A $9 Billion Mizuho Fund Sparks Review of Japan ESG Labels

(Bloomberg) -- A popular ESG fund in Japan managed by Morgan Stanley and sold by Mizuho Financial is triggering an industry-wide review by regulators who are looking into new rules for mutual funds to protect investors from possible “greenwashing.”

Japan’s Financial Services Agency may start discussions with asset management firms and fund distributors by June about whether there should be rules for mutual fund labels, according to FSA officials who spoke on condition they not be identified. One of the goals is to prevent firms from exaggerating or misrepresenting the environmental, social or governance benefits of their funds to attract investors, the people said.

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

According to the FSA, the fund initially offered investors insufficient information about its environmental and social impact, the officials said. The mutual fund is one of the largest of its kind in Asia, and quickly caught on with Japanese investors after launching in July.

After discussions with the FSA, Asset Management One in January began including more ESG details in a monthly update, the officials said. The report now explains ESG-related efforts being made by the 10 biggest holdings in the fund, including Amazon.com Inc., Uber Technologies Inc. and Mastercard Inc. The FSA officials said Mizuho didn’t break any rules with its disclosure.

Asset Management One has improved disclosure for the fund with a revised prospectus and enhanced monthly reports, a spokesperson said in an emailed statement. A representative for Morgan Stanley said they were not in a position to comment on the naming of the fund.

Global regulators are introducing more rules to crack down on so-called greenwashing as questions linger over self-labeled “ESG funds.” Europe’s markets regulator is calling for policing of ESG ratings to prevent false labels from misleading investors, while the U.S. is reviewing its rules for fund names.

Japan has latched on to the ESG fund craze more than any other country in Asia, accounting for 80% of ESG exchange traded fund assets in the region, according to Bloomberg Intelligence estimates. Japanese ESG mutual funds also dominate the list of the largest funds in the region, according to data compiled by Bloomberg:

Still, the absence of clear fund descriptions raises concerns that some companies might take advantage of the boom by labeling funds ESG even if they don’t have a strong link to environmental or social causes, the officials said. That lack of clarity could ultimately undermine Japan’s efforts to persuade households to invest more of their almost 2 quadrillion yen of financial assets, and potentially impair the growth of ESG investments.

The number of Japanese mutual funds with one or more ESG factors in its name has increased by 26% since June to about 120, according to estimates from Shoko Shinoda, a Rakuten Securities Inc. mutual funds analyst. With ESG becoming a buzzword, Nomura Holdings Inc.’s asset management arm late last month renamed its more-than-a-decade-old Nomura Global SRI Index Fund to the Nomura Global ESG Equity Index Fund.

The FSA has been studying the U.S. regulation, generally known as the “names rule,” the officials said. Adopted in 2001 for investor protection, the regulation stipulates that if a fund name signals a particular type of investment, it should put at least 80% of its holdings in that asset class. Japan has no such requirements in place.

The SEC last year asked funds, investors and other market participants for comments on the names rule. It raised the issue of whether the rule should apply to terms that reflect “certain qualitative characteristics” of an investment, such as “ESG” and “sustainable.”

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