[Japan] Strict new rules for funds that inflate their green credentials

Japan’s financial regulator suspects “more than a few cases” of greenwashing by asset managers running portfolios related to environmental, social and governance (ESG) issues and will take “regulatory action against malicious cases”, The Japan Times reports. 

Hideki Takada - director at the Financial Services Agency - shared the regulator’s suspicions in an interview.

The review was, in part, reportedly prompted by the $9 billion (¥1.18 trillion) Mizuho Financial fund that failed to offer investors enough information about its environmental impact. Now the FSA has set new limits on which funds can label themselves “ESG.”

The new rules address “grave concerns” about mislabeling by some financial services firms that are pitching funds focused on ESG issues, Takada said.

Only funds that consider ESG as a “key factor” when choosing investments can be marketed as such, under the FSA’s new guidelines. From April, new funds that don’t fall into that category will not be able to use ESG-related terms such as “green,” “decarbonisation” or “sustainable” in their names. Existing funds will be permitted to keep their names but must state in their prospectuses that they aren’t ESG funds.

The labelling changes could potentially affect as much as $1.8 billion in assets or almost 7 per cent of existing funds with ESG-related keywords in their names, according to a Bloomberg analysis of data from Morningstar.

Takada reportedly rejected the European Union’s “strict” labelling rules, which divide ESG funds into defined categories known as Articles 8 and 9. Setting such a narrow definition of ESG is too hard in a rapidly evolving field, he said.

Japan will take a principles-based approach instead, according to Takada, weeding out sham funds through market forces and greater disclosure and taking regulatory action against the worst offenders.

Japan’s decision is in line with the approach taken by other Asian regulators, including India; which had true-to-label guidelines for ESG funds issued last month. It comes amid confusion and uncertainty in Europe’s sustainable investing market and increased criticism of the continent’s ESG rules from both regulators and fund managers.

In addition, Japan doesn’t intend to introduce a European-style taxonomy defining green and non-green activities, according to Takada.

“ESG is a very wide and evolving concept” with “differing views” on natural gas and nuclear energy, he said.

Source: The Japan Times

(Quotes via original reporting)

Japan’s financial regulator suspects “more than a few cases” of greenwashing by asset managers running portfolios related to environmental, social and governance (ESG) issues and will take “regulatory action against malicious cases”, The Japan Times reports. 

Hideki Takada - director at the Financial Services Agency - shared the regulator’s suspicions in an interview.

The review was, in part, reportedly prompted by the $9 billion (¥1.18 trillion) Mizuho Financial fund that failed to offer investors enough information about its environmental impact. Now the FSA has set new limits on which funds can label themselves “ESG.”

The new rules address “grave concerns” about mislabeling by some financial services firms that are pitching funds focused on ESG issues, Takada said.

Only funds that consider ESG as a “key factor” when choosing investments can be marketed as such, under the FSA’s new guidelines. From April, new funds that don’t fall into that category will not be able to use ESG-related terms such as “green,” “decarbonisation” or “sustainable” in their names. Existing funds will be permitted to keep their names but must state in their prospectuses that they aren’t ESG funds.

The labelling changes could potentially affect as much as $1.8 billion in assets or almost 7 per cent of existing funds with ESG-related keywords in their names, according to a Bloomberg analysis of data from Morningstar.

Takada reportedly rejected the European Union’s “strict” labelling rules, which divide ESG funds into defined categories known as Articles 8 and 9. Setting such a narrow definition of ESG is too hard in a rapidly evolving field, he said.

Japan will take a principles-based approach instead, according to Takada, weeding out sham funds through market forces and greater disclosure and taking regulatory action against the worst offenders.

Japan’s decision is in line with the approach taken by other Asian regulators, including India; which had true-to-label guidelines for ESG funds issued last month. It comes amid confusion and uncertainty in Europe’s sustainable investing market and increased criticism of the continent’s ESG rules from both regulators and fund managers.

In addition, Japan doesn’t intend to introduce a European-style taxonomy defining green and non-green activities, according to Takada.

“ESG is a very wide and evolving concept” with “differing views” on natural gas and nuclear energy, he said.

Source: The Japan Times

(Quotes via original reporting)