updates can be treated as mere enhancement of disclosure (required by European regulations), with no change to the way a fund is being managed or indeed categorised (from an ESG perspective), in which case no prior SFC approval is required compared to where such SFDR disclosure results in material changes to the manner in which a fund is being managed or categorised from an ESG perspective going forward in which case SFC approval is required.
All elements within ESG remain a key area of regulatory focus globally, but until there is greater harmonisation of regulations and indeed regulatory approach to disclosure and categorisation of products, cross border regulatory compliance will remain challenging and potentially expensive to implement.
Hong Kong fund sales team are used to dealing with offering document updates and investor notifications and the SFDR has been no different than other projects driven by an update in European regulations. In addition to complying the SFDR requirements, the extent of the ongoing compliance obligations for UCITS funds which are authorised for retail sale in Hong Kong will only become known once the SFC have decided what changes to make to its own ESG regulations.
I have not heard of managers seeking to switch from UCITS structures to OFCs simply based on SFDR concerns. However, I think one of the issues which may well factor into such decision is the concerns around the potential lack of regulatory harmonisation going forward (which is likely to take some while to resolve). A Hong Kong retail OFC is only going to have to consider the SFC’s regulations in determining product categorisation and disclosure and this may well facilitate ongoing compliance compared to the UCITS structure which can bring multiple regulations and regulators into play. However, at the end of the day whether to capital raise via a UCITS or a domestic structure is in large part going to come down to where your potential investors are located. If your investor base is in Asia then an OFC structure makes a lot of sense.
The SFDR update has been ongoing for many months and I believe that all managers are looking to complete their regulatory updates in Europe by 10 March and their ancillary filings with the SFC. The SFC’s Code on Unit Trusts and Mutual Funds requires a manager to maintain an up-to-date offering document and a failure to do so can prejudice the ability of the manager to maintain its offering in Hong Kong. The SFC has been working closely with managers to facilitate their updates arising from SFDR and whilst there may be some last minute filings in order to complete the regulatory process I would not expect managers to fail to comply with their regulatory obligations.
The article by Echo Huang of Ignites Asia is available here, subject to subscription rights: Asian managers left puzzled over impact of new EU ESG rules.