Uniformity urged in ESG definitions to aid fund sales

A lack of globally consistent and clear definitions of what “green” and “sustainable” actually mean when it comes to projects and investment products has imposed extra burdens on asset managers struggling to meet compliance requirements, according to Fidelity’s head of sustainable investing.

Insufficient regulation of environmental, social and governance (ESG) data and ratings providers also heightens concerns about greenwashing, the act of making unsubstantiated sustainability claims.

“If you are selling a fund as a green fund, that means very different things depending on what country you are from,” said Gabriel Wilson-Otto, head of sustainable investing strategy at Fidelity International, which manages more than US$700 billion of client assets globally.

This created complexity and limited scalability for asset managers, he said during a panel discussion at the Hong Kong Investment Funds Association conference yesterday.

Globally, managed sustainable funds amounted to US$2.7 trillion at the end of March, of which US$89 billion were domiciled in Asia, according to data from Morningstar. The global figure was just over US$2.5 trillion at the end of last year.

“The key challenge is down to the labelling [of green and sustainable funds] and fragmentation of fund [products], as well as the sourcing of fundamental insights for investment decisions without consistent standards on data, which really creates a lot of burden on asset managers,” Wilson-Otto said.

In Hong Kong, the number of ESG funds authorised for sale by the Securities and Futures Commission (SFC) increased by more than 50 per cent year on year to 188 at the end of March, SFC chief executive Julia Leung Fungyee told the conference. Total assets under management rose by 6 per cent to US$150 billion.

Because of the lack of data and ratings consistency, Fidelity had hired 180 analysts to tackle the challenges of identifying comparison baselines and evaluating portfolio companies’ ESG performance, Wilson-Otto said.

“We can see from the size of ESG teams [at asset management firms] locally that there are a lot more people working on these problems, which reflects both the growing volume of products in the market and the emerging complexity,” he said.

The industry awaits more clarity later this month with the launch of two sets of international baseline requirements for corporate reporting of climate and sustainability risks and opportunities by the International Sustainability Standards Board.

However, local regulators needed to make cross-border comparison easier for users of the disclosures, Wilson-Otto said. For example, it would be helpful if Asian regulators waived certain local compliance requirements in case European standards, the most stringent in the world, were used, he added.

To help reduce greenwashing, the SFC was inspecting disclosures by fund managers to their investors to check whether they were consistent with practices in real life, Leung from the SFC said.

“An immediate priority is to provide guidance to the asset management industry on how they engage ESG service providers,” she said.

The inspections included asking fund managers to provide evidence to support claims that they took climate risks into consideration during portfolio construction and risk management, said Anthony Wong, director of intermediaries supervision at the SFC.