Supervision of ESG Greenwashing
The Financial Services Agency of Japan (FSA for short) recently issued documents to supervise ESG fund greenwashing. FSA believes that with the introduction of ESG into the name and investment strategy of the fund, the problem of greenwashing is also growing. To help investors more effectively identify whether there is green drift in funds, the FSA will supervise fund products and fund companies separately. The FSA believes that ESG funds have the following two characteristics:
- Considers ESG as a key factor in the selection of investment assets;
- Describes ESG in the “Objective and Characteristics of the Fund” section of the delivery prospectus;
FSA said that when the fund does not meet the relevant ESG standards, it is not allowed to use words such as “ESG, SDG (Sustainable Development Goals), green, carbon reduction, impact and sustainability” in its name to prevent misleading investors. This requirement will be implemented after the end of March 2023. At the same time, if ESG only holds one aspect of the fund’s investment objectives, it should also be disclosed by the fund in the document to prevent investors from believing that the fund is mainly focused by ESG.
Specific Disclosure Requirements for ESG Funds
FSA requires ESG funds to disclose the following in their investment strategies:
- ESG factors considered in the selection of investment assets, such as environment, society, corporate governance or a combination of above aspects;
- How ESG factors are measured in investment decisions, such as the interpretation and evaluation methods of ESG indicators;
- Risks and limitations of incorporating ESG factors into the investment;
- How to achieve ESG related factors and how to measure the investment results of the fund;
- Public disclosure, such as disclosure of the above information on the fund company’s website;
In addition, FSA will also monitor whether the ESG asset class invested by the fund conforms to the proportion in the fund documents. When the ESG fund selects a specific ESG index as the tracking benchmark, FSA will check whether the ESG content of the fund is close to the benchmark index. The FSA also needs to check the timing of the disclosure by the Fund.