Japan¡¯s financial regulator says it 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,¡± Hideki Takada, director at the Financial Services Agency, said in an interview.
After a review was sparked in part by the $9 billion (?1.18 trillion) Mizuho Financial fund that failed to offer investors enough information about its environmental impact, 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.
Under the FSA¡¯s new guidelines, only funds that consider ESG as a ¡°key factor¡± when choosing investments can be marketed as such. Starting in April, new funds that don¡¯t fall into that category can¡¯t use ESG-related terms such as ¡°green,¡± ¡°decarbonization¡± or ¡°sustainable¡± in their names. Existing funds can retain their names but will have to state in their prospectuses they aren¡¯t ESG funds.
The labeling changes could affect as much as $1.8 billion in assets or almost 7% of existing funds with ESG-related keywords in their names, according to a Bloomberg analysis of data from Morningstar.
Takada rejected the European Union¡¯s ¡°strict¡± labeling rules, which sort ESG funds into defined categories known as Articles 8 and 9. Setting such a narrow definition of ESG is too difficult in a rapidly evolving field, he said.
Instead, Japan will take a principles-based approach, weeding out sham funds through market forces and greater disclosure and taking regulatory action against the worst offenders, he said.
Japan¡¯s decision mirrors the approach taken by other Asian regulators, including India with its true-to-label guidelines for ESG funds issued last month. It comes amid tumult in Europe¡¯s sustainable investing market, and growing criticism of the continent¡¯s ESG rules from regulators and fund managers alike.
Japan also doesn¡¯t intend to introduce a European-style taxonomy defining green and non-green activities, Takada added.
¡°ESG is a very wide and evolving concept¡± with ¡°differing views¡± on natural gas and nuclear energy, he said.
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