Investors call for more clarity on Singapore ESG fund labels
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Authorities should respond to the growing interest in Singapore in investing according to environmental, social and governance principles and take measures to improve ESG fund labelling, industry figures say.
The Monetary Authority of Singapore has called for asset managers to launch more ESG products in Singapore and a total of 22 ESG-related funds were authorised by the regulator in 2020.
However, some industry figures say that while Singapore’s regulator has introduced general environmental risk management guidelines, the lack of standardised ESG regulations and reporting in Singapore leaves local investors at greater risk of being exposed to so-called greenwashing, when funds are marketed to have better ESG credentials than they actually possess.
Singapore should seek to introduce an ESG fund label that identifies and certifies these fund products to investors, said Paul Pak, asset and wealth management leader at PwC Singapore.
“Increasingly investors perceive the sustainable investment market as confusing and complex,” said Mr Pak.
“The use of a fund label would introduce a common standard that brings clarity and communication about how sustainability has played a role in the selection process,” Mr Pak added.
Ng Sze Yoon, Singapore-based senior director for Asia-Pacific insights at Broadridge, agreed that more clarity from the MAS on ESG fund labelling would be helpful for both fund managers and investors.
There is growing ESG demand from Singaporean investors, Ms Ng said, noting that cross-border ESG fund sales reached $1.2bn from January to November 2020, according to Broadridge data.
“What we understand from our interviews with fund selectors is that they want more detailed descriptions and reporting so they can sort out the wheat from the chaff,” she said.
“They would also like to see more transparency as it is more important in ESG than anywhere else,” Ms Ng added.
Fund houses have increasingly found themselves under scrutiny for overstating their green credentials over the past few years.
Up to 85 per cent of green-themed funds globally were guilty of “misleading marketing”, according to a study in December 2019 by the 2 Degrees Investing Initiative.
London-based sustainable finance firm New Money last year highlighted several funds, including one ETF as examples of products that were not living up to their green marketing.
Broadridge’s Ms Ng said that having a set of universally recognised reporting standards would allow investors to compare funds without having to go through very in-depth and time-consuming due diligence processes.
Such an initiative would help to prevent funds being marketed incorrectly, said Leena Dagade, Singapore-based associate director at Cerulli Associates.
Ms Dagade pointed to Hong Kong’s list of approved green and ESG funds as potentially a step in the right direction that Singapore could emulate.
“It could prevent any incidences of greenwashing and ensure not only that ESG funds are sold rightly to investors, but also meet the objectives that these funds seek to address and achieve,” she said.
Last year, Hong Kong’s Securities and Futures Commission began compiling a list of verified ESG products that have at least 70 per cent of their total net asset value in green or ESG-related investments. There are currently 37 mutual funds and exchange traded funds on the list.
The European Commission’s sustainability agenda is another example that Singapore could look towards, according to Broadridge’s Ms Ng.
The agenda’s three key principles are focused on differentiating products with “different shades of green”, mandating the disclosure of the adverse impacts of their investments and forcing a rethinking of fund naming conventions such as the use of the terms “sustainable” and “ESG”.
Taiwan is also setting up its Green Finance Action Plan 2.0, which was launched last year and includes establishing a unified ESG classification standard, Ng says.
PwC’s Mr Pak said that securing broad-based adoption of ESG fund labelling standards across markets in the region would be key to future market development and the emergence of competing local ESG fund labels would be something to watch out for in Asia.
“Against the backdrop of growing demand for ESG investing, the introduction of an ESG fund label would be an important ingredient in Singapore’s plan to establish herself as Asia’s green financing centre,” he added.
Last June, the MAS addressed some of the gaps in local ESG standards by releasing consultation papers that proposed a set of environmental risk management guidelines for financial institutions, including fund firms.
This includes having asset managers develop risk management tools and metrics such as scenario analysis and stress testing, as well as disclosure requirements on risk management and the impact of material environmental risk. But there is nothing in the new rules that covers standardised labelling for sustainable investment products.
Thus far, however, the MAS has not announced any upcoming regulations specific to ESG fund labelling, according to Grace Chong, Singapore-based counsel for Hong Kong and Singapore at Simmons & Simmons.