MAS publishes Information Paper on Good Disclosure Practices for Retail ESG Funds

18 December 2024

On 4 December 2024, the Monetary Authority of Singapore (“MAS”) published an Information Paper on Good Disclosure Practices for Retail ESG Funds (“Information Paper”). The Information Paper sets out good disclosure practices that ESG funds may adopt in their adherence with paragraphs 11 to 14 of Circular No. CFC 02/2022 on Disclosure and Reporting Guidelines for Retail ESG Funds (“ESG Funds Circular”), which took effect on 1 January 2023. The ESG Funds Circular sets out 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 2005 apply to retail ESG Funds (as defined in the ESG Funds Circular), and the disclosure and reporting guidelines applicable to these funds. For more on the ESG Funds Circular, please read our article “MAS issues circular on disclosure and reporting guidelines for retail ESG funds effective from 2023”.

 The observations set out in the Information Paper are drawn from MAS’ ongoing review of prospectuses and periodic reports of authorised and recognised ESG Funds. In sharing good disclosure practices, the Information Paper aims to promote clear disclosures which are capable of being substantiated to facilitate investors’ understanding of the key features and risks of an ESG Fund and mitigate greenwashing risks. 

The Information Paper outlines good disclosure practices pertaining to the following matters: (i) investment focus and strategy, (ii) reference benchmark, (iii) risks, and (iv) additional information. Examples are provided to illustrate the good disclosure practices where relevant. 

Investment focus and strategy

 Define ESG-related terms upfront

 The Information Paper states that when the description of an ESG Fund’s investment focus and strategy includes vague and subjective terms (such as “favourable/improving ESG characteristics”, “sustainable leaders”, or “strong sustainability profile”), it is good practice for managers to clearly define what these terms mean in the context of the ESG Fund. This is because such terms, on their own, do not give investors adequate insight into the type of ESG investments or strategies that the ESG Fund may seek to employ. Investors and the manager may also have a different understanding of what such terms mean. 

Clearly set out how ESG criteria or metrics are used 

Where ESG criteria or metrics (including ESG ratings or scores) are used to measure the attainment of an ESG Fund’s ESG focus or in its investment selection process, it is good practice to include clear descriptions of such ESG criteria and metrics and the extent to which they are to be used. This would facilitate accountability to investors and minimise potential greenwashing by providing clear yardsticks by which investors can assess whether an ESG Fund has met its claims. 

Key areas which managers could consider disclosing as a matter of good practice include (i) the sources of ESG criteria or metrics, (ii) calculation methodologies and description of the underlying data used, (iii) the minimum ESG rating or score that investments must meet, and (iv) the basis for sustainability targets set (if any).

Reference benchmark

In the case of an ESG Fund which tracks an ESG index or references one for performance measurement purposes, it is good practice to disclose if the manager or its related corporation has any influence on the construction of the index, and the extent of such influence. 

Risks 

Paragraph 11(d) of the ESG Funds Circular provides that the prospectus of an ESG Fund should disclose risks associated with the scheme’s ESG focus and investment strategy. In the case of a recognised ESG Fund, while full details of such risks may be set out in the prospectus of the scheme’s home jurisdiction, it is good practice to include a summary of such risks in the Singapore “wrapper” for greater saliency to Singapore investors on risks that are unique to an ESG Fund. 

Additional information 

Where the manager of the ESG Fund also seeks to attain its ESG focus through stakeholder engagement activities (e.g. active engagement with particular issuers to influence changes in their corporate behaviour), it is good practice to disclose the purpose and extent of such engagement activities, including why and how the manager would carry out such engagement, and when the manager would consider divesting the underlying investment. This would enable investors to better understand the nature and objectives of such stakeholder engagement activities and assess its potential impact on the ESG Fund’s underlying investments.

Reference materials

 The Information Paper is available on the MAS website www.mas.gov.sg.