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1) Fund Managers Feel Heat in SEC Crackdown on Overblown ESG Labels

Bloomberg  |  9/3/2021

Because… We hope the regulatory scrutiny may make fund managers more prudent in their ESG endeavor. According to Eco-Business, out of 253 funds that switched to an ESG focus in 2020 in the U.S., 87% rebranded by adding words such as “sustainable” or “ESG” or “green” or “climate” to their names. None changed their stock or bond holdings at that point. The lack of universal standards is a cause for concern. ESG practices, metrics, and priorities are all different at different firms. Some asset managers rely on internal staff for ESG research, while others use third-party ratings to evaluate ESG attributes. There is no consistency and comparability in the industry in terms of ESG definitions and assessment. Some funds use negative screening to exclude companies in certain sectors, whereas other funds use positive screening to include companies with a positive ESG impact. Some funds focus on one aspect, such as clean energy, while others have broad coverage. Therefore, investors have to dig deeper to find out what is really behind the ESG label, as fund managers may incorporate different criteria even with the same screening method.

2) BlackRock’s China Unit Raises $1 Bln in Maiden Mutual Fund

Reuters  |  9/8/2021

Because… As the first foreign asset manager to operate a wholly-owned business in the Chinese mutual fund industry, BlackRock’s fundraising success may become the envy of its rivals. However, we advise fund managers to exercise extreme caution when planning for a move into the Chinese market, which seems too appealing to be passed up. In China, which is still regarded as an emerging market despite its rapid economic growth, constantly changing policies and regulations are not uncommon. Its regulators have recently tightened their oversight of large tech companies. The ride-hailing giant Didi was ordered to remove its app from app stores shortly after going public on the NYSE due to data privacy concerns. TikTok’s parent company, ByteDance, scrapped its plans for an IPO after meeting with regulators earlier in the year. The recent crackdown also hit private education companies. Fund firms should keep themselves abreast of the latest regulatory developments and draw lessons from foreign ventures in other industries. Political risks, lack of transparency, and the potential for the government to impose tighter restrictions after attracting foreign capital are some issues that could have a negative impact in the long run.

3) Morningstar Acquires Moorgate Benchmarks to Fuel Indexing Growth and Disruption

Morningstar  |  9/8/2021

Because… Morningstar’s acquisition of Moorgate Benchmarks suggests its ambition to expand its index business. Morningstar has more than $80 billion of assets benchmarked against its indices, but it is a relatively small player compared to other well-known index providers, such as S&P, MSCI, and Russell. Based in London and Frankfurt, Moorgate’s presence in Europe would enable Morningstar to reach out to more European clients. Moorgate’s expertise in index design and strategy, such as in thematic indices and liquidity-focused indices, could also help Morningstar deliver customized index solutions. According to Financial Times (FT), global passive assets exceeded $15 trillion last year, with ETFs accounting for slightly more than half of the total. FT also pointed out that in addition to publicly reported index funds, many institutional investors adopt the passive approach as well. It is estimated that over $25 trillion are invested in index-tracking strategies, making the index business more attractive than ever before.