The Hong Kong Securities and Futures Commission (SFC) issued its Strategic Framework for Green Finance (the Framework) on 21 September 2018, aiming to develop green finance in Hong Kong, and considering that Hong Kong is well positioned to complement Mainland China’s green development ambitions and to connect green finance flows between Mainland and the rest of the world.
Pursuant to the Framework, the SFC has the following action agenda, in summary:
- Enhance listed companies’ environmental and climate-related disclosures;
- Conduct a survey on integrating environmental, social and governance (ESG) factors, in particular environmental, in investment and risk analysis process;
- Facilitate the development of a wide range of green-related investments and financial products;
- Support investor awareness, education and capacity building in green finance and investment-related matters;
- Promote Hong Kong as an international green finance center.
With respect to the fund management industry in particular, subsequent to the issue of the Framework, on 11 April 2019[1] the SFC issued its “Circular to management companies of SFC-authorised unit trusts and mutual funds – Green or ESG funds” (the Circular). The purpose of the Circular is to enhance disclosure comparability between similar types of SFC-authorised green or ESG funds, and their transparency and visibility in order to facilitate investors making informed investment decisions.
The SFC also conducted an industry-wide survey (the ESG Survey) from March to September 2019, intended to understand how and to what extent licensed asset management firms and leading institutional asset owners consider ESG in investment decisions and risk management, particularly those relating to climate change. The SFC issued the key findings of the ESG Survey in December 2019.
Separately, last year a public consultation was conducted by the Hong Kong Stock Exchange (HKEX) and in December 2019 the consultation conclusions was issued on the review to the ESG Reporting Guide and Related Listing Rules for companies listed on HKEX. This introduced enhanced requirements on the reporting and disclosure by listed companies on ESG, in particular on board governance, requiring mandatory disclosure of board engagement on a corporation’s consideration and reporting of ESG issues in its business activities, including materiality and quantitative assessment, risk management and strategy. On climate, there is now a new requirement for disclosure on the policies and measures to identify and mitigate climate-related issues which have impacted or may significantly impact the listed issuer, and which reflects the Recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD)[2]. The disclosure obligation on all social issues have been upgraded from recommended or voluntary disclosures to mandatory “comply or explain” disclosures. The new requirements apply for financial years commencing on or after July 2020, and are expected to enhance the availability and quality of ESG data on HKEX-listed companies.
In this synopsis, we focus specifically on green or ESG investing of Hong Kong licensed investment managers, including a reflection on the results of the SFC ESG Survey, and also provide a detailed overview on the current range of SFC authorised funds green of ESG funds available for public offer, with reference to the SFC requirements on green or ESG funds under the Circular, from the commonly adopted ESG or green principles or criteria, to the range of investment strategies (thematic, screening, ESG integration and active ownership) being adopted.
The SFC’s current regulatory approach has significantly enhanced product disclosures, while not being overly prescriptive, narrow or final in what may be accepted as green or ESG investments. This gives room for flexibility in the growing field, as the approaches and principles of ESG and green investing are still evolving globally, with hundreds of existing as well as growing numbers of ESG or green investing framework, policies, principles, standards and ratings, besides proprietary approaches.
Undeniably green finance is becoming more and more prominent in the financial and investment industry. The SFC is expected to issue more regulatory policies or guidance on green or ESG investment products or approaches, which will be key to further develop and encourage considered and sustainable development of the field. The investment industry, including all asset managers and asset owners being institutional investors or agents of the investing public, has an important and necessary role to lead broader impact and further engagement to meet goals in line with green or ESG principles.
We hope this synopsis will be beneficial to fund managers in considering their green or ESG investment strategies, and also their product development plans, which may contribute to the further development of green or ESG investing and related fund products in Hong Kong.
For further information or discussion regarding the SFC requirements on green or ESG funds, SFC authorisation of investment funds, or related legal or regulatory considerations, please contact Vivien Teu, Managing Partner (Email: vivien.teu@vteu.co), Christina Suen, Counsel (Email: christina.suen@vteu.co) or any lawyer who is your usual contact at our firm.
[1] Please refer to our update and publication in April 2019 on the issue of the Circular: https://www.vteu.co/2019/04/14/green-or-esg-funds-hong-kong-regulator-issues-guidelines/
[2] The TCFD Recommendations were issued in June 2017 under an initiative of the Financial Stability Board, to develop climate-related financial disclosures that would provide the information needed by investors, lenders and insurance underwriters to appropriately assess and price climate-related risks and opportunities.
