The Monetary Authority of Singapore (“MAS”) announced in September 2021 that to facilitate transparency and reduce greenwashing risk at the fund level, it would set out early in 2022 its expectations on the disclosure standards that ESG retail funds in Singapore with an ESG investment objective must meet. The much-anticipated expectations were issued by MAS vide Circular CFC 02/2022 Disclosure and Reporting Guidelines for Retail ESG Funds (“Circular”) on 28 July 2022, setting out its expectations on how existing requirements under the Code on Collective Investment Schemes (“CIS Code”) and the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations (“SF(CIS)R”) apply to retail ESG funds.
MAS will continue to monitor developments in the ESG investing landscape, and update and supplement this Circular as appropriate. It shared with the media however that retail ESG funds would not be rated or coded by colours, as this may force-fit funds and oversimplify their difference. On the other hand, the disclosures would set the gradations in risks and returns and enable retail investors to compare the investment strategies of the various ESG funds.
The Circular comes after the Board of the International Organisation of Securities Commission’s (IOSCO) Final Report of the Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management in November 2021. The report included a discussion of different types of greenwashing at the product level, and an overview of the different regulatory approaches to product-level disclosure by member jurisdictions for sustainability-related products, following the Board’s consultation report on the subject in June 2021.
It also comes after the Hong Kong Securities and Futures Commission (“SFC”) issued its updated Circular to management companies of SFC-authorized unit trusts and mutual funds – ESG funds (“SFC Circular”) in June 2021. The SFC Circular sets out the SFC’s expectations with respect to how requirements under the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products apply to SFC-authorized funds which consider climate change or green or ESG or sustainability factors in their investment process.
Existing Disclosure Requirements
The SF(CIS)R prescribes disclosure requirements for retail funds generally. An offer of units in a retail fund must be accompanied by a compliant prospectus. The prospectus must contain information about the fund, including its investment objectives and focus (e.g., the types of investments, countries or markets invested in, and any target industry or sector), and how the fund manager selects investments for the portfolio of the fund. It must also contain warning statements on the risks of investing in the fund. Where the fund has been constituted for at least a year, the prospectus must disclose the return on the fund at least over the past one year.
The non-statutory CIS Code on Collective Investment Schemes sets out the best practices that fund managers are expected to observe in the management, operation, and marketing of retail funds, and requires that fund names should be appropriate and not misleading. Semi-annual and annual reports are also expected, where applicable, including on the financial performance of the fund.
The Circular is addressed to all holders of a capital markets services licence in respect of fund management; and trustees approved under s 289 of the Securities and Futures Act, and applies to an authorised or recognised scheme (“ESG fund”) which: (a) Uses or includes ESG factors as its key investment focus and strategy; and (b) Represents itself as an ESG-focused scheme.
The Circular will take effect from 1 January 2023 (“Effective Date”). In particular, the prospectus disclosure requirements and additional information will apply to prospectuses of ESG funds lodged with MAS on or after the Effective Date; and the annual report disclosure requirements will apply to annual reports covering financial years ending on or after the Effective Date
Name of Fund
Where a scheme’s name includes or uses ESG-related or similar terms, the scheme should reflect such an ESG focus in its investment portfolio and/or strategy in a substantial manner and comply with the Circular. Conversely, if a scheme’s name uses a term which is considered by MAS to be ESG-related but does not comply with the Circular, the name will be deemed inappropriate.
Prospectus Disclosure Requirements
The prospectus of an ESG fund should disclose:
(a) Investment focus;
(i) The scheme’s ESG focus;
(ii) The relevant ESG criteria, methodologies or metrics used to measure the attainment of the focus;
(b) Investment strategy;
(i) A description of the strategy used by the scheme to achieve its ESG focus, the binding elements of that strategy in the investment process, and how the strategy is implemented in the investment process on a continuous basis;
(ii) Any relevant ESG criteria, metrics or principles considered in the investment selection process;
(iii) The minimum asset allocation into assets used to attain the ESG focus;
(c) Reference benchmark; and
(i) Where the scheme uses a benchmark index to measure the attainment of its ESG focus, an
explanation of how the index is consistent with or relevant to its investment focus; and
(ii) Where the scheme uses a benchmark index for financial performance measurement only, a
statement of that fact;
Risks associated with the scheme’s ESG focus and investment strategy.
Annual Report Disclosure Requirements
The annual report of an ESG Fund should disclose:
(a) How and the extent to which the scheme’s ESG focus has been met during the financial period, including a comparison with the previous period (if any);
(b) The proportion of investments that meet the ESG focus (if applicable); and
(c) Any action taken by the scheme in attaining the ESG focus.
Where appropriate, additional information should also be disclosed to investors or prospective investors on the manager’s website or by other appropriate means:
(a) How the ESG focus is measured and monitored, and the related internal or external control mechanisms that are in place to monitor compliance with the focus on a continuous basis;
(b) Sources and usage of ESG data or any assumptions made where data is lacking;
(c) Due diligence carried out in respect of the ESG-related features of the scheme’s investments; and Any stakeholder engagement policies that can help shape corporate behaviour of companies that the scheme invests in and contribute to the attainment of the scheme’s ESG focus.
Application to Recognised Schemes
Compliance by a scheme with the relevant ESG rules in its home jurisdiction, if any, may be considered by MAS to be compliance with the requirements of the Circular. In particular, Undertakings for the Collective Investment in Transferable Securities (UCITS) schemes which fall within the scope of ESG funds will be deemed to have complied with the Circular’s disclosure requirements if they are classified as falling under Articles 8 or 9 of the EU’s Sustainable Finance Disclosure Regulation.
MAS Circulars are regulatory instruments that have no legal effect, but this does not mean they are not ‘enforceable’. MAS has shared with the media it will be working very closely with fund managers on these expectations, and there’s no need to take any other action beyond calling up a fund manager to a meeting to send a message across.