JFSA Updates Address Crypto-Asset and ESG Investment Guidelines
The Financial Services Agency of Japan (JFSA) is seeking comments, until January 27, 2023, on the proposed partial amendments to the comprehensive supervisory guidelines for financial instrument business operators regarding environmental, social and governance (ESG) investment trusts, finalized the Code of Conduct for ESG evaluators and data providers, established a working group to facilitate efforts toward the decarbonization of economy, and published a guideline for supervision of crypto-asset exchange service providers. The guideline on crypto-assets explains the scope of covered crypto-assets and the related applicability criteria, in addition to the supervisory approach and measures.
JFSA recently proposed changes to the guidelines for ESG investment management business. JFSA conducted a survey of 225 publicly offered investment trusts managed by 37 asset managers in Japan and identified seven expectations for asset management companies managing ESG investment trusts. Based on these seven expectations, JFSA is proposing revisions to the "comprehensive supervisory guidelines for financial instruments business operators to define specific points for supervisors to check disclosure of information on publicly offered investment trusts and organizational resources and due diligence of asset managers regarding ESG." The proposal document states that, among others, where an ESG investment trust has a target or guideline ratio of investments (on a market value basis) that are selected by ESG as a main factor out of its net asset value, or where it has other target or guideline indicators for evaluation of key ESG factors in the investment strategy, supervisors will check whether the ratio or other figures is disclosed in the "Objective and Characteristics of the Fund" section of the delivery prospectus. When ESG ratings provided by a third party are used in the investment process of publicly offered investment trusts, or when data provided by a third party is used in own ESG assessment by an investment trust management company, supervisors will check whether the investment management trust company conducts appropriate due diligence, which could include an understanding of its organizational resources, what is being rated or assessed by its product, how it is being rated or assessed, and limitations and purposes for which its product is being used.
Another related development involves the publication of the final Code of Conduct for ESG evaluators and data providers. This Code of Conduct is designed to be a voluntary code on a “comply or explain” basis, where JFSA calls for organizations to express their support for the Code via public announcement and the organizations supporting the Code will either comply with the principles and guidelines of the Code or explain the reasons why they do not comply with a particular principle or guideline. When implementing the principles or guidelines of the Code, it is important to provide easy-to-understand explanations so that readers can understand the status of compliance with each item of the principles and guidelines. Based on the received notifications of endorsement of the Code of Conduct from evaluation organizations, JFSA will publish the list of status of endorsement of the Code of Conduct by June 2023 and the status of endorsement regarding data provision by June 2024.
Keywords: Asia Pacific, Banking, Regtech, Climate Change Risk, Japan, Sustainable Finance, Code of Conduct, Securities, ESG, Data Providers, Low-Carbon Economy, Crypto-Assets, JFSA
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Michael Denton, PhD, PE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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