FCA Cautions Investment Funds against ESG Mislabeling
On August 9, 2022, the Financial Conduct Authority (FCA) sent a letter to a number of alternative fund managers outlining an updated supervisory strategy. The letter aimed to update the asset management sector on risks and portfolio priorities as it relates to the FCA's supervisory plan. The letter discussed multiple topics, including mitigating risk for consumer investors, conflict of interest management and ESG as a strategy for positive change.
The FCA noted the increase in the number of fund registrations with an ESG focus, recommending that "[f]irms should ensure that documentation of such products are clear, not misleading and that firms' actions match the stated claims." The FCA noted that it continues to assess authorized fund applications with an ESG or sustainability focus and stated its intention to prioritize ESG in its Asset Management department. The FCA noted that firms offering ESG products should expect to be subject to review to ensure marketing materials accurately describe their product with clear and consistent disclosure.
Previously, in December 2021, the FCA published rules requiring certain asset managers and FCA-regulated pension providers to make disclosures aligned with the Taskforce on Climate-related Financial Disclosures. In July 2021, the FCA laid out a set of guiding principles for ESG and sustainable investment funds, which included the following:
- Consistency. The fund's ESG focus should be explained and reflected consistently in its name, objectives, investment policy and strategy, and its holdings.
- Design. The fund's name, financial promotion and documentation should reflect the materiality of its ESG focus, policy and strategy. Unless an ESG-focused investment strategy leads to a material difference in how the fund is managed, ESG related terms would be misleading.
- Delivery. A firm should use appropriate resources in pursuit of the fund's ESG objectives.
- Disclosure. Pre-contractual and ongoing disclosures should be accessible and contain clear, succinct and comprehensible information, avoiding the use of jargon and technical terms when possible. Ongoing reporting should contain sufficient data to enable 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 sovereign green bond (the "Aug-72 bond") was priced at 3.04%. The effective yield of 3.04% entails a coupon rate of 3.00% per annum and a price of S$98.976 per S$100 in principal value. The Aug-72 bond is the first 50-year bond issued by the Singapore government, and it is the longest-tenor green bond issued by a sovereign to date.
S$2.35 billion of the Aug-72 bond was placed with accredited and institutional investors including DBS Bank Ltd., Deutsche Bank AG Singapore Branch, and The Hong Kong and Shanghai Banking Corporation Limited Singapore Branch. An additional S$50 million of the bond is currently being offered to individual investors. The combined orderbook is currently at S$5.3 billion, which is 2.26 times the size of the amount offered under the initial placement, reflecting strong investor demand.
Proceeds from the green bond will be used to finance expenditures in support of the Singapore Green Plan 2030. This plan is targeted at transitioning to a low-carbon economy in Singapore and facilitating the United Nations Sustainable Development Goals. The categories of green expenditures include, but are not limited to, clean transportation, sustainable water management, green building, renewable energy and energy efficiency. Morningstar Sustainalytics conducted an external ESG review and rated the green bond framework as credible and impactful.
European Commission Reports on ESG Ratings Consultation and
Sustainability Risks in Credit Ratings
On August 4, 2022, the European Commission (EC) released its Summary Report, titled "Targeted consultation on the functioning of the ESG ratings market in the EU and on the consideration of ESG factors in credit ratings." The consultation aimed to obtain better insight into how the market utilizes ESG ratings and how credit rating agencies ("CRAs") incorporate ESG risks in their creditworthiness assessment. Responses from market participant data will feed into an impact assessment to evaluate whether a possible policy initiative on ESG ratings and on sustainability factors in credit ratings is needed.
The report consolidates findings from 168 survey responses submitted by market participants, a majority of which (77%) were from the private sector. The target group also included the following "main stakeholders": (a) ESG rating providers, (b) CRAs, (c) investors, (d) public authorities, including supervisory bodies and (e) civil society including NGOs and academics.
Highlights of the report include the following:
- Market participants confirmed their use of ESG ratings – "The vast majority of respondents declare that they do use ESG ratings and among these, 77% use them 'very much', while a smaller share use them 'a little'. [. . .] The large majority of respondents (81%) use a combination of overall ESG ratings with E, S, G or even more granular ratings. A smaller share of respondents use either only overall ESG ratings or only ratings of specific elements within E, S or G factors."
- Market participants would welcome improvement in ESG ratings market – "The large majority of respondents (over 84%) consider that the market is not functioning well today. On the quality of ESG ratings, two thirds of respondents consider the quality to be fine to very good, with about one third considering it poor."
- Majority of market participants want to see regulatory intervention in the ESG ratings market – "Almost all respondents (94%) consider that intervention is necessary, of which the large majority (80%+) support a legislative intervention with the remainder supporting the development of non-regulatory intervention in the form of guidelines, code of conduct."
- Incorporation of ESG factors in credit ratings – "Credit ratings are used by the large majority of respondents for investment decisions (48 out of 55), but they are only decisive for 9% of respondents; they are rather one of many sources of information (for 51%) or a starting point (for 13%)."
- Current intervention in the credit ratings market considered to be insufficient – "As far as enabling users' understanding of how ESG factors influence credit ratings is concerned, the majority (72%) do not consider market trends and ESMA Guidelines to be sufficient. However, out of those who do not consider the current situation sufficient, the majority favors a non-legislative approach (56%), i.e. further detailing ESMA Guidelines and/or further supervisory actions by ESMA."
Regarding next steps, the EC noted that the results of the consultation will be reflected in further EC action related to ESG ratings and in future impact assessments produced by the EC. The consultation is also aimed at supporting the European green deal objectives, by improving quality of information for investors and companies taking action on the green transition.
eFront, BlackRock's Alternative Investment Management Platform, Partners with Sustainability Tech Firm Clarity AI to Enable Quantitative Assessments of Sustainable Investments
Clarity AI, a leading ESG analytics and data science platform, announced a new partnership with BlackRock's eFront to enable investors to generate quantitative assessments of their sustainable investments.
Investors will be able to measure the impact of their portfolios against certain sustainability metrics with the aid of the data sets and machine learning leveraged by Clarity AI. Importantly, this tool will be available to those beyond the domain of publicly listed companies, where much of this analysis is currently concentrated, in order to help investors meet new sustainability disclosure obligations such as those required by Sustainable Finance Disclosure Regulation (SFDR). BlackRock has already integrated Clarity AI's sustainability data into its Aladdin portfolio management software to support enterprise reporting under the SFDR framework.
BlackRock first invested in Clarity AI in January 2021, and the new partnership is aimed at helping their clients achieve greater transparency with regulators and better understand climate-related exposures and opportunities. The eFront platform currently serves more than 850 alternative investment professionals including six of the top 10 GPs worldwide.
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