Beginning Jan. 1, 2023, investment fund managers will have to comply with new regulations when attempting to sell retail ESG-related financial products.
On Jul. 28, the Monetary Authority of Singapore (MAS) announced new disclosure and reporting guidelines for retail ESG funds.
ESG stands for environmental, social and governance and has become a popular metric amongst investors to determine whether investments have a positive impact on society and the environment.
Greater transparency and regular reporting required
Under the new guidelines, funds that bear ESG-related or similar terms, such as "green" or "sustainable", will have to comply with the terms of the guidelines.
More importantly, the investment portfolio or strategy of the fund will need to reflect the focus claimed by the name of the fund.
MAS assesses this by checking if at least two-thirds of the assets of a fund are invested according to the declared investment strategy.
Fund managers are also required to declare in a fund's prospectus what the scheme's ESG focus area is, such as climate change, low carbon transition, and the relevant ESG criteria, methodologies, or metrics used to measure the scheme's ESG focus.
These come on top of requirements to disclose the fund's investment strategy and the risks associated.
With the new guidelines, fund managers are required to provide an annual report, disclosing the extent the fund's ESG focus has been met within a financial period, the proportion of investments that meet the scheme's ESG focus, and any action taken to attain this focus.
Guidelines designed to prevent greenwashing
MAS managing director Ravi Menon said during a briefing on this year's MAS sustainability report that the new guidelines are designed to "reduce greenwashing risks and enable retail investors to better understand the ESG funds they invest in".
The new guidelines come as part of MAS' efforts to leverage the financial industry to help attain Singapore's net-zero by 2050 goal through green finance strategies, Menon shared during the briefing.
"ESG" a misleading term globally
According to investment analysis firm MSCI, ESG investing started back in the 1960s as a form of socially responsible investing, aiming to exclude from portfolios companies participating in activities deemed harmful to society, such as tobacco companies.
Today, MSCI's own ESG Rating standard is marketed as a way to measure the ESG-related risks "significant to a company's bottom line".
In other words, rather than reflecting a company's impact on society and environment, some ESG ratings reflect the impact of regulations on a company's business instead.
That means that the investment strategies of ESG funds that employ such ratings are unrelated to whether a company actually adopts socially responsible practices.
Yet, marketing materials for some of these funds continue to leave retail investors with the impression that their investments are indeed toward companies that engage in socially responsible activities, according to a Harvard Business Review report.
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