After recognizing greenwashing and investor protection as critical issues, financial authorities of major economies have recently worked on administrative restrictions and legislative bills to meet the related challenges. As part of these efforts, the European Commission adopted the Regulatory Technical Standards (RTS) for implementing the Sustainable Finance Disclosure Regulation (SFDR), while the US Securities and Exchange Commission (SEC) released the regulation mandating ESG disclosure by investment advisers and investment companies.
A wide range of funds are subject to ESG disclosure. All funds managed within the EU should in principle describe sustainability risks and major adverse impacts in the format and template set forth by the RTS at the level of both GPs and funds. If they fail to do so, the reason for non-compliance should be explained in detail. In the US, a broader definition of ESG funds by the SEC could make most funds subject to the ESG disclosure regulation. Notably, the EU and US have adopted the principle of proportionality in their ESG disclosure rules, meaning that how much impact sustainability factors have on investment decisions determines the level of information to be disclose.
It might be difficult for Korea to bring its ESG disclosure practices up to the level of the EU’s scheme in a short period of time. Hence, a more practical alternative would be the establishment of guidelines for effectively encouraging ESG-related information disclosure, based on the existing regulatory framework for better investor protection and greater responsibility for asset managers as specified in the Financial Investment Services and Capital Markets Act. But separate guidelines should be devised only if ESG is represented or mentioned in the name and prospectus of funds.
ESG funds should provide a detailed description of the investment type and method and periodically report the process and results of investments. The internal control system is necessary to guarantee the participation of professionals for sustainability analysis and integrity of data being used. Additionally, a due diligence process should be arranged if a fund depends on third-party service providers for data and analysis. ESF funds also need to adopt a benchmark that aligns with sustainability features pursued by them and if they engage in shareholder activities for ESG agendas, they should inform investors of such agenda items and the implementation process and report whether the goal of shareholder activities is achieved on a periodic basis.