As set out in Figure 1 above, the distinction between an ESG-Related Fund and a Non-ESG Fund is whether a fund considers ESG factors as part of its investment process.
In most cases, it should not be difficult for an IFM to determine whether its fund considers ESG factors as part of its investment process. However, there are some types of funds that may appear to consider ESG factors but that, in staff’s view, may not ac tually consider ESG factors as part of their investment process, including the following:
- Funds that invest in an ESG-related asset class but that do not consider ESG factors: Staff’s view is that funds that invest in an asset class that is related to an ESG-related segment of the economy solely because of the financial value of the asset class, but that do not consider ESG factors as part of their investment process, are Non-ESG Funds and should therefore not be marketed as ESG-Related Funds. An example would be a fund that invests in carbon credit futures solely due to the financial value of c arbon credit futures, not due to ESG-related considerations.
- Funds that are subject to an exclusionary screen that has no impact on the investment selection process: In staff’s view, a fund that is subject to an exclusionary screening strategy (including a firm-wide exclusionary screen) that has no impact on its investment selection process does not consider ESG factors as part of its investment process and is theref ore a Non-ESG Fund. For example, some IFMs have a firm-wide exclusionary screen that excludes all issuers involved in landmines and cluster munitions, wh ich would likely have no impact on the majority of funds, given the limited number of companies involved in these industries, particularly for funds that primarily invest in companies that operate in countries that are signatories to bans on landmines and cluster munitions. Such funds would be Non-ESG Funds, unless they use other ESG strategies as part of their investment process.
- Funds that are subject to an IFM’s general proxy voting or engagement approach that addresses ESG matters: Some funds are managed by IFMs that have general proxy voting policies and procedures that are applicable to all or most of the IFM’s funds, which address how the funds generally vote proxies on various issues, including ESG issues, but the funds do not use ESG-focused proxy voting as a principal investment strategy. Similarly, some funds are managed by IFMs that have a general engagement approach that is applicable to all or most of the IFM’s funds, which covers a range of issues, including ESG issues, but the funds do not use ESG-focused engagement as a principal investment strategy. In both cases, the consideration of ESG factors usually plays a limi ted role, if any, in the investment process.
Where a fund that does not have ESG-related investment objectives is managed by an IFM that has general proxy voting policies and procedures that address ESG matters among other matters or has a general engagement approach that addresses ESG matters among other matters, but the fund does not use any other ESG strategies as part of its investment process, staff’s view is that the fund is not an ESG Strategy Fund.
Depending on whether the ESG factors addressed in the proxy voting policies and procedures or contemplated in the engagement approach have any impact on the proxy voting or engagement approach of the fund, this type of fund may be either a Non-ESG Fund or ESG Limited Consideration Fund.