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Hong Kong regulator says ESG funds must justify their green credentials

HONG KONG, April 11 (Reuters) - Hong Kong's securities regulator has told funds who claim to consider environmental, social or governance (ESG) factors in their investment decisions to make it clear to their investors how it is they do so.

The Securities and Futures Commission (SFC) said in a Thursday circular that a majority of the more than 20 funds it has authorised that claim an investment focus on ESG do not specifically disclose how they incorporate such factors into their investment selection process.

Under the new rules, funds that say in their name or their investment strategy that they follow ESG or green principles must provide documents to investors that describe their investment focus, their selection criteria and evaluation methodology, among others.

"This guidance drives home the important message to asset managers that they are expected to do more than simply make the claim that they take ESG factors into account, without making clear to investors how they do this," Ashley Alder, the SFC's chief executive, said in a statement.

Research from BNP Paribas, published on Monday, found that Asian investors lagged global counterparts in terms of ESG investment (allocating 10 percent of assets compared to 18 percent of assets globally). However, Asian respondents to the survey said that they expected to allocate more funds to ESG investment in the coming years.

The move by the Hong Kong watchdog comes as other regulators are also tightening standards, including those around green bonds.

China is close to releasing tougher requirements for selling green bonds, Reuters reported last month.

The new rules will demand the products, where proceeds are used to fund environmentally friendly projects, no longer include fossil fuels such as "clean coal" – a controversial definition that has put Beijing at odds with some investors and environmental groups. (Reporting by Alun John; Editing by Rashmi Aich)