AFIM’s Perspective on SFC ESG Circular

On 11 April 2019, the Securities and Futures Commission (SFC) issued a circular[1](Circular) to provide guidance to management companies of SFC-authorised unittrusts and mutual funds on enhanced disclosures for SFC-authorised green orenvironmental, social and governance (ESG) funds.

AvantFaire Investment Management Limited isan SFC-licensed asset management firm that does impact investment, which is anemerging asset class in the alternative investment space. We study and research impact investment strategies that integrate the concept of green, sustainability and ESG, including positive and negative screening, thematic investing, and evaluation methodology of social investment.

The new circular is apositive signal to the ESG and impact investing practitioners. It 
shows the Hong Kong regulator and the investment industry not only start to pay attention to the  ESG and impact investment sector, but also to pool in more resources to develop this asset class. We believe this circular will bring upon the following implication to the market:

Comparability of Information

The variation in the quality among ESG investment products is big. The circular indicates that investmentproducts currently seen in the market use very different approaches in defining their investment theses and integrating ESG in their investment. Suchvariations create difficulties for investors to make proper comparison and investment decisions. Over the last two years, we have seen an increasing number of ESG investment products in Hong Kong. Investing for social good has become a popular slogan that sometimes prevent investors from seeing the trueintention of the investment. There are some investment products that claim to invest for social good but there is no sound research to support their ESG investment theses. As a result, such investment may be marginally touching the ESG theme or cannot effectively produce meaningful net ESG impact as expected. We believe the Circular will encourage the market to enhance comparability of information for ESG investment products. It can help investors to filter out “genuine” and “relevant” ESG investment products and to facilitate their investment decision making process. We also expect growing understanding, knowledge and interest in ESG and impact investment products which will eventually enter the mainstreaminvestment market.

Enhancement of Transparency

As disclosure and reporting fall within the regulatory expectation, we foresee more development in the standardization in defining, collecting, measuring and benchmarking of ESG and impact data. In comparison to impact and social return data, ESG data arerelatively ample as there are definite outcomes to be categorized and quantified. However, complication and comparability in ESG data and metrics still exist due to the broadness of ESG scope and the variety of industries and companies underlying the investment. With theon-going requirement in disclosure and reporting, we expect more comprehensiveand transparent ESG data and metrics are made available to market practitioners.These data and metrics are critical for ESG and impact investment managers to monitor and measure the ESG and social performance of their investment, and to validate the social aspect of their investment theses and strategies. We believe forward-looking investors will start to pay attention to ESG and impact investment fund disclosure and reporting, and will be able to discern goodfunds with genuine ESG and impact purposes.

Creation of ESG Data Repository

The Circular also mentioned the SFC will create a central database of SFC-authorised green or ESG funds on its website to enhance the visibility of these funds which would certainly benefit the development of the Hong Kong ESG and impact investment market. We believe such facility may also encourage the private sector to develop ESG and impact data repositories.  With the increase incomparability, transparency and availability of data, we expect investors will become more sophisticated in ESG and impact investing and demand asset managers to justify their investment and elaborate on impact and social benefit measurements.

As a private equity and alternative investment manager, we aim to provide meaningful impact investment products and advocate this theme in Hong Kong. Over years, we have seen more collaborations between private and public sectors on ESG and impact investment, and a sheer amount of valuable experiences from other countries which could be brought to Hong Kong. In the near future, we will publish timely and informative articles for our investors, join forces of asset owners and asset managers, and invest for a better world together.


Disclosure requirements

Offering documents ofSFC-authorized funds shall contain information necessary for investors to makean informed judgement of the investment. The SFC expects the offering documents(including the product key fact statements (KFS)) of the Green or ESG funds todisclose, at a minimum, the following:a) a description of the key investment focus (e.g.climate change, green, low carbon footprint, sustainability, etc.) and targetedobjective (e.g. financial return, mitigating climate change or environmentaldamage, etc.) of the Green or ESG fund, and where applicable how the keyinvestment focus is considered as green or ESG related;

b) a description ofthe investment strategies adopted by the Green or ESG fund, including but notlimited to:(i) the relevantgreen or ESG criteria or principles considered;(ii) the expectedexposure to the securities or other investments that reflect the stated greenor ESG investment focus;(iii) theinvestment selection process and criteria adopted by the Green or ESG fund,such as:- assessment criteria ofthe underlying investments (e.g. reference to any ESG ratings or third partycertificates or labels, constituents of any green or ESG-related indices, thecarbon footprint and environmental impact associated with companies, theproportion of revenue or profits generated from the relevant green or ESGactivities of the issuer companies, etc.);- ESG analysis andevaluation methodology (e.g. proprietary tool with internal ESG ratings,research provided by third party agencies on ESG rating or certificates orlabels, engagement with issuer companies, etc.);- reference ESG benchmarkbeing tracked and the characteristics and general composition of the benchmark;c) a description of whetheran exclusion policy is adopted by the Green or ESG fund and types of exclusion(e.g. activities, sectors, countries, etc.);d) a description ofrisks associated with Green or ESG fund’s investment theme (e.g. lack ofstandardized taxonomy, subjective judgment in investment selection, reliance onthird party providers for environmental scoring / certification / labelling,style drift, concentration in investments with environmental or ESG focus,etc.); ande) any otherinformation, considered necessary by the manager.

Ongoing monitoring

Manager of the Green or ESG fund should regularly monitorand evaluate the underlying investments to ensure the Green or ESG fundcontinues to meet the stated investment objective and requirements set out inthis circular.