Global asset management quarterly – Asia

Publication July 2019


SFC raises disclosure requirements for green or ESG funds

On April 11, 2019, the Securities and Futures Commission (SFC) issued a Circular to management companies (Managers) of SFC-authorised green or environmental, social or governance funds (green or ESG funds). The circular provides guidance on the application of the existing Code on Unit Trusts and Mutual Funds (UT Code) to an SFC-authorised green or ESG fund and sets out additional disclosure requirements applicable to its offering documents.1

The enhanced disclosure requirements are intended to narrow the disclosure gap among SFC-authorised green and ESG funds and to provide investors with greater transparency on the Manager’s investment selection process. The initiative taken by the SFC to enhance disclosure requirements for green and ESG funds is part of the broader strategic plan by the SFC to develop green finance in Hong Kong and to ensure that Hong Kong remains aligned with international standards.2

Name of green or ESG fund and investment focus

Paragraph 7.42 of the UT Code provides that if the name of the scheme indicates a particular objective, investment strategy, geographic region or market, the scheme should, under normal market circumstances, invest at least 70 per cent of its total net asset value in securities and other investments to reflect the particular objective, investment strategy, geographic region or market which the scheme represents.

The SFC has provided guidance on how this provision of the UT Code applies to green and ESG funds as follows

  • For a fund adopting screening strategies or thematic investment strategies – that at least 70 per cent of the green or ESG fund’s total net asset value is invested in securities or other investments to reflect the particular green or ESG investment focus which the fund’s name represents or
  • For a fund adopting other strategies, it should demonstrate to the SFC, on a case by case basis, how the fund could comply with this requirement.

Disclosure requirements

The circular also sets out the SFC’s minimum disclosure requirements on any offering documents (this also includes the product key fact statements) of green or ESG funds, as follows

  • A description of the key investment focus and targeted objective of the green or ESG fund, and where applicable an explanation of why the key investment focus is considered as green or ESG-related
  • A description of the investment strategies adopted by the green or ESG fund, including but not limited to
  • The relevant green or ESG criteria or principles considered
  • The expected exposure to the securities or other investments that reflect the stated green or ESG investment focus
  • The investment selection process and criteria adopted by the green or ESG fund.
  • A description of whether an exclusion policy is adopted by the green or ESG fund and types of exclusion and
  • A description of risks associated with the green or ESG fund’s investment theme.

Filings with the SFC and implementation dates

For an existing SFC-authorised fund, the Manager should submit a confirmation of compliance with the SFC stating, among other things, that the green or ESG funds comply with requirements set out in the Circular (Confirmation of Compliance).3 Further, the Manager should review the green or ESG fund’s offering documents, and if necessary, revise and update the offering documents to ensure that they comply with the Circular as soon as practicable, and in any event, no later than December 31, 2019.

For a new fund seeking the SFC’s authorisation to be classified as a green or ESG fund, the manager should, similarly, file a Confirmation of Compliance with the SFC and ensure that all requirements set out in the Circular and the UT Code are complied with.

Managers are also under an obligation to regularly monitor and evaluate the underlying investments to ensure the green or ESG fund continues to meet the stated investment objectives and requirements set out in the Circular.

The SFC has also announced that all SFC-authorised green or ESG funds in compliance with the Circular will appear on a central database which is expected to be launched by the SFC later this year.

Filings with the SFC and implementation dates

 

Mutual Recognition of Funds: Netherlands-Hong Kong and United Kingdom-Hong Kong (updates)

The Securities and Futures Commission (SFC) has continued to expand its mutual recognition of funds (MRF) arrangements by recently concluding a new memorandum of understanding (MoU) on MRF with the Dutch Authority for Financial Markets (AFM). The MoU will enable eligible Hong Kong collective investment schemes (CIS) and Dutch undertakings for collective investment in transferable securities (UCITS) to be distributed in each other’s market through a streamlined process.

Netherlands Hong Kong MRF

Funds applying for authorisation under the Netherlands-Hong Kong MRF will need to meet certain eligibility criteria and those that have received approval from the applicable regulator will need to comply with, amongst other things, various disclosure and ongoing reporting requirements. A summary of the key requirements are set out below.

For more detailed information, please refer to the SFC’s circular dated May 15, 2019 (SFC Circular) and the AFM requirements and process for mutual recognition of Hong Kong Funds dated May 15, 2019 (AFM Circular). In addition, the SFC has also published the FAQ on the Netherlands-Hong Kong MRF.

  Dutch funds Hong Kong funds
Eligibility
  • UCITS authorised by the AFM.
  • Managed by a Dutch management company that is approved by the AFM to manage UCITS.
  • CIS authorised by the SFC.
  • Managed by a Hong Kong management company that is licensed by or registered with the SFC for Type 9 regulated activity (asset management).
Types of eligible funds
  • General equity funds, bond funds and mixed funds
  • Index funds (other than exchange-traded funds)
Hong Kong representative The fund must appoint a Hong Kong representative to handle dealing requests and inquiries from Hong Kong investors. The fund must appoint a Dutch representative and confirm to the AFM the address of the place of business in the Netherlands for service on notices and/or other documents.
Offering documents The fund may use the prospectus registered by the AFM. In addition, the AFM-registered prospectus must be supplemented by a Hong Kong covering document to comply with the disclosure requirements set out in Annex A to the SFC Circular. The fund may use the offering documents authorised by the AFM. In addition, the SFC-authorised offering documents must be supplemented by a Dutch covering document to comply with the disclosure requirements set out in Annex A to the AFM Circular.
Ongoing disclosure in respect of financial statements The fund may use its Dutch financial reports as the basis for distribution in Hong Kong provided that the reports are supplemented by the additional information and meet the other requirements set out in Annex A to the SFC Circular. The fund may use its Hong Kong financial reports as the basis for distribution in the Netherlands provided that the reports are supplemented by the additional information and meet the other requirements set out in Annex A to the AFM Circular.
Disclosure language The offering documents and notices provided to Hong Kong investors must be published in both English and Chinese. The offering documents and notices to investors in the Netherlands must be provided in Dutch. The Dutch translation of the offering documents must be certified by a duly authorised or acknowledged translator.

United Kingdom-Hong Kong MRF (updates)

In the February 2019 edition of Global asset management quarterly – Asia, we noted that the SFC entered into a MOU on MRF with the Financial Conduct Authority of the United Kingdom. This MoU has recently been amended. A fund seeking authorisation under the United Kingdom-Hong Kong MRF should ensure that it complies with the most up to date requirements set out in the revised circular dated May 21, 2019.


Footnotes

1  

The disclosure guidance applies to SFC-authorised funds which incorporate one or more of the globally recognised green or ESG criteria or principles as their key investment focus and reflect such in their name and investment objective or strategy.

2  

The SFC published the “Strategic Framework for Green Finance” on September 21, 2018.

3  

The relevant forms are annexed to the Circular (see Annex 2). Note that for self-managed schemes, the investment delegate of the scheme is required to file the relevant forms.


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