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FCA Cautions Investment Funds against ESG Mislabeling
On August 9, 2022, the Financial Conduct Authority (FCA) sent aletter to a number of alternative fund managers outlining anupdated supervisory strategy. The letter aimed to update the assetmanagement sector on risks and portfolio priorities as it relatesto the FCA's supervisory plan. The letter discussed multipletopics, including mitigating risk for consumer investors, conflictof interest management and ESG as a strategy for positivechange.
The FCA noted the increase in the number of fund registrationswith an ESG focus, recommending that "[f]irms should ensurethat documentation of such products are clear, not misleading andthat firms' actions match the stated claims." The FCAnoted that it continues to assess authorized fund applications withan ESG or sustainability focus and stated its intention toprioritize ESG in its Asset Management department. The FCA notedthat firms offering ESG products should expect to be subject toreview to ensure marketing materials accurately describe theirproduct with clear and consistent disclosure.
Previously, in December 2021, the FCApublished rules requiring certain asset managers and FCA-regulatedpension providers to make disclosures aligned with the Taskforce onClimate-related Financial Disclosures. In July 2021, the FCA laidout a set of guiding principles for ESG and sustainable investmentfunds, which included the following:
- Consistency. The fund's ESG focus should be explained andreflected consistently in its name, objectives, investment policyand strategy, and its holdings.
- Design. The fund's name, financial promotion anddocumentation should reflect the materiality of its ESG focus,policy and strategy. Unless an ESG-focused investment strategyleads to a material difference in how the fund is managed, ESGrelated terms would be misleading.
- Delivery. A firm should use appropriate resources in pursuit ofthe fund's ESG objectives.
- Disclosure. Pre-contractual and ongoing disclosures should beaccessible and contain clear, succinct and comprehensibleinformation, avoiding the use of jargon and technical terms whenpossible. Ongoing reporting should contain sufficient data toenable investors to interpret performance of the fund.
Singapore Launches Inaugural Sovereign Green Bond
On August 4, 2022, the Monetary Authority of Singapore (MAS)announced that Singapore's S$2.4 billion inaugural sovereigngreen bond (the "Aug-72 bond") was priced at 3.04%. Theeffective yield of 3.04% entails a coupon rate of 3.00% per annumand a price of S$98.976 per S$100 in principal value. The Aug-72bond is the first 50-year bond issued by the Singapore government,and it is the longest-tenor green bond issued by a sovereign todate.
S$2.35 billion of the Aug-72 bond was placed with accredited andinstitutional investors including DBS Bank Ltd., Deutsche Bank AGSingapore Branch, and The Hong Kong and Shanghai BankingCorporation Limited Singapore Branch. An additional S$50 million ofthe bond is currently being offered to individual investors. Thecombined orderbook is currently at S$5.3 billion, which is 2.26times the size of the amount offered under the initial placement,reflecting strong investor demand.
Proceeds from the green bond will be used to financeexpenditures in support of the Singapore Green Plan 2030. This planis targeted at transitioning to a low-carbon economy in Singaporeand facilitating the United Nations Sustainable Development Goals.The categories of green expenditures include, but are not limitedto, clean transportation, sustainable water management, greenbuilding, renewable energy and energy efficiency. MorningstarSustainalytics conducted an external ESG review and rated the greenbond framework as credible and impactful.
MAS Press Release – August 4
MAS Press Release – June 9
European Commission Reports on ESG Ratings Consultation andSustainability Risks in Credit Ratings
On August 4, 2022, the European Commission (EC) released itsSummary Report, titled "Targeted consultation on thefunctioning of the ESG ratings market in the EU and on theconsideration of ESG factors in credit ratings." Theconsultation aimed to obtain better insight into how the marketutilizes ESG ratings and how credit rating agencies("CRAs") incorporate ESG risks in their creditworthinessassessment. Responses from market participant data will feed intoan impact assessment to evaluate whether a possible policyinitiative on ESG ratings and on sustainability factors in creditratings is needed.
The report consolidates findings from 168 survey responsessubmitted by market participants, a majority of which (77%) werefrom the private sector. The target group also included thefollowing "main stakeholders": (a) ESG rating providers,(b) CRAs, (c) investors, (d) public authorities, includingsupervisory bodies and (e) civil society including NGOs andacademics.
Highlights of the report include the following:
- Market participants confirmed their use of ESGratings – "The vast majority of respondentsdeclare that they do use ESG ratings and among these, 77% use them'very much', while a smaller share use them 'alittle'. [. . .] The large majority of respondents (81%) use acombination of overall ESG ratings with E, S, G or even moregranular ratings. A smaller share of respondents use either onlyoverall ESG ratings or only ratings of specific elements within E,S or G factors."
- Market participants would welcome improvement in ESGratings market – "The large majority ofrespondents (over 84%) consider that the market is not functioningwell today. On the quality of ESG ratings, two thirds ofrespondents consider the quality to be fine to very good, withabout one third considering it poor."
- Majority of market participants want to see regulatoryintervention in the ESG ratings market –"Almost all respondents (94%) consider that intervention isnecessary, of which the large majority (80%+) support a legislativeintervention with the remainder supporting the development ofnon-regulatory intervention in the form of guidelines, code ofconduct."
- Incorporation of ESG factors in credit ratings– "Credit ratings are used by the large majority ofrespondents for investment decisions (48 out of 55), but they areonly decisive for 9% of respondents; they are rather one of manysources of information (for 51%) or a starting point (for13%)."
- Current intervention in the credit ratings marketconsidered to be insufficient – "As far asenabling users' understanding of how ESG factors influencecredit ratings is concerned, the majority (72%) do not considermarket trends and ESMA Guidelines to be sufficient. However, out ofthose who do not consider the current situation sufficient, themajority favors a non-legislative approach (56%), i.e. furtherdetailing ESMA Guidelines and/or further supervisory actions byESMA."
Regarding next steps, the EC noted that the results of theconsultation will be reflected in further EC action related to ESGratings and in future impact assessments produced by the EC. Theconsultation is also aimed at supporting the European green dealobjectives, by improving quality of information for investors andcompanies taking action on the green transition.
eFront, BlackRock's Alternative Investment ManagementPlatform, Partners with Sustainability Tech Firm Clarity AI toEnable Quantitative Assessments of Sustainable Investments
Clarity AI, a leading ESG analytics and data science platform,announced a new partnership with BlackRock's eFront to enableinvestors to generate quantitative assessments of their sustainableinvestments.
Investors will be able to measure the impact of their portfoliosagainst certain sustainability metrics with the aid of the datasets and machine learning leveraged by Clarity AI. Importantly,this tool will be available to those beyond the domain of publiclylisted companies, where much of this analysis is currentlyconcentrated, in order to help investors meet new sustainabilitydisclosure obligations such as those required by SustainableFinance Disclosure Regulation (SFDR). BlackRock has alreadyintegrated Clarity AI's sustainability data into itsAladdin portfolio management software to supportenterprise reporting under the SFDR framework.
BlackRock first invested in Clarity AI in January 2021, and thenew partnership is aimed at helping their clients achieve greatertransparency with regulators and better understand climate-relatedexposures and opportunities. The eFront platform currently servesmore than 850 alternative investment professionals including six ofthe top 10 GPs worldwide.
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