Sustainable investment– navigating thechallenges forfund governanceOctober 2022

First Sentier MUFG
Sustainable Investment InstituteContents

About the Institute

01

About the Institute’s sponsors

02

Executive summary

03

Introduction08
Methodology

09

Defining sustainable investments and greenwashing10Growth in sustainable investment funds

11

Increasing regulation

12

Fund structures and oversight

13

Typical structure of an investment fund13

Governance of an investment fund

14

The fund board challenge: developing robust sustainability oversight

15

Delivery of fund’s commitments to its investors

16Compliance with laws and regulations

22

Risk management

26

Board composition

30

The regulatory environment

33

Appendices34
Appendix 1: Interview methodology notes

34

Appendix 2: Regulations overview

36

Endnotes39About the Institute

The First Sentier MUFG Sustainable Investment Institute (the Institute) provides
research on topics that can advance sustainable investing. As investors, bothFirst Sentier Investors and MUFG recognise our collective responsibility tosociety and that investment decisions should be made with consideration to ourcommunities both now and in the future.
The Institute commissions research on Environmental, Societal
and Governance (ESG) issues, looking in detail at a specific topic
from different viewpoints. The Institute recognises that investors
are now looking in far greater depth, and with far greater focus,
at issues relating to sustainability and sustainable investing.
These issues are often complex and require deep analysis tobreak down the contributing factors. If as investors we can better
understand these factors, we will be better placed to consider
our investment decisions and use our influence to drive positivechange for the benefit of the environment and society.
The Institute is jointly supported by First Sentier Investors(FSI) and Mitsubishi UFJ Trust and Banking Corporation,a consolidated subsidiary of MUFG. Representatives of bothorganisations provide input to the activities of the Institute.
An Academic Advisory Board advises the Institute on
sustainability and sustainable investment research initiatives.
The Academic Advisory Board comprises prominent leadersfrom academia, industry and nongovernmental organisations in
the fields of Responsible Investment, climate science and related
ESG endeavours. The Board provides independent oversightto ensure that research output meets the highest standards ofacademic rigour.

Contact

institute@firstsentier.com
www.firstsentier-mufg-sustainability.com
www.mufg-firstsentier-sustainability.jp

01

Acknowledgements

The Institute would like to thank the authors of this publication,
Fund Boards Council (FBC), and the many individuals who kindly
gave of their time to be interviewed as part of this research.

About Fund Boards Council

FBC is an organisation exclusively focused on fund governance,
promoting examples of excellence from the asset management
industry where we find them, offering guidance, consultancy andtraining to firms who need our help.
We actively support fund boards in delivering greater value,
improved transparency and better governance for their investors.
FBC has extensive understanding of the intricacies and nuancesof fund governance and its role within the wider governancestructure of investment management firms.
Through internal expertise, industry advisers and key
relationships with regulators, we have our finger on the pulse of
the needs of fund boards and provide unique proprietary insightand support for fund boards and the senior executives who work
closely with them. Our unique singular focus on fund governancemeans we can support our corporate members and clients withaccess to unparalleled insight, latest thinking and deep expertiseto help them address the challenges their fund boards aregrappling with.
https://fundboards.org/about/About the Institute’s sponsors

About First Sentier Investors

First Sentier Investors (formerly First State Investments) is a
global asset management group focused on providing highquality, long-term investment capabilities to clients. We bring
together independent teams of active, specialist investors whoshare a common commitment to responsible investment andstewardship principles. These principles are integral to our overallbusiness management and the culture of the firm.
All our investment teams – whether in-house or individuallybranded – operate with discrete investment autonomy, according
to their investment philosophies.
https://www.firstsentierinvestors.com

About MUFG

MUFG Mitsubishi UFJ Financial Group, Inc. (MUFG) is one of
the world’s leading financial groups. Headquartered in Tokyoand with over 360 years of history, MUFG has a global networkwith approximately 2,400 locations in more than 50 countries.
The Group has about 170,000 employees and offers services
including commercial banking, trust banking, securities,
credit cards, consumer finance, asset management, and leasing.
The Group aims to “be the world’s most trusted financial group”
through close collaboration among our operating companies andflexibly respond to all of the financial needs of our customers,
serving society, and fostering shared and sustainable growth fora better world. MUFG’s shares trade on the Tokyo, Nagoya, andNew York stock exchanges.
https://www.mufg.jp/english

About the Trust Bank

Mitsubishi UFJ Trust and Banking Corporation, as a core
member of MUFG, provides its customers with a wide range ofcomprehensive financial solutions leveraging unique and highly
professional functions as a leading trust bank. Such financial
solutions include real estate, stock transfer agency, asset
management and investor services, and inheritance related
services, in addition to banking operations. We aim to realize
our vision to be the trust bank that creates “a safe and affluent
society” and “a bright future with our customers together”. We
support our customers and societies through their challenges
with Trust, and thus we build on a new key concept: “Create a
Better Tomorrow”. First Sentier Investors was acquired by theTrust Bank in August 2019.
https://www.tr.mufg.jp/english

02

Executive summary
Investors choose to invest in pooled funds to access the expertise of investment
professionals. Financial objectives, such as capital preservation and/or growth,remain key investment objectives, but other considerations, such as investments’sustainability characteristics are increasingly being considered.
Sustainable investment has evolved and grown significantly overrecent decades and particularly in the past three to five years.
Assets under management in sustainable investment funds havequadrupled in just 3 years, increasing from around US$0.7 trillion
at the start of 2019 to almost US$3.0 trillion at the end of 20211.
New regulations and an increasing variety of approaches haveaccompanied this growth. The term ‘sustainable investment
fund’ is used within the report to refer to any investment fund that
may include some form of sustainability-related considerations
within the investment decision.
As guardians of third party capital, investment managers
are required to act in their investors’ best interests, including
striving to meet the stated objectives of the investments thatthey manage, whatever they may be. Legal, structural andorganisational arrangements of investment funds vary globally– for example ‘investment company’ corporate structures which
are more common in Western Europe and contract-based unit
trust structures which are more common in Hong Kong, Japanand Australia. Nonetheless, ultimate accountability and oversightof a fund’s activities typically rests with a fund governance body.
Such governance body is, usually and for the purposes of thisreport, referred to as a ‘fund board’.
Fund governance and oversight arrangements could vary acrosslegal structures and jurisdictions, however there is a broadconsistency in the core objectives of fund oversight overall(Appendix 2).

03

In the context of fund oversight, inclusion of sustainability
considerations in investment decisions arguably does notfundamentally change the existing governance responsibilities
of fund boards. However, the implementation of fund oversight
could be impacted by the evolving backdrop for sustainable
investment, including:• Variation in definitions of sustainability and greenwashing– resulting in a risk of fund’s objectives and strategy being
misunderstood by investors and intermediaries and/or a riskthat statements with respect to fund’s sustainability features
cannot be substantiated• Growth in sustainable investments – increasing theoversight responsibilities for fund boards, as the number andvariety of thematic funds grow• Increasing regulation – increasing the regulatorycompliance responsibilities for investment firms, with ultimate
responsibility on boards to ensure compliance.
The goal of this report is to take account of the above context
and help fund boards improve their oversight of sustainable
investment funds. The research concentrates primarily on retailinvestment funds and six jurisdictions – the United Kingdom,
Ireland, Luxembourg, Japan, Hong Kong and Australia.

Executive summary

The legal and regulatory frameworks applicable to investment
products in the reviewed jurisdictions can be very detailed andprescriptive, as is the case for example for fund authorisation,
disclosure requirements and corporate governance requirements(including board composition). Some of this prescription extends
to how sustainable investment funds are managed, including fundnaming, classification and disclosures (e.g. the Sustainable
Finance Disclosure Regulation (SFDR) in the EU). However, theseframeworks are generally silent when it comes to the requirements
for effective oversight of sustainable investment funds, otherthan setting out general rules which apply across all typesof investments.
For the purpose of the report, fund board responsibilities are
considered within four areas of governance, commonly noted
within fund governance guidance in the jurisdictions underreview (Appendix 2):• Delivery of the fund’s commitments to its investors:
ensure that funds have clearly articulated objectives,
select appropriate investment managers to fulfil these objectives
and effectively monitor whether these objectives are being met• Compliance with laws and regulations: ensure thatfunds are developed and managed in line with relevant
requirements, including those covering product design,
product documentation, and mandatory reporting• Risk management: ensure that key risks are identified,monitored and managed within agreed board risk appetite
limitations and consider the effectiveness of internal controls• Board composition: ensure that the board members haveappropriate skills, knowledge and experience to discharge
their duties
Interviews with 25 fund board directors and other fund board
professionals were held to understand how they are approaching
the oversight of sustainable investment funds (Appendix 1).
These interviews highlighted a number of key challenges facedby fund boards, as well as suggestions on how to address them.
Our research also identified examples of management information(MI) which can be used to facilitate oversight of sustainable
investment funds.

04

Executive summary

Delivery of fund’s commitments to its investors
Generally, any contractual fund features, including such that may
be sustainability-related, should be appropriately incorporated
into fund objectives, considered in the selection of investment
managers and monitored effectively.
Challenges: It is currently unclear as to what role fund boards
should play in terms of ensuring that this takes place, especiallywhen it comes to overseeing fund documentation, how theinvestment manager implements sustainable investing and how
monitoring takes place. Indeed, interviews conducted indicatethat a minority of fund boards are involved in setting policies or
guidance on how sustainability is incorporated in the investment
process or receive information on sustainability-related featuresof such funds (Exhibits 1 and 2).
Most of the fund boards saw sustainability policy as being
explicitly set by the fund’s mandate and the fund’s investment
manager’s general approach to sustainable investing i.e. from the‘bottom-up’ (Exhibit 1). The general consensus view was that theexecutive teams responsible for managing funds are best placed
to understand and implement sustainable investing policy.
However, there was also acknowledgement that the fund board
was ultimately responsible for this policy and the associatedcontrols to oversee it.
Exhibit 1: How would you describe the board’s involvement in setting thefund’s sustainability investment policy and/or objectives

Still, almost two thirds of the fund boards described theirinvolvement in monitoring fund’s performance againstsustainability objectives/characteristics as being low – with astrong reliance on executive functions, executive committees orboard sub-committees to undertake this oversight (Exhibit 2).
With respect to other internal forums receiving MI on fund’s
sustainability features, investment committees were cited inalmost two-thirds of the cases (with variation as to whether thisinvestment committee was a sub-committee of the fund board
or an executive forum). A much smaller proportion consider
this type of MI at a Risk Committee (usually a sub-committeeof the fund board), with a quarter of fund boards monitoring thiselsewhere (usually various executive forums, including productgovernance committees).
Actions: Fund boards should satisfy themselves that:• clearly articulated sustainable investing policies are in place(including how fund objectives are set)
• they understand and have confidence in their manager’s
approach to assessing sustainability• monitoring of fund performance explicitly considers
sustainability features for funds that have such features
Exhibit 2: How would you describe your involvement in oversight of fundperformance against sustainability objectives/characteristics

5%

14%
Bottom-up

29%

21
respondents

Combination57%

Top-down

Source: Fund Boards Council
Note: Refer to Appendix 1 for methodology notes on interview approach and data gathering

05

32%

Low

19
respondents

Medium63%

High

Source: Fund Boards Council
Note: Refer to Appendix 1 for methodology notes on interview approach and data gathering.

Executive summary

Compliance with laws and regulations

Detailed rules and guidance in relation to to sustainable
investment fund naming, classification and productdocumentation are emerging. Some of the reviewed jurisdictions
also require mandatory reporting on sustainability-related risks,even for funds and entities where sustainability is not part of thefund objectives (e.g. SFDR).
Challenges: Some fund boards are relatively remote from
activities impacted by these rules and guidance, including
requirements affecting product development, pre- and post-saledisclosures and mandatory reporting – including for example
the requirements of the Taskforce on Climate-Related Financial
Disclosures (TCFD).
Actions: Fund boards should satisfy themselves that:• sustainability requirements are incorporated into productgovernance frameworks• controls around fund documentation and mandatory reporting
remain effective• the product approval proposals (especially requests to‘repurpose’ existing funds as sustainable investments)
remains adequate• they are aware of data used, its potential limitations andrelated data integrity controls.

06

Risk management

Fund managers are increasingly required to consider and/or
disclosure assessment of sustainability-related investment risks,
including climate change risk, at an entity and product level.
Growing scrutiny of how sustainability-related characteristics
of investment products are communicated also draw greaterattention to true to label requirements and the risks of those notbeing met (more generally referred to as greenwashing in thecontext of sustainability). Such risks also need to be integrated aspart of investment due diligence and risk management policies
and processes as well as within governance structures.
Challenges: Some fund boards may not have considered how
sustainability risk is managed in portfolios or included in their risk
management frameworks. Internal processes may not be fully
adapted to reflect fast evolving regulatory requirements.
Actions: Fund board directors should satisfy themselves that:• sustainability risk is appropriately incorporated into portfolio
management and enterprise risk management frameworks
and governance, where necessary and appropriate• all relevant risk management functions can effectively address
sustainability-related risks• true to label controls can effectively address greenwashing risk.

Executive summary

Board composition and expertise

Fund board directors need to have knowledge, skills,
and experience to fulfil responsibilities relating tosustainable investments. This includes a full understanding of
the nature of these funds, related risks and relevant regulatory
responsibilities.
Challenges: Some fund boards may not yet have developed an
appropriate knowledge and understanding of key sustainable
investing regulations, investment approaches, tools andmetrics involved. For example, under a third of interviewees rated
the knowledge of the boards that they serve on as ‘high’ – a levelof knowledge generally observed by them in professionals more
actively involved in product or investment processes, (Exhibit 3).
The interviewees felt that their fund boards were generally more
knowledgeable about fund-related sustainable investment
regulations (such as fund naming, labelling and disclosures)
than entity-level disclosures (such as the TCFD). It was generally
acknowledged that executive directors (EDs) had a higher levelof knowledge than non-executive directors (NEDs), often withat least one ED being a subject-matter-expert (such as Headof Product, Head of Responsible Investment or someone withinvestment experience such as the Chief Investment Officer).

Actions: Fund boards should:• undertake board assessments to identify gaps in sustainable
investment knowledge, skills and experience• address any gaps identified, as appropriate – this could
include training, ‘deep dive’ board sessions, recruitment of a
subject matter experts in the board.
Sustainable investment requirements are still developing inmany jurisdictions. As those evolve, interviewees pointed out thatclear and consistent governance guidance from regulators would
be welcomed, especially in terms of the local requirements
for fund labelling, disclosure and monitoring of sustainable
investment funds.
Apart from advancing local requirements, international
harmonisation, where possible and practical, was also pointed
out as beneficial. This includes standards such as the SFDR
and the EU Taxonomy, as well as those being developed atinternational level, such as by the International Sustainability
Standards Board (ISSB) and TCFD.

Exhibit 3: How would you rate the fund board’s knowledge of sustainability-related regulation on a scale of high, medium or low
Fund-related regulations

Entity-level disclosures

6%

7%

25%
Low

16
respondents

MediumHigh

69%

Source: Fund Boards Council
Note: Refer to Appendix 1 for methodology notes on interview approach and data gathering.

07

27%

Low

15
respondents

Medium67%

High

Introduction

Investors choose to invest in pooled funds to access the expertise of investment
professionals. Financial objectives, such as capital preservation and/or growth,remain key investment objectives, but other considerations, such as investments’sustainability characteristics are increasingly being considered.
Sustainable investment has evolved and grown significantly overrecent decades and particularly in the past three to five years.
Assets under management in sustainable investment funds havequadrupled in just 3 years, increasing from around US$0.7 trillion
at the start of 2019 to almost US$3.0 trillion at the end of 20211.
New regulations and an increasing variety of approaches haveaccompanied this growth. The term ‘sustainable investment
fund’ is used within the report to refer to any investment fund that
may include some form of sustainability-related considerations
within the investment decision.
As guardians of third party capital, investment managers
are required to act in their investors’ best interests, including
striving to meet the stated objectives of the investments thatthey manage, whatever they may be. Legal, structural andorganisational arrangements of investment funds vary globally,
but ultimate accountability and oversight of fund’s activities
typically rests with a fund governance body. Such governancebody is, usually and for the purposes of this report, referred to asa ‘fund board’.
08

In the context of fund oversight, inclusion of sustainability
considerations in investment decisions arguably does notfundamentally change the existing governance responsibilities
of fund boards. However, the implementation of fund oversight
could be impacted by the evolving backdrop for sustainable
investment, including:• Variation in definitions of sustainability and greenwashing– resulting in a risk of fund’s objectives and strategy being
misunderstood by investors and intermediaries and/or a riskthat statements with respect to fund’s sustainability features
cannot be substantiated• Growth in sustainable investments – increasing theoversight responsibilities for fund boards, as the number andvariety of thematic funds grow• Increasing regulation – increasing the regulatorycompliance responsibilities for investment firms, with ultimate
responsibility on boards to ensure compliance.

Introduction

Methodology

Purpose of report

The goal of this report is to help fund boards improve theiroversight of sustainable investment funds. It aims to:• Explore how sustainability considerations fit within fund board
responsibilities• Map some of the challenges that fund boards face withrespect to sustainability considerations• Suggest practical actions which fund boards can take tonavigate these challenges.

Scope

This report concentrates primarily on:• Retail-customer focused sustainable investment funds– this includes funds which have specific sustainabilityrelated investment objectives, as well as funds which may
not have a sustainability objective, but incorporate somesustainability-related considerations into the underlying
investment approach• Six jurisdictions – the UK, Ireland, Luxembourg, Japan, Hong
Kong and Australia.

Research methods

The research included two main research methods:• Desktop research of regulatory and legal requirements• In-depth interviews with fund board directors and other fundboard professionals.

09

Limitations

The research has focused on how to improve the effectivenessof fund board oversight of sustainable investments. Many otherrelated questions arise such as whether sustainable investingis effective to achieve a ‘real world’ outcome in general andwhether sustainable investments may deliver superior risk/returnoutcomes. Answering such questions is not in scope of theresearch and are only mentioned in the context of examples ofissues for individual fund boards to explore.
This report is primarily focused on the role of the fund board andwhile touching on the responsibilities of relevant executives andother related entities, the aim is not to provide a detailed guide on
managing sustainable investments.
The research does not provide a full review of all regulations
and laws that could be applicable to such a complex topic but
rather aims to offer a practical guide to help fund boards navigate
through the relevant challenges.
The report considers regulatory and legal requirements applicable
across the six jurisdictions around the time of publication of thisreport. The rapid pace of change in sustainable investment related
regulations and laws mean that some observations may not becompletely aligned with all current requirements.
The suggestions made in the report are informed by the research
approach and are aimed at being broadly applicable acrossjurisdictions. Full compliance with local regulations has not beenverified as part of the report. It is recommended that fund boards
and individual directors seek input from their compliance officers,
legal counsel and other professional advisors where appropriate.

Defining sustainable investments and greenwashing
There has been much industry debate over the years about
defining sustainability and sustainable investments in thecontext of financial products. The fact that sustainability
continues to lack a common global definition and remainsubjective, results in challenges for fund oversight, forexample with respect to how fund boards ensure that fund’s
sustainability objectives/characteristics are well communicatedand/or how attainment of those objectives is monitored.
Sustainable investing evolved from ethical or ‘values-based’
approaches which exclude certain companies or controversial
activities from investment portfolios to a more broadly defined
investment process which incorporates (or integrates)
environmental, social and corporate governance (ESG) issues
in the analysis, selection and retention of investments.
The term ‘ESG’ was coined by the UN Principles for
Responsible Investment (PRI) initiative, convened in 2006.
The notion of ‘ESG integration’ is fundamental to the PRI
Principles for Responsible Investment where it is defined
as: “the explicit and systematic inclusion of ESG issues ininvestment analysis and investment decisions”.
This definition allows for a wide range of approaches froma very light level of integration to the consideration of ESG
issues in every single investment decision, and every shade
in between. This is reflected in the wide variety of sustainable
investment funds available today.
Two key initiatives agreed in 2015 influence the way ESG isdefined and considered in practice:• the ‘Paris Agreement’, an international treaty on climatechange which aims to limit global warming, and• the UN’s ‘2030 Agenda for Sustainable Development’,
an internationally supported plan to ensure sustained
and inclusive economic growth, social inclusion, andenvironmental protection.
The EU’s Sustainable Finance Action Plan, which aims topromote sustainable investment, built on these initiatives andintroduced the Sustainable Finance Disclosure Regulation
which came into effect in March 2021. The SFDR defines
sustainable investment2 as:‘sustainable investment’ means an investment in an economic
activity that contributes to an environmental objective, as
measured, for example, by key resource efficiency indicatorson the use of energy, renewable energy, raw materials,
water and land, on the production of waste, and greenhousegas emissions, or on its impact on biodiversity and thecircular economy;

10or an investment in an economic activity that contributes
to a social objective, in particular an investment that
contributes to tackling inequality or that fosters social
cohesion, social integration and labour relations or aninvestment in human capital or economically or sociallydisadvantaged communities,
provided that such investments do not significantly harm
any of those objectives and that the investee companies
follow good governance practices, in particular with respect
to sound management structures, employee relations,
remuneration of staff and tax compliance;
In turn, sustainability at economic activity level has been defined
via sustainability or green ‘taxonomies’. An environmental
taxonomy (such as the EU Taxonomy) is a classification system
which provides definitions for which economic activities can beconsidered environmentally sustainable. The EU have developed
the world’s first taxonomy with other regions including the UK,some Asia Pacific countries and international organisations likethe World Bank following suit.
However, taxonomies are also subject to being deemedambiguous as the debate about the classification of nuclear
power and natural gas as sustainable under the EU’s system
has shown.
As the subjectivity and variability around definitions of‘sustainability’ and ‘sustainable investment’ remain, so does
the risk of intentionally or unintentionally misrepresenting afund’s sustainability characteristics. Fund boards will need to beaware not only of the state of greenwashing-related regulations
and regulatory sanctions imposed, but also of the drivers ofgreenwashing risk and how those are being mitigated.
The EU defines greenwashing through an environmental lens as:“the practice of gaining an unfair competitive advantage bymarketing a financial product as environmentally friendly, when
in fact basic environmental standards have not been met”3.
In practice, greenwashing could also be unintentional, forexample when communications are less clear and objectiveor when a claim is not necessarily incorrect, but cannot be
substantiated with evidence.
The issue of greenwashing is of increasing concern toregulators globally, including being a priority area of focus in
the roadmaps issued by the UK’s Financial Conduct Authority(FCA) and the European Securities Markets Association(ESMA) in 2022. Regulators in other jurisdictions includingin Hong Kong, Singapore, Australia, Switzerland, Germany,
Japan and the US have also raised concerns. The numberof related regulatory investigations is still relatively small,but precedents already exist – for example BNY Mellon
investigation by the Securities and Exchange Commission(SEC) in the US and DWS investigation by the SEC andFederal Financial Supervisory Authority (BaFin) in Germany.

Growth in sustainable investment funds
There has been a proliferation of new (or in many cases repurposed) products entering the market in recent years. The numberof sustainable funds grew to 6,709 in June 2022 from 5,932 as at the end of 2021 with the majority of products and the current
growth being in Europe (Exhibit 4 and 5).
Exhibit 4: Global sustainable funds, flows and assets undermanagement as of Q2 2022

3,000

Assets

USD bn% Total

USD bn% TotalEurope

30.7

94%

2,033

82%

United States

−1.6

−5%

296

12%

Asia ex-Japan

1.1

3%

61

2%

Australia/New Zealand

0.6

2%

26

1%

Japan

0.2

1%

25

1%

Canada

1.5

5%

24

1%

Total

32.6

2,465

Source: Morningstar Direct, Manager Research. Data as of 30 June 2022.

2,500
2,000
USD bnFlows

Exhibit 5: Sustainable funds – evolution of assets under management

1,500
1,000
500
0

Q4 2019

EuropeQ4 2020
US

Q4 2021

Q2 2022

Rest of the world

Source: Morningstar, data as of Q2 2022; Note: Estimated data using screen grabbing utility,
Graph Grabber v2.0.2.

Note: Data classification utilizes Morningstar’s definition of sustainability. This definition excludes funds that employ only limited exclusionary screens such as controversial weapons, tobacco,and thermal coal, as well as funds that formally integrate ESG considerations in a ‘non-determinative’ way for their investment selection.

It will be interesting to see how the demand for sustainable investment funds develops, as regulators step in to tighten
sustainability definitions and impose more reporting requirements.
A new provision under the Markets in Financial Instruments Directive (MiFID) and Markets in Financial Instruments Regulation(together MiFID II) introduced in August 2022, arising as an action from the EU Sustainable Finance Action Plan, introduced provisions
on integrating sustainability factors, risks and preferences into certain organisational requirements and operating conditions for MiFID
investment firms, including in respect of suitability assessments.
The regulations require that, as a routine component of financial advice, investment advisers should ask about, and thenrespond to, investors’ preferences regarding the sustainable impact of their investments.
Research has shown that when provided with information on the sustainability profile of similar investment products, themajority of consumers will choose the more positive sustainability products.
On one hand, regulations such as MiFID II could contribute to further interest in and demand for suitable/ESG products acrossthe EU and beyond. On the other, it could dampen demand if sustainability preference assessments reveal that there is a gap
between consumer expectations and product availability. Increasingly onerous disclosure and reporting requirement withrespect to sustainability funds may also deter fund providers from developing such products.

11Increasing regulation

For fund boards, a key challenge will be building up an
appropriate understanding of all new regulations that are beingbrought into force and how to ensure compliance with them.
In addition to taxonomies which define ‘sustainability’or ‘sustainable activities’, regulators have to a varying
degree mandated:• product or entity-level disclosures of certain information(for example, SFDR has different requirements dependingon the nature of the fund, see box below)• fund classifications according to their sustainability
characteristics• sustainability and/or climate-change risk related disclosures.
SFDR regulation requires sustainability risk
disclosures for all funds (as set out in Article 6),
with additional disclosures for the two types offunds described in Article 8 and 95:
Article 8“Where a financial product promotes, among othercharacteristics, environmental or social characteristics,
or a combination of those characteristics, provided
that the companies in which the investments are madefollow good governance practices”
Article 9“Where a financial product has sustainable investment
as its objective and an index has been designated as areference benchmark”

12

Climate risk features as a common theme across many
ESG and sustainability regulations and laws. This arises
from the close link between sustainability and the policy
goals of initiatives like the Paris Climate Agreement
and the environmental elements of the Sustainable
Development Goals (part of the 2030 Agenda for Sustainable
Development).
There is increasing regulation governing the financial
industry’s management of climate-related risks andopportunities. For example in 2021, Australia, the UK & Hong
Kong finalised requirements and guidelines in relation toclimate-related risk management and reporting (Appendix 2),
with similar regulation expected across other key jurisdictions.
The common baseline for these standards is the TCFD
framework created by the Financial Stability Board. The TCFD
was established to develop consistent climate-related
financial risk disclosures for use by companies, banks,and investors in providing information to stakeholders.
Its framework is structured around four thematic areasof how organisations operate: Governance, Strategy,
Risk Management and Metrics & Targets.
For example, the UK requirement for product level reporting
will include an annual TCFD-aligned report which will be
required to disclose various greenhouse gas emissionsrelated information, as well as various climate scenario
analysis with implied temperature rise metrics and climate
value-at-risk data6.

Fund structures and oversight
Typical structure of an investment fund

Although legal structures and forms could vary by jurisdiction,
typically an investment fund structure would include a fund vehicle,
an authorised fund manager and a depository or trustee (Exhibit 6).
• A fund vehicle issues units or shares in the fund to investors(depending on the legal structure of the vehicle). Two of themost common vehicles are unit trusts, being the primarystructure in use in Hong Kong, Australia and Japan for
example, and investment companies, being often used in theEuropean Union and the UK.
• An authorised fund manager (AFM) is ultimately responsible
for running an investment fund, including ensuring that it
is managed according to relevant regulations. The AFM istypically a corporate entity which needs to be authorisedby the relevant regulator. A fund’s AFM is typically a distinct
legal entity, but is often owned by or is part of the investment
manager (IM) appointed to manage the fund’s portfolio.
• A depositary or trustee is required to be independent from the
AFM. It plays an investor protection role and is responsible forthe safekeeping of a fund’s assets (often appointing a custodian
for this purpose). It is also responsible for overseeing the AFM’s
activities to ensure that they are performed in accordance withregulation and in investors’ best interests.

Investment companies – Collective investment funds
structured as investment companies with variable capital are
more commonly used in Western Europe, including Ireland,
Luxembourg and the UK. Such structures are known as an
Irish collective asset management vehicle (ICAV) in Ireland,a société d’investissement à capital variable (SICAV) in
Luxembourg and an open-ended investment company (OEIC)
in the UK. Although regional nuances would exist, investmentcompanies are corporate entities, typically governed byinstruments of incorporation and a board of directors.
Investors own shares in the investment company and thecompany is able to issue and redeem shares continuallyaccording to investor demand.
Unit trusts – Collective investment funds in Australia, Japan andHong Kong are primarily structured as unit trusts – a contractual
arrangement under a trust deed as opposed to an incorporated
entity structure. Established vehicles in Western Europe are also
structured as unit trusts, while incorporated entity structures are
more common for newer funds.
Fund governance and oversight arrangements could varyacross legal structures and jurisdictions, however there is abroad consistency in the core objectives of fund oversightoverall (Appendix 2).

Exhibit 6 – Generic structure of an investment fundInvestment manager

Authorised fund manager

Depository/trustee

Fund vehicle

Safekeeping of fund’s assets
Investment management of fund’s assets
Source: Fund Boards Council
13

Investors

Governance
Portfolio assets

Fund board
Investment manager board

Fund structures and oversightGovernance of an investment fund

Given the similarities in the core objectives of fund oversight across the reviewed
jurisdictions, the term ‘fund board’ is used to refer to the governance body that is
ultimately responsible for the oversight of funds activities and that investors’ bestinterest is observed.
In general an AFM is ultimately responsible for running an investment fund. An AFM is also commonly called a management company
or ‘ManCo’ in European funds and in the UK is often referred to as an authorised corporate director (ACD). In Australia the AFM isreferred to as the ‘Responsible Entity’. Sometimes the investment manager also plays the legal role of the AFM, as is the case in someJapanese and Hong Kong fund structures.
Some jurisdictions also operate the concept of a fund vehicle board with a group of directors who are separate to the board of the AFM (forexample in Luxembourg and Ireland). It is common for the fund vehicle board to delegate many of their responsibilities to the fund vehicle’s
AFM. In the context of this report, ‘fund board’ is used to refer to the board of both types of entities7.
The governance and broader management responsibilities of an AFM can vary by jurisdiction, legal structure, size of AFM, etc.
Exhibit 7 illustrates the general scope of AFM governance and management, using the ‘three lines of defence’ model.
In practice, many AFMs delegate elements of these first, second and third-line responsibilities to other entities, either within the same groupor third-party service providers. Investment management activities are the most commonly delegated activity. While the fund board candelegate activities and responsibilities, accountability remains with the fund board, including the duty to act in the best interests of investors.
Exhibit 7: Typical governance structure of an Authorised Fund Manager
Layer

Typical roles

Responsibilities and typical activities

Fund board

Establish objectives for the organisation and a strategy to achieve them
Chair, Chief Executive Officer,
Ensure that necessary resources are in place to meet these objectives and measure performance against them
Chief Financial Officer, Chief Risk
Establish a framework of prudent and effective controls which allow risk to be assessed and managed
Officer, Non-Executive Directors etc.
Meet any regulatory responsibilities specifically assigned to the board
Provide the fund management services to investors including:Selecting investments

First line

Portfolio managers, Productmanagers, Fund operations,
Finance, Marketing, Distribution etc.

Producing literature and mandatory disclosures
Marketing, promotion and sales
Developing new funds
Fund administration
Finance and accounting
First line risk management (including design and implementation of controls as well as identifying risk owners).
Provide expertise and support on regulatory and risk-management matters

Second line

Compliance, Risk management

Monitor compliance with applicable laws and regulations
Assist risk owners to define target risk exposure
Provide risk reporting

Third line

Internal audit

Source: Fund Boards Council
14

Provide assurance on the effectiveness of governance, risk management and internal controls, including first andsecond line controls

The fund board challenge: developing
robust sustainability oversight

The legal and regulatory frameworks applicable to investment products can bevery detailed and prescriptive, as is the case for fund authorisation, disclosure
requirements and corporate governance requirements (including board composition).
Some of this prescription extends to how sustainable investment funds are managed,
including fund naming, classification and disclosures (e.g. EU SFDR requirements).
However, these frameworks are generally silent when it comes to the requirements
for effective oversight of sustainable investment funds, other than setting out generalrules which apply across all types of investments.
For the purpose of the report, four common themes have been
identified (Appendix 2):• Delivery of the fund’s commitments to its investors: ensurethat funds have clearly articulated objectives, select appropriate
investment managers to fulfil these objectives and effectively
monitor whether these objectives are being met.
• Compliance with laws and regulations: ensure thatfunds are developed and managed in line with relevant
requirements, including those covering product design,
product documentation, and mandatory reporting.
• Risk management: ensure that key risks are identified,monitored and managed within agreed board risk appetite
limitations and consider the effectiveness of internal controls.
• Board composition: ensure that the board members
have appropriate skills, knowledge and experience todischarge their duties.

15

Interviews with 25 fund board directors and other fund board
professionals were held to understand how they are approaching
the oversight of sustainable investment funds (Appendix 1).
These interviews highlighted a number of key challenges facedby fund boards, as well as suggestions on how to address them.
Our research also identified examples of management
information which can be used to facilitate oversight ofsustainable investment funds.
It is worth noting that some fund boards may see this type of MI
as much more detailed than would typically be considered atboard level for other types of funds. The appropriate level of detailfor MI will be a decision based on each AFM’s operating modeland the board’s risk appetite.
Many interviewees commented that it could be appropriate forthe fund board to get to a lower level of detail on sustainable
funds for a period until such time as they have confidence in theeffectiveness of the controls and their own knowledge of this area.

The fund board challenge: developing robust sustainability oversight

Delivery of fund’s commitments to its investors

The fund board is ultimately responsible
for ensuring that a fund has a clearly
articulated objective and an investment
strategy to achieve this. The fundboard is also responsible for selecting
appropriate investment managers to
implement the strategy and ensuring
effective monitoring of whether theobjective is being met.
Sustainability considerations
Where funds have general or specificsustainability features, these features
should be:• appropriately incorporated into the fund’sstated objectives• considered in selection of investment managers• monitored effectively.
Challenges
It is currently unclear as to what role fund boards shouldplay in determining:
1. How sustainability features are incorporated into
fund objectives (e.g. impact of sustainability on
investment policy)
2. How the investment manager implements sustainability
considerations in order to meet the fund’s statedobjectives (e.g. data and assessment tools used)
3. Fund’s performance oversight – how performanceagainst stated sustainability features is monitored.

16

The fund board challenge: developing robust sustainability oversight

Delivery of fund’s commitments to its investors

1. How sustainability features are incorporated into fund objectives

The way in which sustainability is incorporated into fund objectives is arguably a key
policy decision for authorised fund managers.
This includes deciding whether a fund might have general or
specific sustainability targets as well as whether these follow a‘group company’ sustainability policy or a ‘fund-specific’ approach.
It also involves taking a view on what sustainability means,including what framework to use to assess individual investments
and support investment decisions.
The interviews conducted suggested a wide range of practicewhen it comes to the degree to which fund boards are involvedin driving how sustainability considerations are incorporated into
investment decisions and fund objectives.

The fund boards which set policy at board level were typicallyindependent fund management companies (operating funds
for a range of delegate investment managers), or organisations
operating a ‘manager of manager’ fund proposition (where funds
utilise one or more third-party investment managers).
The general consensus view was that the executive teams
responsible for managing funds are best placed to understand andimplement sustainable investing policy. However, there was also
acknowledgement that the fund board was ultimately responsible
for this policy and the associated controls to oversee it.

Most of the fund boards saw sustainability policy as being
explicitly set by the fund’s mandate and the fund’s investment
manager’s general approach to sustainable investing (i.e. fromthe ‘bottom‑up’). A minority of fund boards set a ‘top-down’sustainable investing policy which they expect funds and fundmanagers to follow, while just under a third of boards consider
policy to be set in a ‘combined’ way (e.g. where the board engages
with proposals from the investment manager and signs these off).

“The role of the fund board director is very different
to a corporate board director – less aboutprogressing an ESG agenda for a company andmore about making sure that a fund does what it
says on the tin in terms of ESG promises”.

Exhibit 8: How would you describe the boards’ involvement in setting thefunds’ sustainability investment policy and/or objectives

Fund board focus
Fund boards should satisfy themselves that
there is a clearly articulated policy for how
the funds’ sustainability features are set. Thisshould include details on whether policy isbased on a general corporate view or if it is set on a fund-byfund basis.

14%
Bottom-up

29%

21
respondents

Combination57%

Top-down– Irish fund board director

Examples of relevant MI
Documentation from the investment manager which clearlysets out:• their interpretation of sustainable investing and how this isincorporated in investment decisions

Source: Fund Boards Council
Note: Refer to Appendix 1 for methodology notes on interview approach and data gathering• a set of criteria by which funds are categorised dependingon the degree to which sustainable investing features in
the fund’s objectives and investment strategy• how the investment manager’s internal categorisation
maps onto relevant regulatory requirements (e.g. disclosure
requirements under Article 8 and 9 of SFDR).

17The fund board challenge: developing robust sustainability oversight

Delivery of fund’s commitments to its investors

2. How the investment manager implements sustainability considerations in order tomeet a fund’s objectives (including data and assessment tools)

There is considerable variability in how different investment managers implement
sustainability considerations in their investment and decision-making processes,
even for funds with apparently similar objectives. This includes variability in thenature and output from assessments and tools which consider sustainability (forexample, tools which produce ESG ‘ratings’).
In light of variability in assessments and approaches, the interviews
explored the degree to which fund boards were aware of andengaged with how their funds’ investment manager undertakes
assessments of sustainability. For example, an oil and gas energy
company could be categorised as:• ‘green’ (high environmental sustainability): appropriate forinclusion in a sustainable fund because of its commitment
and investment to the clean energy transition, or• ‘brown’ (low environmental sustainability): inappropriate forinclusion in a sustainable fund because of its current andhistorical greenhouse gas emissions.
Interviewees acknowledged the variability in approaches and all
felt that the selection of individual investments was wholly the
responsibility of relevant executive teams. There was, however,some debate about whether it was appropriate for fund board
directors to question a portfolio manager on why a particularinvestment was included in a portfolio. Most interviewees felt thiswas appropriate, especially from the perspective of the board
satisfying themselves that the portfolio manager can describe aclear process and robust case for including the security, rather
than questioning the choice of the individual company.
All the fund boards which were ‘internal’ to investment
management groups were broadly aware of the fact that theirinvestment manager had a proprietary assessment approachwith respect to sustainability factors. Most of the investment
managers had central assessment approaches, including a
global model which is used across all funds across jurisdictions.
None of these fund boards felt they had any control over thisassessment approach and only a small minority of themconsidered the fund board to even have been consulted on theapproach. One interviewee did note that they were aware ofsome of the controls around the group model and details of agroup internal audit review had been shared with the fund board.
18

None of the fund boards which operated as an independent
management company had their own assessment approach,although they would typically undertake technical due diligenceon delegate managers investment processes in general (which
could include their sustainable investing approach).

“Why should our fund board sign off the ESGassessment model? We don’t sign off the yield
curve model for fixed income valuation or the
discounted cashflow model for equity valuation…
…but I guess I can see the case for thinking aboutsome degree of board involvement in oversightof these models given the materiality of ESG
investing to our business and how new thesemodels are (relative to the more established ones).”– Hong Kong fund board director“Our role as a fund board is to make sure thefunds do what it says on the tin. That meansthat we should be ensuring that appropriate
fund strategies, policies and procedures arein place, but we should not be looking at how
individual stocks are selected.”– Irish fund board director

The fund board challenge: developing robust sustainability oversight

Delivery of fund’s commitments to its investors“It is not the board’s role to undertake detailed policy-setting and oversight of the minutiae. The board
should ensure that the business has the right governance, the right people, the right process and theright oversight arrangement – not the detail, that is for the ExCo to undertake. They should ensure thatappropriate controls have been set up to undertake oversight at each stage of the product life cyclefrom design to implementation to monitoring and reporting.”– UK independent authorised fund manager board director
The interviews also covered the potential reputational risks to thefund board if their investment manager’s approach resulted in
the inclusions of investments which would be rejected by othercredible assessment methodologies. Interviewees recognised
this risk and some acknowledged it as a potential gap in thecontrols in place in their organisations.
Some interviewees felt that clear disclosures of the assessment
approach adopted by the firm (and controls to ensure it isfollowed) would mitigate this risk.

One interviewee noted a control in place at his fund’s
management company, whereby a second-line risk teamindependently reviews stocks in funds with an explicit
sustainability objective using a third party assessment
methodology. This team then challenges the portfolio manager
if they find outliers using their independent assessment, andrecord whether they consider the manager’s justification
for including the stock is credible. MI on this control wasthen reported to the fund board’s risk committee foroversight purposes.

Fund board focus
Evaluate the fund board’s level of confidence
in the way the investment manager
implements sustainable investing, including
any assessment tools and models employed.

Examples of relevant MI
Documentation from the investment manager which articulates
their approach to implementing sustainable investing, including
the nature and role of any assessment tools and models(to facilitate challenge of any vague or unclear statements).

Consider obtaining additional assurance on areas, such as:

The results of internal or external assurance work reviewing theway sustainable investing is implemented, which could include:• the effectiveness of first line controls over investment
strategy implementation• the use of second line risk management controls• independent reviews of sustainability assessment models(e.g. from a third-party specialist consultancy).

• validation of the nature and effectiveness of theassessment models• results of quality assurance reviews by first line responsible
investing teams (e.g. reviews undertaken of each investment
team’s approach and implementation)• results of second line compliance monitoring or risk reviews
and internal audit reviews• results of external specialist third-party reviews.

19

The fund board challenge: developing robust sustainability oversight

Delivery of fund’s commitments to its investors

3. Fund performance oversight – how delivery of fund objectives is monitored

Overall oversight of fund performance is generally recognised as a fund board
responsibility across all reviewed jurisdictions (Appendix 2). A key question is thedegree to which fund boards are (and should be) involved in the detailed oversight of afund’s performance against stated sustainable investment objectives/characteristics.
Almost two thirds of the fund boards described their involvement
in monitoring fund’s performance against sustainability
objectives/characteristics as being low (with a strong relianceon executive functions, executive committees or board subcommittees to undertake this oversight).

A small minority noted that the board receives some MI in theperformance section and/or risk section of board packs.

“We are starting to see one or two page ESG
summaries for funds, but very little time is spent
discussing this at board meetings. I assume
Around a third of the fund boards considered themselves to havea medium level of involvement in oversight of fund sustainability
this is being covered in more detail at executive
performance, with this being discussed at board meetings,
level boards at the investment manager or
including receipt of relevant MI.
management company. I do think that a lot of
Only one fund board was highly involved in oversight (forwork needs to be done to demonstrate to theexample, scrutinising MI in detail as part of board discussions)fund board that the investment manager andand they were responsible for a number of Article 9 funds under
SFDR (i.e. funds with an explicit sustainable investment objective). management company are monitoring andmanaging this. I will be asking questions at my
Most of the interviewees noted that their fund board did not receive
fund board discussions, looking for evidence of
any MI on sustainable investment funds (i.e. management information
specifically focused on monitoring performance against sustainability how the investment process includes checking if
objectives of funds which have such features in their mandates).
individual investments meet ESG requirements.”
Exhibit 9: How would you describe your involvement in oversight of fundperformance against sustainability objectives/characteristics

5%

32%

Low

19
respondents

Medium63%

High

Source: Fund Boards Council
Note: Refer to Appendix 1 for methodology notes on interview approach and data gathering.

20– Irish fund board director“We are starting to ask more questions at our fundboard on this. I think we should be taking a ‘showme’ rather than ‘tell me’ approach because of
the high reputational risk of greenwashing. ESG
oversight is less mature than other areas likeoversight of liquidity risk. We went through asimilar process on liquidity risk where a couple ofyears ago we wanted detailed MI (to ‘show me’)and now that things are more established, we are
comfortable with MI which is at a level to just ‘tellme’ what is going on.”– UK fund board director

The fund board challenge: developing robust sustainability oversight

Delivery of fund’s commitments to its investors

Exhibit 10: Which other internal forums receive MI and monitor funds’
sustainability features24%

21
respondents
14%

62%

Fund board focus
Fund boards should be satisfied that effective
monitoring arrangements are in place toconsider the sustainability-related features offunds. This includes obtaining assurance that:

Investment committee• appropriate controls are in place to ensure compliance withany sustainable investment features in fund mandates

Risk committee• relevant sustainability-related KPIs or KRIs are agreed

Other

The risk of insufficient data being available to monitor
outcomes should be addressed at the design stage by
selecting KPIs and KRIs which can realistically be obtainedwith existing systems and data providers.

Source: Fund Boards Council
Note: Refer to Appendix 1 for methodology notes on interview approach and data gathering.

With respect to other internal forums receiving MI on fund’s
sustainability features, investment committees were cited inalmost two-thirds of the cases (with variation as to whether thisinvestment committee was a sub-committee of the fund board
or an executive forum). A much smaller proportion consider
this type of MI at a Risk Committee (usually a sub-committeeof the fund board), with a quarter of fund boards monitoring thiselsewhere (usually various executive forums, including productgovernance committees).
In general, interviewees considered that the product governanceprocess plays a key role in setting agreeing an appropriate
sustainable investment policy and how this translates into thefund’s mandate.
They also felt that this product governance process should
ensure that any sustainable investment funds being launchedshould have appropriate controls in place to ensure mandate
compliance, including agreeing relevant sustainability Key
Performance Indicators (KPIs) or Key Risk Indicators (KRIs).

Monitoring activities should be related to the degree ofsustainability features of funds, for example higher levels of
attention and more detailed metrics for funds subject to the
Article 8 and 9 disclosure requirements under SFDR.
Examples of relevant MI• Governance maps setting out where responsibility lies formonitoring the performance and objectives of sustainable
investment funds• Terms of reference for relevant committees or executive
forums, to include:– explicit delegation of responsibility to monitor measuresof sustainable investment objectives/features– escalation and reporting routes up to the fund board• Examples of relevant KPIs and KRIs that could be included
in MI packs:– carbon emissions-related data for a climate change
related fund– average ESG-rating for a fund’s holdings vs. benchmark
where the objective is to invest in companies with better
than benchmark ESG-ratings)• Documentation of pre and post-trade controls, as wellas portfolio monitoring controls, incorporate sustainable
investing portfolio constraints and requirements.

21

The fund board challenge: developing robust sustainability oversightCompliance with laws and regulations

Generally the fund boards are ultimately
responsible to ensure that funds aredeveloped and managed in line withall relevant requirements (Appendix 2).
Sustainability-related regulation is rarely
included as an explicit complianceresponsibility; however boards’
responsibilities include compliance withall applicable laws and regulations.
Sustainability considerations
Regulators are increasingly applying rules andguidance to how sustainability considerations
are to be addressed in fund naming,classification and product documentation(both documents issued to investors pre-contract andperiodically post sale).
Some jurisdictions also require mandatory reporting onsustainability-related risks or factors, even for funds andentities where sustainability is not part of the investment
objectives. Many financial regulators require additional
reporting in line with the TCFD framework.
Challenges
Some fund boards are relatively remote from the following
activities and will need to consider how to achieve anappropriate level of oversight of:
1. Product development activities, including fund naming andclassifications/labels
2. Production and publication of product documentation(including pre-contractual and post-sale disclosures)
3. Other mandated disclosures, such as TCFD reporting– meeting both entity level and product level reporting
requirements, including oversight of climate data.

22

The fund board challenge: developing robust sustainability oversightCompliance with laws and regulations

1. Product development activities, including fund naming and classification

Regulators typically impose general requirements that a fund’s sustainability focus
should be reflected consistently in its design, delivery and disclosure.
Most of the reviewed jurisdictions require fund names to be clear
and not misleading. The UK and Hong Kong offer more focused
guidance, requiring the sustainability-related fund names toreflect the level of materiality of sustainability in the fund’s
objective (Appendix 2).

Fund board focus
Fund boards should be satisfied that theirproduct governance framework addresses
all relevant sustainable investment fundrequirements. This includes obtaining
assurance that:• relevant requirements are considered in sustainable
investment fund approvals and existing fund reviews• requests to ‘repurpose’ or ‘reclassify’ existing funds assustainable investment funds are appropriate (e.g. raisingchallenges if no material changes are being introduced tothe investment objective or process )• appropriate checklists are incorporated into productapproval templates to demonstrate that all relevant
requirements have been addressed (including sign-off
by compliance).

Similar requirements for being clear and not misleading apply
also to descriptions of a fund’s objective and investment strategy,
and all documentation (including promotional materials) (e.g. theConsistency and Design principles outlined in the UK FCA’s ESG
Guiding Principles, as shown in Appendix 2).

Examples of relevant MI• Documentation of product governance frameworks, including
examples of product development templates which explicitly
address sustainable investment fund requirements (including
checklists, where appropriate)• Documentation of the fund classification process (including
assurance controls and thresholds for each category).
• List of funds overseen by the board within each sustainability
category, highlighting any changes in classification sinceprevious board meeting• Compliance monitoring review reports to provide assurance,that e.g. :– fund names align with the fund objective, strategy andsustainability characteristics– fund descriptions are ‘true to label’ and objective inmarketing literature, factsheets etc.
• Results of investor and intermediary testing to validate
understanding of fund names and classification

23

The fund board challenge: developing robust sustainability oversightCompliance with laws and regulations

2. Production and publication of product documentation (including pre-contract andpost-sale disclosures)

The regulatory requirements applicable to product documentation are typicallyvery prescriptive.
Pre-contract fund disclosures requirements include elements
such as:Post-sale fund disclosures requirements include elements
such as:• the nature of sustainable investment objectives and theinvestment strategy to achieve this objective (EU, UK,
Hong Kong)• the extent to which the fund has attained its statedsustainability objective, based on pre-defined metrics(Hong Kong)• the assessment methodology to be used to evaluatesustainability of investments (EU, Hong Kong)• a comparison of the fund’s performance against thedesignated benchmark (EU, Hong Kong)• metrics to be used to assess the fund’s sustainability
performance through its life cycle (Hong Kong)• specific sustainability metrics or indicators when relevant (atinvestment manager or fund level). Those could include:• the share of fund assets managed to the sustainability
objective (EU, UK)• reference benchmarks (EU, Hong Kong)• how sustainability risks are considered in the investment
strategy (EU, Hong Kong).

Fund board focus
Fund boards should be satisfied that robust
processes are in place to produce pre andpost-sale disclosures and that these comply
with all relevant requirements, including withrespect to sustainability considerations.
Given variability in data completeness and quality, impact ofdata sources on prepared documentation and disclosures
should also be understood.

– SFDR Principal Adverse Impact indicators (PASIs)– Greenhouse gas (GHG) emissions, carbon intensity, etc.
See Appendix 2 for a list of sustainability-related pre- and postsale disclosure requirements across the relevant jurisdictions.

Examples of MI• Documentation of the process by which pre and post-saledisclosures are produced, including:– roles and responsibilities– relevant risk management and quality assurance controls(including checklists, where appropriate).
• Exception reports highlighting where any fund disclosure
documentation has not been produced, reviewed or met thecurrent requirements• Documentation of sustainability data architecture, details ofdata integrity controls and impact of data sources or quality on
mandatory disclosures• Compliance monitoring includes a review of customer-facing
reports to provide assurance on the disclosure production
process, including data used in the process.

24The fund board challenge: developing robust sustainability oversightCompliance with laws and regulations

3. TCFD reporting – meeting both entity level and product level reporting requirements,
including oversight of climate data

While the TCFD reporting framework was originally something which firms could
adopt on a voluntary basis, financial regulators are increasingly requiring firms(including AFMs) to report following the TCFD framework.
For example, the UK’s FCA’s rules require asset managers
to make mandatory disclosures consistent with the TCFD’s
recommendations on an annual basis at:• entity level – an entity-level TCFD report setting out how theytake climate-related risks and opportunities into account inmanaging or administering investments, and• product or portfolio level – a baseline set of consistent,
comparable disclosures in respect of their products andportfolios, including a core set of metrics.
Both levels of reporting require a significant depth of analysis
and explanation including climate-related scenario analysis andquantitative metrics on greenhouse gas emissions.
Acknowledging that AFMs are often part of larger groups, theUK regulation does allow for some flexibility for firms to crossrefer to disclosures made by the group or an affiliate memberof the group. However, the AFM would still be expected tohave a clear rationale for relying on other entities and to haveappropriate engagement by the fund board to meet theirgovernance obligations.

25

Fund board focus
Be aware of:• AFM’s regulatory responsibilities toundertake TCFD reporting, both at entityand product (fund) level• how the business ensures robust methodologies
are applied to climate-related scenario analysis anddata quality.
Examples of relevant MI• Documentation of the process by which TCFD reportingis produced, including roles and responsibilities of key
functions involved• Documentation of how the business approaches climaterelated scenario analysis and controls in place to validate
models utilised• Documentation of sustainability related data architectureand details of data integrity controls• Compliance monitoring including a review of reports
to provide assurance on the TCFD disclosure process,including data used in the process.

The fund board challenge: developing robust sustainability oversight

Risk management

The fund board is ultimately accountable for ensuring that the AFM has
appropriate processes, systems and controls in place to identify, monitor andmanage risks (Appendix 2). Risks would generally include investment andoperational risks.
Sustainability considerations can impact risk-related
responsibilities of fund boards in two main ways:
1. sustainability (or climate change more specifically) as aninvestment risk
2. ‘greenwashing’ risk.

Sustainability as an investment risk

Several of the reviewed jurisdictions require product and/or
entity-level disclosures on how sustainability and/or climatechange risks are incorporated into the investment process.
Some of the examples include:• amendments to Undertakings for Collective Investment
in Transferable Securities (UCITS) regulations require
sustainability to be considered in investment decisions where
it could have material negative investment impact• SFDR requires disclosure of how sustainability risks havebeen considered and incorporated in the investment process
or why they are not considered material• the Securities and Futures Commission of Hong Kong (SFC)
requires disclosures on governance and oversight of climate risk.

In some jurisdictions (e.g. EU), those requirements do not apply
only to funds which may have a defined sustainability mandate/objective, they apply to all funds, so fund boards should be
looking to implement relevant assessments across all funds thatthey are responsible for. Sustainability considerations may also
be incorporated into risk management frameworks.

Greenwashing risk

The issue of greenwashing is of increasing concern to regulators
globally – for example it is a priority area in the roadmaps issued
by the UK’s FCA and ESMA in 2022.
Greenwashing is generally not a new risk for the investment
management industry. It could be considered as a variant of misselling, which is already prohibited and can and does result incivil or criminal sanctions. Investment managers already need
to be able to articulate clearly their investment proposition andprovide evidence when challenged by boards or regulators.
Fund boards should be aware of greenwashing risks and satisfy
themselves that appropriate and effective controls are in place
to mitigate it.

“ESG risk is a big focus now, in a similar way to how liquidity risk was a big focus in the recent past.
As was the case with liquidity risk, I expect ESG risk metrics will be incorporated in the MI which we see.
For example, whereas the risk dashboard at the fund board in the past would have include things
like a market stress test, liquidity stress test and credit stress test, there will now be an ESG section
going forward.”– Luxembourg fund board director

26

The fund board challenge: developing robust sustainability oversight

Risk management

1. Incorporating sustainability risk considerations into risk management frameworks
and governance
AFMs typically have in place risk management frameworks at
two levels – portfolio risk management and enterprise risk
management (ERM).

Portfolio risk management covers how risk is managed within
and across individual investment funds, including as part of theinvestment process. Examples below demonstrate how sustainability
risk management may be incorporated in portfolio risk management.
It is also important to note that sustainability may play a greater or
lesser role within individual investment strategies depending on thenature of the strategy, but the regulatory expectation is increasingly
for sustainability risk to be considered across all funds.
• The investment due diligence process: for example,
evaluation of sustainability-related risks as part of theinvestment research for a securities inclusion in (or removalfrom) a portfolio• Monitoring sustainability risk: for example by considering asustainability risk profile for a fund across a range of metrics,
including relative to a benchmark (e.g. metrics associated withgreenhouse gas emissions)• Stewardship: the way in which engagement takes place withthe firms in which the fund invests, including the approachtaken to voting in light of sustainability risk considerations• Climate Scenario Analysis: for example assessing‘Transition’ and ‘Physical’ risks facing portfolios and how this
could influence investment strategy• Distribution: for example, considering sustainability
preferences in the distribution chain for the fund, especiallyinvestor sustainability preferences
Enterprise risk management covers how risk is managed
for the AFM as a corporate entity, including compliance withregulatory requirements. At an enterprise level, sustainability
risk management may be incorporated in a number of ways
including, but not limited to:• Risk taxonomy – incorporate sustainability risk within theentity’s taxonomy, i.e. the way it describes risks to facilitate risk
identification and categorisation• Risk appetite – establish key risk indicators (KRIs) relevant tosustainability and agreeing board risk appetite for these measures

27• Impact on other risk categories – consider how toincorporate sustainability risk into other risk categories,
including potential impact on credit risk, market risk, liquidity
risk and operational risk (including data availability/data qualityrisk) and reputational risk
• Corporate governance – incorporate sustainability risk
into existing management and board level governanceforums (including risk and compliance committees andproduct governance committees), including considering
appropriate dashboards and MI relating to sustainability risk atthese forums.
Fund board focus
Fund board directors should be aware of
their AFM’s regulatory responsibilities toconsider sustainability risk and should satisfy
themselves that risks are appropriately
incorporated into both portfolio management and
ERM frameworks and governance.
Examples of relevant MI
Portfolio management• Documentation of portfolio management approaches,
including how sustainability risk is considered• Portfolio level sustainability risk reporting, including
evidence of monitoring risks (e.g. greenhousegas emissions)• Output from assessment of Transition and Physical risksfacing portfolios (including climate scenario analysis)
ERM frameworks and governance• Documentation of the AFM’s risk taxonomy, key risk
indicators (KRIs) and risk registers which incorporate
sustainability risk
• Documentation of the AFM’s governance frameworkand sustainability risk policies, signposting roles andresponsibilities of forums and individuals to monitor andmanage sustainability risks

Three lines of defence and sustainability risk
Research interviews highlighted a common theme in theway fund boards approached managing regulatory risks andsustainability risk in particular. There is strong reliance placed
upon the ‘three lines of defence’ model, for example:• Oversight is likely to be most effective where sustainabilityrelated features are clearly defined and translated intomeasurable restrictions. (Note: this may not be applicable
to all types of features, e.g. stewardship activities).

• First line activities: where portfolio managers,
researchers and trading teams are responsible forinvestment selection and monitoring, including using preand post-trade compliance systems• Controls and competencies are generally the mostdeveloped in the first line of defence with portfolio managers
and responsible investment teams who are experts onsustainable investing. Second and third-line of defence
teams may have relatively less experience in this area.

• Second line activities: where compliance monitoring
and risk review teams review the effectiveness of first line
controls and whether policies and processes are alignedwith regulatory requirements• Third line activities: internal audit reviews of the control
environment, as well as particular areas of attention,for example as set by the board audit committee
However, a number of key themes emerged from discussions
about the efficacy of the three lines of defence to oversee
funds’ sustainability-related features:• Fund boards are currently making relatively limited use of
second and third lines of defence to undertake assurance
work on the effectiveness of sustainable investment
fund controls. However, many of the research interviews
highlighted that this was something they would consider
adding to the 2023 compliance monitoring and/or audit plan.
Interviewees also commented on the fact that there are
generally no prescribed regulatory requirements for the
degree to which fund boards should oversee sustainable
investment fund mandate compliance, so each entity will
operate what they deem to be appropriate controls.

“Mandate compliance is overseen using the ‘standard approach’ with involvement of the three linesof defence as well as the ManCo and Depositary.
The ManCo does spot checks of things, but places reliance on the investment manager anddoes not have their own risk management and oversight teams or systems. The focus will be on
monitoring against breaches at a fund level and ensuring that things are escalated to the board
and regulator where necessary.”– Irish fund board director

Examples of the kind of controls which could be put in place within each of the three lines of defence include:
First line
• Sustainable investment features coded into preand post trade compliance systems and first-line
investment risk/compliance teams monitor MI to
identify any issues on a daily basis• Integration of sustainability across all funds is monitored
periodically (at least annually) with validation taking
place across each investment team’s processes• Stewardship activities are monitored, with qualitative MI
produced to demonstrate the nature and outcome ofengagement with investee companies• Validation takes place of all sustainability statements
in fund documentation and marketing materials(including online content) to ensure consistency withinvestment processes, including testing investor andintermediary understanding

28

Second line
• Second-line risk teams monitor agreed KPIs and KRIs inmonthly reports, including comparing these to agreed
risk appetite thresholds• Second-line compliance monitoring team review
relevant areas including: integration of sustainability
into investment processes, alignment of processes
with disclosures and general alignment with regulatory
requirements
Third line
• Internal audit review of areas considered to be ofhigh risk by the fund board, including potential areasof greenwashing (e.g. validating that key promises
about sustainable investment features of funds can besupported by evidence)

The fund board challenge: developing robust sustainability oversight

Risk management

2. Greenwashing risk

The widely used term of ‘greenwashing’ is not universally defined,
but is generally used to refer to situations where there may be
a mismatch between the (often exaggerated) claims about thesustainability credentials of an investment product and the actual
credentials of the product. Greenwashing could be intentional orunintentional and could arise in a variety of cases.

AFMs require effective controls to ensure that funds are ‘true
to label’ with respect to their ‘promised’ sustainability features.
These controls are explored in more detail in earlier sections(for example on delivering a fund’s commitment to its investors
and the importance of utilising the three lines of defence model
to mitigate risks).

Sources of greenwashing risk:

Research interviews highlighted different opinions amongst fundboard directors regarding responsibility for general sustainability
commitments made by a fund’s investment manager, rather
than specific features included in a fund’s objectives or strategy.
For example, many investment managers are signed up to
the UN PRI and/or the Net Zero Asset Managers Initiative,
impacting the way they select investments across all clients(including funds).

• ambiguity in the narratives on the fund’s sustainability
credentials and/or the investment strategy• overstating the ESG characteristics of a fund• lack of consistency between the set investment strategy/
policy and product documentation/ marketing materials• inability to substantiate or evidence statements in productdocumentation• investment execution does not correspond to the fund’s
objective and strategy or inability to evidence consistency• analytical tools and data limitations and/or inappropriate
use of tools/data which results in inability to support
the investment analysis with the intended sustainability
consideration

Most interviewees agreed that the fund board should havesome oversight of these more general commitments, but one
interviewee felt that reputational risk arising from thesecommitments fell to the investment manager’s board to manage,with the fund board only liable for specific sustainability features
promised by individual funds.

“Post SFDR, the level of scrutiny was raised significantly and we created a board sub-committee called
the Fund Approval Committee comprising fund board directors and ManCo board directors (mainly
independents) to review the entire development process and fund design.
Whereas previously there has been a focus on things like liquidity, investment universe, leverage andbenchmarks, now ESG was added prominently to the mix. The focus of the Fund Approval Committee
is not just disclosure, but also obtaining assurance that the fund manager can support and achieve thepromises in the disclosures.”– Luxembourg fund board director

29

The fund board challenge: developing robust sustainability oversight

Board composition

Most jurisdictions require fund board directors to have the necessary knowledge,
skills, and experience to fulfil their responsibilities.
This includes having a full understanding of the nature of theregulated company’s business, activities and related risks, as wellas their individual and collective responsibilities. For example, theIrish Funds Corporate Governance Code specifies that the board
should be of a sufficient size and expertise to adequately oversee
the operations of the fund’ (Appendix 2).
Sustainability considerations
In order to fulfil their responsibilities, fundboard directors require sufficient knowledge
and understanding of:• sustainable investing regulations• relevant investment approaches, including the different
investment objectives to incorporate sustainability (ranging
from values-based exclusions to investing for particularsustainability outcomes, such as impact investing)• available data, metrics and assessment tools (e.g. ESG ratings,
climate scenario modelling, etc), including their limitations.
Challenges
Fund boards may not have all necessary knowledge, skills,
and experience to fulfil their responsibilities when it comes tosustainable investment funds.

The interviews revealed a variable picture of the level of knowledge
and competency of fund boards relating to sustainable investing.
It was generally acknowledged that executive directors (EDs)
had a higher level of knowledge than non-executive directors(NEDs), often with at least one ED being a subject-matter-expert(such as Head of Product, Head of Responsible Investment
or someone with investment experience such as the Chief
Investment Officer).
It was acknowledged, however, than NEDs could bring very valuable
sustainability-related skills and experience to the fund board table.

“The two independent NEDs on our board arevery involved in ESG-related activities, with myother board appointment to a listed investment
trust focused on clean energy and the other iNED
being very involved in industry working groups
on ESG-investing. This equips us as iNEDs tocalibrate what management are telling us, enables
us to be self-informed and provides us withaccess to deep-dive training”
UK fund board director

30

The fund board challenge: developing robust sustainability oversight

Board composition

The interviewees felt that their fund boards were generally more
knowledgeable about fund-related sustainable investment
regulations (such as fund naming, labelling and disclosures) thanentity-level disclosures (such as the TCFD requirements).
This was not surprising given the fact that sustainable investing
regulations are already mandatory in many fund jurisdictions(especially the EU, Hong Kong and Australia – refer to Appendix 2)and have been for years in some cases. By contrast, entity-level
disclosures have been voluntary for most organisations up until
now and will only become mandatory for some organisations
from 2022 or later. It is interesting to note that more than two-

thirds of interviewees felt their fund board had a medium level ofknowledge and experience of sustainability-related regulations.
In many cases this was described as an average between
Executive Directors, who would be rated high, and Non-Executive
Directors who would be rated low.
Many considered entity-level disclosures to be the responsibilityof the fund’s investment manager and/or a group company.
However, there appears to be growing awareness that the fundboard will be held accountable for these entity-level disclosuresand many interviewees noted that this was on the agenda forlater in 2022 or early 2023, as well as training being planned.

Exhibit 11: How would you rate the fund board’s knowledge of sustainability-related regulation on a scale of high, medium or low
Fund-related regulations

Entity-level disclosures

6%

7%

25%
Low

16
respondents

MediumHigh

69%

Source: Fund Boards Council
Note: Refer to Appendix 1 for methodology notes on interview approach and data gathering.

31

27%

Low

15
respondents

Medium67%

High

The fund board challenge: developing robust sustainability oversight

Board composition

Fund board focus
Fund boards should:• undertake board assessments to identify gaps, if any, in sustainable investment knowledge, skills and experience• take appropriate action to address these gaps – for example:– regular and ‘deep-dive’ training for existing board members– recruitment of a subject-matter-expert board member (can be as an independent director, to provide a greater degree of
independent challenge).
Examples of knowledge and understanding to develop
Relevant regulations• General knowledge of the regulations on sustainable investing relevant to the domicile of the fund range (including fundlabelling, disclosure and reporting requirements)
Sustainable investing• Sustainable investing approaches: how investment managers typically implement sustainable investing across different
asset classes• Fund objectives and strategies: the nature of the various approaches and how they map to the degree of sustainability
features included
Assessment tools and metrics• Sustainable investment assessment tools and models: awareness of the nature and limitations of these tools and models• Sustainability metrics: the nature and range of metrics, including data challenges and limitations in some asset classes– focus on climate metrics including for example greenhouse gas emissions metrics and portfolio temperature metrics• Stewardship: an understanding of the different components of stewardship (e.g. engagement & voting), how they achieve
outcomes and what best practise in engagement looks like• Climate related risks: understanding of Transition and Physical climate risks and broad appreciation of how the key risks play out
in each asset class– Includes a high level understanding of climate scenarios, the different types and how the output should be interpreted32

The regulatory environment
Project research, including interviews and desktop, identified more commonalities
than differences in fund board oversight of sustainable investment funds acrossthe selected jurisdictions.
The main identified differences relate to the degree to which regulators in each region have articulated expectations of how
sustainable investment funds should be overseen, as well as the way the regulators themselves supervise investment firms withsustainable investment funds in their product range. For example, preservation of trust in financial markets is a key priority for the
Financial Conduct Authority in the UK.

“The financial sector can support not just the transition to net zero, but also towards a more sustainable
future more broadly – but this requires consumers being able to trust firms to deliver on their ESG
promises. Greenwashing presents a risk to confidence in the market and the much needed flow ofcapital to help secure net zero and help to secure all our futures”– Mark Manning, Technical Specialist, Sustainable Finance and Stewardship, FCA
Fund Boards Council event, March 2022
As sustainable investment continues to develop and so does regulation, the project research identified two regulatory areas which
would continue to evolve.
Better global alignment in regulation and practical implementation guidance
Sustainable investment requirements are still developing in many jurisdictions. Apart from advancing local requirements, international
harmonisation, where possible and practical, was pointed out as beneficial. This includes standards such as the SFDR and the
EU Taxonomy, as well as those being developed at international level, such as by the International Sustainability Standards Board(ISSB) and TCFD.
Clear and consistent guidance from regulators would also be welcomed, especially in terms of the local requirements for fundlabelling, disclosure and monitoring of sustainable investment funds.
Supervision and enforcement
To date, most regulatory activity has been focused on disclosure requirements. The research interviews highlighted appetite from fundboard directors for effective supervision (including enforcement, where appropriate) once clear implementation guidance is available.
Examples of good and poor practices would also be welcomed by fund board directors.

33

Appendices

Appendix 1: Interview methodology notes

Interview approach and questions

A total of 25 individuals across 21 organisations were interviewed.
Interviewees were fund board directors or otherwise involved in
the work of fund boards (e.g. executives or consultants involved infund board governance).
Interviewees were sent an agenda in advance of meetings
with a set of questions. The following example illustrates
these questions in the context of an Irish fund board director.
Please note that slight variations were applied to tailor questions
to fund board directors in other jurisdictions.

Example questions

Q1. Does your fund board have its own policy setting out
expectations for if and how funds should incorporate
Environmental, Social and Governance (ESG) considerations
in how investments are selected, or does it ‘approve’ an ESG
policy proposed by the investment manager for each fund?
Q2. How does your fund board go about overseeing whether
individual funds are being managed according to theirmandate in general, and in particular when that mandate has
specific ESG features?
Note: we understand that detailed oversight may bedelegated to executive committees including an investmentcommittee, but we are still keen to understand how
the board obtains comfort that this oversight is taking
place effectively.
Q3. Where the fund’s investment manager has a ‘general’
policy ‘integrating’ ESG across all funds (i.e. including thosewhich may not have a specific ESG mandate), how does thefund board go about obtaining assurance that this policy is
being followed (i.e. that ESG is indeed being integrated in amaterial way within each fund or investment process)?
Q4. Are any ESG measures being presented to the fund board
as part of performance or other Management Information, oris this level of detail considered at an investment committee(and is this committee constituted as a sub-committee ofthe board)?
Q5. Has the fund board been consulted on the selection of an
ESG measurement ‘basis’ – i.e. the principles behind any
methodology selected to measure and incorporate ESG into
mandates and/or to integrate it across funds? This includes any‘ESG-rating’ models utilised as part of the investment process.
34

Note: we understand that the minutiae of the methodology’s
calculation and application will be undertaken by the
executive – we are interested in what role the board has
played, if any, in the selection of the methodology (given thewide range of possible approaches available today, bothusing internal ratings within a fund manager or using thirdparty rating providers like Sustainalytics, MSCI etc).
Q6. How would you rate the fund board’s level of knowledge andexpertise of (and any significant gaps for attention relating to:• Fund-related ESG considerations, including the
EU Sustainable Finance Disclosures Regulation
requirements and Central Bank of Ireland’s specificrequirements?
• Entity-level climate-related disclosure requirements – i.e.
Task Force on Climate-Related Financial Disclosures,
including those which may apply to your fund’s
management company now and in the future, say as aresult of the EU’s EU Corporate Sustainability Reporting
Directive (CSRD)?
Q7. Has the fund board had any training on fund-related
ESG matters and/or climate-related disclosure
requirements recently?
Interviews were typically held for 45–90 minutes, with detailed
notes produced to record the discussions.
The interviews were qualitative in nature, but some responses
to questions were coded to facilitate the production of charts toillustrate the range of responses. The coding was undertaken by
FBC based on a judgement of interviewee responses.
Data presented through charts in the report could depict avarying number of responses, depending on whether enoughdetail was covered in the interview to facilitate coding a response
to a particular question. The number of responses varied
between 15 and 21.
The charts and other interview findings presented in thereport are included to illustrate the nature of discussions withthe sample of interviewees. They are not presented as being
statistically significant, nor warrant that they are indicative of thefull population of fund boards across the jurisdictions includedin this work.

Appendices

Appendix 1: Interview methodology notes

Summary of interviewee details

We refer to authorised fund manager in a generic sense, as also used throughout the report. This includes whether an AFM is ‘internal’(i.e. part of the same group as the investment manager for the funds) or ‘independent’ (i.e. providing ‘hosted’ services to a range ofthird-party different investment managers for individual funds which they ‘host’).
References to ‘ManCo’ are to a management company and to a ‘fund entity’ are as per the definitions used throughout the report.
Where an interviewee held more than one role, we have mentioned the most relevant role to this research. We include multiple roles
where more than one individual was included in the same interview.
Exhibit 12: List of interviewees#

Role

Type of organisation

Location1

Non-Executive Chair of Board

AFM (internal)

UK

2

Non-Executive Chair of Board

AFM (internal)

UK

3

Non-Executive Chair of Board

AFM (independent)

UK

4

Executive Chair of Board
Chief Executive (designate)
Head of Product Governance

AFM (internal)

UK

5

Non-Executive Chair of Board

AFM (internal)

UK

6

Non-Executive Director
Non-Executive Director (Chair of Board Risk Committee)

AFM (internal)

UK

7

Non-Executive Director

Fund entity

Ireland8

Non-Executive Chair of Board

Fund entity

Ireland9

Non-Executive Chair of Board

Fund entity

Ireland10

Non-Executive Chair of Board and Non-Executive Director(one individual)

ManCo (internal)
Fund entities

Luxembourg

11

Non-Executive Director

Fund entity/ManCo

Luxembourg

12

Executive Director (of group company) (Head of Compliance)

ManCo (independent)

Luxembourg

13

Investment Consultant (Responsible investment consultant to fund entities)

AFM (Responsible Entity)

Australia

14

Corporate Governance Lead (Head of Legal and Company Secretariat)

AFM (Responsible Entity) and Investment Manager Australia

15

Executive Director (Managed Fund Services)

AFM (independent Responsible Entity)

Australia

16

Executive Director (Chief Executive Officer)

Fund entity/investment manager

Hong Kong

17

Head of ProductHead of Product Development

Fund entity/investment manager

Hong Kong

18

Senior Investment Research Manager

Fund entity/investment manager

Hong Kong

19

Head of Investments

Fund entity/investment manager

Japan

20 Investment and governance team (detailed written response to questions)

Fund entity/investment manager

Japan

Executive Director (UK entity) (Head of Compliance and Regulation)

Fund entity/investment manager

Japan (via UK office)21

35

Appendices

Appendix 2: Regulations overview
The regulatory synopsis hereto is included in order to provide context and examples of regulatory requirements. It should not be considered as a complete and/ or exclusive regulatory review within
the selected jurisdictions.

Luxemburg11

United Kingdom12

Hong Kong13

Sufficient size and expertise to adequately
oversee the operations of the fund;The board should mostly be formed of
non-executive directors and at least 1
independent director;
The independent directors shall havea knowledge and understanding of theinvestment objectives, the regulation ofcollective investment schemes, policies andoutsourcing arrangements;
The board shall ensure that directors areaware of the relevant policies and proceduresand have received adequate and sufficienttraining to enable them to discharge
their duties.

The Board should havegood professional standing
and appropriate experienceand use best efforts toensure that it is collectively
competent to fulfil its
responsibilities;
Consideration should begiven to the inclusion in
the Board of one or moremembers that are, inthe opinion of the Board,
independent.

At least one quarterof the members of
AFM’s governing
body are independent
natural persons;
The AFM must takereasonable steps to ensurethat independent members
appointed to its governing
body have sufficientexpertise and experience.

The directors of the management company
must be of good repute and in the opinionof the Commission possess the necessary
experience for the performance of their duties.
In determining the acceptability of the
management company, the Commission
may consider the qualifications andexperience of persons employed by the
management company and any appointed
investment delegate.

Delivery of the fund’scommitments to its investors

Senior managementof UCITS managementcompanies is
responsible for:• responsibility for thegeneral investment
policy for each managed
UCITS and oversightof the approval ofinvestment strategies foreach UCITS;• verification that thegeneral investment policy
is properly implemented;• periodical approval of
the adequacy of theinternal procedures forinvestment decisions;

The directors have certain common law duties
including, inter alia, the duty to act with due
skill, care and diligence, duty to act honestly inthe best interests of the company;
The board may delegate authority to
subcommittees or third parties… but, where
the Board does so, it shall have mechanisms inplace for monitoring the exercise of delegatedfunctions. The Board cannot abrogate its
overall responsibility;
The Board shall ensure that internal control
procedures of service providers are being
monitored to ensure that they are effective;

The board should ensurethat high standards ofcorporate governance areapplied at all times;
the board should act fairly
and independently inthe best interests of theinvestors;
The board should ensurethat investors are properly
informed, are fairly andequitably treated, andreceive the benefits andservices to which they
are entitled;
The board should act withdue care and diligencein the performance ofits duties;
The board should ensurethat shareholder rights are
exercised in a considered
way and in the bestinterests of the fund;

AFM senior personnel
responsibilities include:
Implementation of thegeneral investment
policy for each scheme it
manages;
Overseeing the approval ofinvestment strategies;
Ensuring and verifying
on a periodic basis thatthe general investment
policy, the investment
strategies and the risk limit
system of each scheme it
manages are properly andeffectively implemented
and complied with;
Approving and reviewing
on a periodic basis theadequacy of the internal
procedures for undertaking
investment decisions foreach scheme it manages;

General obligations of a managementcompany include:
Manage the scheme in accordance withthe scheme’s constitutive documents andin the best interests of the holders. It is also
expected to fulfill the duties imposed on it by
the general law;
Take reasonable care to ensure that thetrustee/custodian is properly qualified forthe performance of its duties and functions
and discharging its obligations in respect ofcustody of a scheme’s property;
At all times demonstrate that those
representatives and agents appointed by it orengaged for the scheme possess sufficientknow-how, expertise and experience indealing with the underlying investments ofthe scheme;
Ensure the scheme is designed fairly,
and operated according to such productdesign on an ongoing basis, including,among others, managing the scheme in a
cost-efficient manner taking into account thesize of the scheme and the level of fees andexpenses etc.

Compliance with laws
and regulations

UCITS9Ensuring compliance;

The Directors shall ensure a CIS or ManCo is
run in compliance with legislation, regulations,codes of practice, guidance notes, guidelines
and any other rules or directives, which areof relevance;
The Board is responsible for compliancewith legislation and applicable regulatory
requirements and for compliancewith provisions of the prospectus andconstitutional documents of the applicable CIS
or ManCo;

The board should ensurecompliance with allapplicable laws andregulations and with thefund’s constitutional
documents;

Ensuring that the AFM has
a permanent and effective
compliance function;

Periodical approval of therisk management policy;
Sustainability factors
should be taken into
account by managementcompanies as part of theirduties towards investors;
management companies
should assess not only
all relevant financial risks
on an ongoing basis,but also all relevant
sustainability risks.

The board is responsible for the effective
and prudent oversight…and is ultimately
responsible for ensuring that risk andcompliance is properly managed;
The board is responsible for ensuring that all
applicable risks can be identified, monitored
and managed at all times; ensuring that there
are appropriate processes and systems inplace to monitor and manage risks.

The board should ensurethat an effective risk
management process
and appropriate internal
controls are in place.

Approving and reviewing
on a periodic basis the risk
management policy andarrangements, processes
and techniques for
implementing that policy;

Other

Composition, independence andexpertise of fund oversight body

Ireland10

Risk management

Requirements

Exhibit 13: Fund governance requirements across selected jurisdictions

36

Japan14Australia15

Minimum of three directors,
with at least two of
those ordinarily residing
in Australia.

A Trustee has the following duties:• duty of care: a trustee must administer trust
affairs in line with the purpose of the trust;a Trustee must administer Trust affairs withthe due care of a prudent manager• duty of loyalty: a Trustee must administer
Trust affairs and conduct any other actsfaithfully on behalf of a Beneficiary• conflicts of interest: a Trustee is not allowed
to carry out acts that create conflictsof interest• duty to appoint and supervise a third
party when delegating administrationof Trust affairs: when delegating theadministration of Trust affairs to a third
party, a Trustee must delegate said
administration to a suitable person in light ofthe purpose of a Trust• duty of equity: in the case of a Trust with
two or more Beneficiaries, a Trustee must
perform duties of Trustee equitably onbehalf of these Beneficiaries.24

An officer of a registeredscheme must:
Act honestly;
Exercise the degree ofcare and diligence that areasonable person would
exercise if they were in theofficer’s position;
Act in the best interests ofthe members and, if there
is a conflict between themembers’ interests and theinterests of the responsible
entity, give priority to themembers’ interests;

Take all steps that areasonable person would
take, if they were in theofficer’s position, to ensurethat the responsible entity
complies with this Act,any conditions imposedon the responsible entity’sAustralian financial
services licence, thescheme’s constitution,and the scheme’scompliance plan;
Put in place proper risk management andcontrol systems to effectively monitor andmeasure the risks of the positions of thescheme and their contribution to the overallrisk profile of the scheme’s portfolio;

Maintain or cause to be maintained the books
and records of the scheme and prepare thescheme’s financial reports. These reports
must be prepared and made available toall registered holders and filed with theCommission.

Duty to separate property: a Trustee must
separate property that comes under Trust
property from property that comes under
Trustee’s own property and that which comesunder Trust property of other Trusts.
Duty to report on processing status ofadministration of Trust affairs: a settlor or abeneficiary may request a Trustee to reporton the processing status of administration ofTrust affairs as well as the status of property
that comes under Trust property and theobligation covered by the Trust property.
Duty to prepare, report on, and retain books:
a Trustee must prepare books and otherdocuments or electronic or magnetic records
relating to the Trust property, in order to clarify
the accounts on Trust affairs as well as thestatus of property that comes under Trust
property and the obligation covered by theTrust property.

Not make use of
information acquired
through being an officer ofthe responsible entity;
Not make improper useof their position as an
officer to gain, directly or
indirectly, an advantage
for themselves or any
other person or to cause
detriment to the membersof the scheme.

Appendices

Appendix 2: Regulations overview

Standardised sustainability
definitions

Requirements

Exhibit 14: Sustainability-related fund requirements and classifications across selected jurisdictionsUK

EU Sustainability Regime (SFDR/Taxonomy)

Hong Kong

Sustainable investment means an investment
in an economic activity that contributes to an
environmental objective, as measured, forexample, by key resource efficiency indicators…
or an investment in an economic activity that
contributes to a social objective… or an investment
in human capital or economically or sociallydisadvantaged communities, provided that suchinvestments do not significantly harm any of thoseobjectives, and that the investee companies follow
good governance practices.2

Sustainable – products that pursue specificsustainability characteristics, themes or objectives
alongside delivering a financial return.16

Funds which incorporate ESG factors as their
key investment focus and reflect such in theinvestment objective and / or strategy.18

It is essential that funds marketed with asustainability and ESG focus describe theirinvestment strategies clearly and any assertions
made about their goals are reasonable andsubstantiated;

A product’s name shall not be misleading; an ESG
fund’s primary investments and/or strategy shouldreflect the particular ESG focus which the fundname represents.18

Japan

Australia

When assigning names such as ‘ESG’, ‘SDGs’and ‘impact’ to the funds it is necessary to explainand disclose more clearly how the products meetthe characteristics implied by the names so that
customers do not misunderstand the meaning of
the names.24

General prohibitions of misleading and deceptive
statements and conduct include:

Sustainability-related
fund naming conventions

The EU taxonomy is a classification system,
establishing a list of environmentally sustainableeconomic activities.3

A fund’s s focus on ESG/sustainability should
be reflected consistently in its name, statedobjectives, its documented investment policy andstrategy, and its holdings;

Fund classifications based on sustainability
characteristics of funds

References to ESG/sustainability in a fund’s name,financial promotions or fund documentation should
fairly reflect the materiality of ESG/sustainability
considerations to the objectives and/or investment
policy and strategy of the fund.17
SDR proposals outline the following sustainable
fund categories:• products not promoted as sustainable;• responsible products (which may have somesustainable investments);• transitioning ((sustainable characteristics,
themes or objectives; low allocation to UK
taxonomy-aligned sustainable activities);• aligned (sustainable characteristics, themes
or objectives; high allocation to UK taxonomyaligned sustainable activities);
impact (objective of delivering positiveenvironmental or social impact).16
37• false or misleading statements;15• dishonest conduct;15• misleading or deceptive conduct in relation to afinancial product15• misleading or deceptive conduct;19• false or misleading representations19

Appendices

Appendix 2: Regulations overview

Pre-contract
product disclosures

Requirements

Exhibit 15: Product-level sustainability disclosure requirements

EU Sustainability Regime (SFDR/Taxonomy/UCITS
Amendments)

SFDR Art 6 (all funds):• the manner in which sustainability risks are integrated into
investment decisions;• the results of the assessment of the likely impacts ofsustainability risks on the returns of the financial product.
• If the financial market participant deems sustainability risks
not relevant, the disclosure should include a clear and concise
explanation as to why.20
SFDR Art 8 (funds promoting environmental/social
characteristics):• description of the environmental or social characteristics
promoted by the products;• sustainability indicators used to measure the attainment ofthese characteristics;• investment strategy and asset allocation approach;• if there is a designated index, whether and how this index is
consistent with those characteristics, and where the index
methodology can be located;• whether the fund assesses the adverse impacts of its
investments on sustainability factors;20
FDR Art 9 (funds with a sustainable investment objective):• description of the sustainable investment objective;

United Kindom

Hong Kong

Japan

Australia

TCFD product reports must include thefollowing information:

An ESG fund should disclose the following in
the offering documents:• carbon emissions (scope 1, 2,3 GHG
emissions, total carbon emissions, total
carbon footprint, weighted average carbon
intensity);• the ESG focus of the fund (a description of
the fund’s ESG focus & a list of ESG criteria
used to measure the attainment of the fund’s
ESG focus);

If the fund’s name includes “ESG” or “SDGs”,
disclosures on how the fund satisfies these
designations using specific metrics.21• where a TCFD product report relates to a
TCFD product that has concentrated exposers
or high exposures to carbon intensive sectors,
the firm must describe those and disclose aqualitative summary of the likely impact of the‘orderly transition’, ‘disorderly transition’ and‘hothouse world’ scenarios on the underlying
assets;• the ESG investment strategy (a descriptionof the investment strategy adopted by the
ESG fund & a summary of the process ofconsideration of ESG criteria);

A Product Disclosure Statement must
include the following statements, and suchof the following information as a person
would reasonably require for the purposeof making a decision, as a retail client,
whether to acquire the financial product(…) if the product has an investment
component – the extent to which labour
standards or environmental, social or ethicalconsiderations are taken into account in
the selection, retention or realisation of theinvestment.15• climate value-at-risk;• metrics that show the climate warming
scenario with which a TCFD product isaligned.24
References to ESG (or related terms) ina fund’s financial promotions or funddocumentation should fairly reflect
the materiality of ESG/sustainability
considerations to the objectives and/or
investment policy and strategy of the fund.17• indicators used to measure attainment of that objective;

The proposals for retail investor-focused
disclosures include:• investment strategy and asset allocation approach;• the investment product label,• if no designated reference benchmark, an explanation on how
the objective is to be attained;• the objective (including specific sustainability
objectives),• if an index has been designated, information on how the index
is aligned with the objective;• investment strategy pursued to meet theobjective (including sustainability objectives),• consideration of the principal adverse impacts onsustainability factors;20• the proportion of assets allocated tosustainable investment (according to the UK
Taxonomy),

In addition, if an Article 8/9 fund promotes environmental
characteristics/contributes to an environmental objectives,
the EU Taxonomy adds the following requirements:• environmental objectives/objectives to which the fundcontributes (or environmental characteristics which the fundpromotes);• asset allocation (the expected or minimum
proportion of securities or other investmentsthat are commensurate with the fund’s ESG
focus);• reference benchmark;An ESG fund should disclose the following
additional information:• how the ESG focus is measured andmonitored throughout the lifecycle of the ESG
fund and the related control mechanisms;• methodologies adopted to measure ESG
focus;• due diligence carried out in respect of the
ESG-related attributes of the fund’s assets;• engagement policies;• sources and processing of ESG data.18• stewardship approach,• sustainability metrics.16

Periodic productdisclosures• how and to what extent the underlying investments qualify
as environmentally sustainable for the purposes of theTaxonomy & the proportion of environmentally sustainable
investments.3
SFDR Article 8 (funds promoting environmental/social
characteristics):• the extent to which the fund met the environmental or social
characteristics;• the top investments of the fund;• the proportion of sustainability-related investments;• actions that have been taken to meet the environmental orsocial characteristics during the reference period.20
SFDR Art 9 (funds with a sustainable investment objective):• the extent to which the sustainable investment objective of
the fund was met;

Pre-contractual and ongoing periodic
disclosures on responsible or sustainable
investment funds should be easily available
to consumers and contain information thathelps them make investment decisions.17

An ESG fund should conduct periodic
assessment, at least annually, to assess how
the fund has attained its ESG focus.
The fund should disclose the following
information about its periodic assessment:• how the fund has attained its ESG focus
during the assessment period (including the
proportion of underlying investments that arecommensurate with the fund’s ESG focus;• the proportion of the investment universe thatwas eliminated or selected as a result of thefund’s ESG-related screening;• the proportion of sustainability-related investments;• a comparison of the performance of thefund’s ESG factors against the designatedreference benchmark;• actions that were taken to attain the sustainable investment
objective during the reference period.20• actions taken by the fund in attaining thefund’s ESG focus;• the top investments of the fund;• any other necessary information).18
38

The following is also recommended:• appropriate information provision anddisclosure should be promoted in aconsistent manner that conforms to theinvestment process• a firm should strive to enhance disclosureof its policies and initiatives by, for example,
explaining its basic ESG approach ESG
integration, engagement policies and specificexamples in its sustainability report or
responsible investment report

A product issuer must disclose if labour
standards or environmental, social or
ethical considerations are taken into
account in selecting, retaining and realising• the characteristics and investment process ofan investment; the extent to which these
ESG funds should be adequately disclosed instandards and considerations are taken into
the prospectus
account in selecting an investment, including• where a firm invests in a company considering methodology and any weighting system used;
ESG factors based on the investment process a description of the retention and realisation
described in the prospectus, efforts should
policies.22
be made to enhance disclosure, not only
through investment reports and monthly
reports, but also by using other documents
so that the firm can explain in detail ‘how
the corporate value of investees is currently
evaluated based on ESG factors’ and ‘what
engagement and voting rights are exercised
toward improving the corporate value ofinvestments based on ESG factors, as well as
future policies’.

Endnotes
1. Morningstar (2022) Morningstar Global Sustainable Fund Flows: Q2 2022 in Review.
2. ‘Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector’ (2019) Official Journal of theEuropean Union, L 317.
3. ‘Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU)2019/2088’ (2020) Official Journal of the European Union, L 198.
4. https://dcif.co.uk/giving-millennials-the-responsible-investments-they-want-2/
5. Please note that this summary is provided for illustrative purposes only. Please see relevant EU regulation for current requirements, such as REGULATION (EU) 2019/2088 Article 6, 8 and 9 as well as
relevant regulatory technical standards (RTS) relating to this regulation.
6. Financial Conduct Authority (2021) Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers (PS21/24).
7. Please note that this simplification aims to allow for a discussion of the practical impacts of sustainable investment fund requirements across the various jurisdictions considered in this report. Please
note that detailed consideration of how specific regulation and laws apply to AFMs vs. fund boards is out of scope of this report and fund board directors should seek legal and compliance advice if andwhere required.
8. Financial Conduct Authority (2021) Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers (PS21/24).
9. ‘Commission Delegated Directive (EU) 2021/1270 of 21 April 2021 amending Directive 2010/43/EU as regards the sustainability risks and sustainability factors to be taken into account for Undertakings
for Collective Investment in Transferable Securities (UCITS)’ (2021) Official Journal of the European Union, L 277.
10. The Irish Funds Industry Association (2011) Corporate Governance Code for Collective Investment Schemes and Management Companies.
11. Association of the Luxembourg Fund Industry (2022) ALFI Code of Conduct for Luxembourg Investment Funds.
12. Financial Conduct Authority, FCA COLL Collective Investment Schemes Sourcebook.
13. Securities & Futures Commission of Hong Kong (2019) SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products.
14. The Trust Act 2006 (Japan).
15. Corporations Act 2001 (Australia).
16. Financial Conduct Authority (2021) Sustainability Disclosure Requirements (SDR) and investment labels (DP21/4).
17. Financial Conduct Authority (2021) Authorised ESG & Sustainable Investment Funds: improving quality and clarity.
18. Securities & Futures Commission of Hong Kong (2021) Circular to management companies of SFC-authorized unit trusts and mutual funds - ESG funds.
19. Australian Securities and Investments Commission Act 2001.
20. ‘Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing Regulation (EU) 2019/2088 of the European Parliament and of the Council with regard to regulatory technicalstandards specifying the details of the content and presentation of the information in relation to the principle of ‘do no significant harm’, specifying the content, methodologies and presentationof information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social
characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports’ (2022) Official Journal of the European Union, L 196.
21. Financial Services Agency (2021) Report by the Expert Panel on Sustainable Finance: Building A Financial System that Supports a Sustainable Society.
22. Australian Securities & Investments Commission (2011) RG 65 Section 1013DA disclosure guidelines.
23. Financial Conduct Authority, FCA ESG Environmental, Social, and Governance Sourcebook.
24. Financial Services Agency (2022) Progress Report on Enhancing Asset Management Business 2022 (Summary).

39

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