Japanese economy

Japan to Review ESG Rules After $9.4b Fund Greenwashing

The Financial Services Agency, Japan’s financial watchdog, has announced it will initiate an industry-wide review of the ESG rules.

The move was triggered after a popular ESG fund in Japan managed by Morgan Stanley and sold by Mizuho Financial being slammed for “greenwashing”, Bloomberg reported.

The regulator intends to hear asset management firms and fund distributors about whether there should be rules for mutual fund labels.

Among other goals, the FSA wants to review the rules in order to prevent firms from exaggerating or misrepresenting the environmental, social, or governance benefits of their funds to attract investors.

The Global ESG High-Quality Growth Equity Fund, a 1 trillion yen ($9.4 billion) mutual fund owned by Mizuho Financial Group Inc.’s Asset Management One Co. and managed by New York-based Morgan Stanley, triggered the whole review process.

The fund is being accused of offering investors insufficient information about its environmental and social impact. According to the report, the fund has since then improved the disclosure of ESG-oriented information with a revised prospectus and enhanced monthly reports.

In 2020, the World Federation of Exchanges conducted a survey which found that 41% had initiatives that correspond to all five Sustainability Principles of ESG.

ESG is becoming an integral part of exchanges’ strategies and ethos as a marked number of operators were encouraged by the new opportunities arising from their sustainability engagement.

Close to 90% of the responding exchanges perceived investor demand for ESG disclosure, of which 29% believed demand to be extensive. The majority of exchanges do not require assurance on ESG disclosure, but the number of exchanges planning this requirement in the future almost doubled.

There is still no convergence on ESG standards and formats adopted by the exchanges industry. Green bonds became the most commonly offered ESG products for the first time.

Bloomberg Intelligence has recently released a report that found ESG ETFs net inflows jumping by 3x, from $31 billion to $89 billion, in 2020. Ten times more than the $9 billion in 2018. The record pace could even accelerate in 2021 with the rise of climate-focused ETFs.

The highest inflows were observed among smart-beta strategies in the US and Europe, which suggests ESG investments tend to be sticky, non-cyclical, and can be viewed as long-term holdings. Flows are fairly concentrated. Three ETFs from the iShares Aware alone account for 18% of ESG. BlackRock, Vanguard, UBS, and Invesco saw some of the largest inflows last year.

The report warns that increased inflows may be driven by asset managers moving their own ETFs into model portfolios, which might not represent organic market demand.

Climate ETFs could continue to see support from favorable policies like the European Green Deal. Clean energy flows rose 13 times faster last year compared to 2019, while low-carbon or fossil-free funds rose five times faster, the report stated.

Bloomberg Intelligence has also found that complex ESG themes, like diversity and inclusion, are often more expensive, with such funds risking liquidation unless returns justify costs.