Oversight: FAQs on disclosure and reporting guidelines for ESG funds

On 3 January 2023, the Monetary Authority of Singapore (MAS) released the FAQs on CFC 02/2022 Disclosure and Reporting Guidelines for Retail ESG Funds (the Circular) (the FAQs). This Oversight article highlights key clarifications made by the MAS in the FAQs.

Background of the Circular

The Circular was released on 28 July 2022 and it sets out the MAS’ expectations on how existing requirements under the Code on Collective Investment Schemes and the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations apply to retail ESG funds. In the FAQs released on 3 January 2023, the MAS made further clarifications in respect of these expectations.

Key Clarifications

Regarding Section A of the Circular, the MAS highlighted that fund managers are responsible for assessing whether their fund is an ESG fund which would fall within the scope of the Circular (an ESG Fund). Fund managers may consult the MAS if in doubt. A fund falls within the scope of the Circular if it uses or includes ESG factors as its key investment focus and strategy, and represents itself as an ESG-focused fund.

A fund will be considered as representing itself as an ESG-focused fund if either:

1. its name includes ESG-related or similar terms;

2. it is, or will be, marketed as an ESG-focused scheme, or

3. it represents itself as an ESG-focused scheme through disclosures made in its offering documents, websites, etc,

and this thereby causes investors to construe the fund as an ESG Fund.

Managers of feeder funds should note that where a feeder fund invests all, or substantially all, of its net asset value in an underlying master ESG Fund, the feeder fund must still comply fully with the Circular if the feeder fund is itself assessed to be an ESG Fund. A feeder ESG Fund will not be considered to have complied with the Circular merely by referencing disclosures made by the underlying master ESG Fund.

To comply with Section B of the Circular and Chapter 4.1 of the Code on Collective Investment Schemes, the FAQs have clarified that fund managers should mitigate the risk of confusion among investors by clearly differentiating their ESG Fund from other retail funds. The name of their ESG Fund should include ESG-related or similar terms to reflect its ESG focus. Funds that do not comply with the Circular will not be allowed to use ESG-related or similar terms in their names. Existing funds that contain ESG-related terms in their names or represent themselves as ESG-focused schemes but do not comply with the Circular will be required to change their names or be represented by another name when their funds are offered to investors in Singapore. Fund managers should also ensure that their ESG Funds invest at least two-thirds of their net asset value in accordance with their stated ESG-focused investment strategy at all times.

When lodging a prospectus, managers of ESG Funds must submit a prospectus checklist in relation to the disclosure and reporting requirements under Section C of the Circular, contained in Appendix A1 of the CIS Practice Note 1/2005 – Administrative Procedures for Retail Schemes (the CIS Practice Note). This is in addition to the other documents required for the lodgment of prospectuses set out in the CIS Practice Note.

UCITS funds classified under Article 8 or 9 of the European Union’s Sustainable Finance Disclosure Regulation (Article 8 or 9 funds) will be deemed to have complied with the disclosure and reporting requirements under Section C of the Circular. However, in order to be marketed to retail investors in Singapore, the Article 8 or 9 fund must also fall within the scope of the Circular (in accordance with Section A) and comply with the naming requirements contained in Section B of the Circular.

Compliance Timelines

All ESG Funds seeking authorisation or recognition on or after 1 January 2023 must comply with the Circular.

Existing ESG Funds will have to comply with the requirements under the Circular when, on or after 1 January 2023, they (1) re-lodge their prospectuses that would otherwise expire (annual re-lodgments), and (2) submit the relevant Form 1-A/2-A on OPERA to indicate their statuses as ESG Funds. Supplementary or replacement prospectuses of existing ESG Funds lodged on or after 1 January 2023 but prior to their annual re-lodgments do not have to comply with the Circular.