The Monetary Authority of Singapore (“MAS”) has issued Circular No. CFC 02/2022 on Disclosure and Reporting Guidelines for Retail ESG Funds (“Circular”), which will take effect on 1 January 2023 and apply to prospectuses of retail environmental, social and governance (“ESG”) funds that are lodged with MAS on or after 1 January 2023.
MAS has observed an increasing number of retail funds with ESG investment focus being offered in Singapore. To mitigate the risk of greenwashing, the Circular sets out MAS’ 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 2005 (“SF(CIS)R”) apply to retail ESG funds, and the disclosure and reporting guidelines applicable to these funds.
Scope of Circular
The Circular applies to an authorised or recognised scheme (“ESG Fund”) which:
(a) uses or includes ESG factors as its key investment focus and strategy, that is to say, ESG factors significantly influence the scheme’s selection of investment assets. This would include impact investing and ESG inclusionary investing (including broad or thematic strategies). A scheme that only uses negative screening, or a scheme that merely incorporates or integrates ESG considerations into its investment process to seek financial returns, would not be regarded as having an ESG investment focus; and
(b) represents itself as an ESG-focused scheme.
In assessing compliance with the Circular by recognised schemes, MAS will consider the schemes’ compliance with the relevant ESG rules in their home jurisdictions, if any.
UCITS schemes falling within the scope of ESG Funds will be deemed to have complied with the disclosure requirements under the Circular if they are classified as falling under Article 8 or 9 of the EU’s Sustainable Finance Disclosure Regulation. The name of the UCITS scheme should still comply with the requirements of the Circular.
Name of ESG Fund
The CIS Code requires a scheme’s name to be appropriate and not be undesirable or misleading.
Under the Circular, a scheme whose name includes or uses ESG-related or similar terms (e.g. “sustainable”, “green”) should reflect such an ESG focus in its investment portfolio and/or strategy in a substantial manner and comply with the guidelines in the Circular. In assessing whether a scheme’s investment portfolio and/or strategy is focused on ESG in a substantial manner, MAS would consider factors such as whether the scheme’s net asset value is primarily invested in accordance with the scheme’s investment strategy. In this regard, a scheme is normally considered to be “primarily invested” if at least two-thirds of the scheme’s net asset value is invested in accordance with the scheme’s investment strategy.
MAS notes that there may be cases where it is not possible or practicable for a manager to determine, at the individual asset level, the proportion of a scheme’s net asset value that is invested in accordance with ESG investing approaches. In such cases, MAS expects the manager to explain in the offering documents how the scheme’s investments are substantially ESG-focused.
Under the SF(CIS)R, a scheme’s prospectus should disclose its investment objective, focus and approach, as well as the risks of investing in the scheme.
In the context of an ESG Fund, the following should be disclosed in the prospectus:
- Investment focus: The prospectus should disclose the scheme’s ESG focus (e.g. climate change, low carbon footprint, sustainability, reduction in greenhouse gas emissions) and the relevant ESG criteria, methodologies or metrics (e.g. third-party or proprietary ratings, labels, certifications) used to measure the attainment of the scheme’s ESG focus.
- Investment strategy: The prospectus should include a description of the sustainable investing 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. In addition, relevant ESG criteria, metrics or principles considered in the investment selection process should be disclosed (e.g. a climate-focused fund may use climate-related indicators such as carbon footprint, weighted average carbon intensity, and greenhouse gas emissions). The minimum asset allocation into assets used to attain the ESG focus of the scheme should also be disclosed.
- Reference benchmark: Where the scheme uses a benchmark index to measure the attainment of its ESG focus, an explanation of how the benchmark index is consistent with or relevant to its investment focus must be included. Where the scheme uses a benchmark index for financial performance measurement only, a statement of that fact must be included.
- Risks: Risks associated with the scheme’s ESG focus and investment strategy should be disclosed (e.g. concentration in investments with a certain ESG focus, limitations of methodology and data, lack of universal ESG standards or taxonomy, or reliance on third party information sources).
In addition, any ESG-related terms used in the prospectus should be clearly defined.
The annual report of an ESG Fund should disclose the following:
- A narrative on 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);
- The actual proportion of investments that meet the scheme’s ESG focus (if applicable); and
- Any action taken by the scheme in attaining the scheme’s ESG focus (e.g. stakeholder engagement activities).
The Circular further states that where appropriate, additional information on the following areas regarding an ESG Fund, its manager or index provider should be disclosed to investors or prospective investors on the manager’s website or by other appropriate means:
- 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 scheme’s ESG focus on a continuous basis (including methodologies used to measure the attainment of the scheme’s ESG focus, if any);
- Sources and usage of ESG data or any assumptions made where data is lacking;
- Due diligence carried out in respect of the ESG-related features of the scheme’s investments; and
- Any stakeholder engagement policies (including proxy voting) that can help shape corporate behaviour of companies that the scheme invests in and contribute to the attainment of the scheme’s ESG focus.