Hong Kong’s financial regulatory authorities and its major securities exchange have long been engaged in efforts to require accurate and complete Hong Kong ESG disclosures by companies and investment managers, just as the EU and the US have been. Furthermore, they are also focusing on specific provisions for climate risk reduction.
HKMA sets expectations
In June 2020, the Hong Kong Monetary Authority (HKMA) set out supervisory expectations for governance, strategy, risk management and disclosure of “green and sustainable banking.” HKMA’s white paper detailing these expectations advised “authorized institutions” to develop a governance framework for climate resilience, along with including climate considerations when forming strategies, as well as including these considerations in organizational structures, policies, processes and resource availability. Also HKMA advised including climate risk considerations in risk management frameworks, and setting up a way to disclose climate-related information, to increase transparency.
SFC issues more guidance
About a year later, in June 2021, the Securities and Futures Commission (SFC) of Hong Kong, following on guidance it had issued to fund management companies in 2019, added more guidance on enhancing ESG disclosures. This guidance instructs funds to disclose what their ESG focus is, how their investment strategy follows ESG principles, including how assets are allocated and what benchmarks are being referenced, along with the risks of an ESG-compliant investment. The June 2021 guidance also included provisions on other necessary disclosures and periodic assessments of compliance with ESG principles. It took effect January 1, 2022.
Hong Kong’s regulators were not finished, however. The SFC and HKMA have teamed with the Stock Exchange of Hong Kong to form a Task Force on Climate-Related Financial Disclosures (TCFD). In addition, the SFC has set climate risk rules, effective from August and November 2022 and the HKMA issued its own set of climate risk guidelines with a compliance deadline of December 30, 2022.
The SFC’s rules generally apply to fund managers while HKMA regulation governs what corporations and financial firms do. As of August 20, 2022 large fund managers will be considering climate related risk in their investments and risk management, and disclosing what they find. The SFC amended its Fund Manager Code of Conduct to that effect, and gives all other fund managers until November 20, 2022 to comply as well. These climate related risk revisions by the SFC follow its previous guidance that applied to all ESG investments, including the four elements of investment management, risk management, governance and disclosure.
HKMA Guidance on Hong Kong ESG Disclosures
The HKMA’s guidance, issued for banks in December 2021 with its deadline one year later, sets out several steps that banks should undertake:
- Establish governance for climate risk management
- Incorporate climate risk in risk management frameworks
- Implement a strategic planning process
- Adopt scenario analysis, including stress testing
- Implementing controls that turn goals into policies and procedures
- Dedicate adequate resources to climate related risk and controls
- Monitor climate risk at portfolio and counterparty levels
- Implement mitigation measures
- Align climate disclosures with TCFD recommendations
The analysis by Hong Kong-based global law firm King & Wood Mallesons criticizes the HKMA guidelines as lacking information on how banks should meet their expectations for mitigating climate related risks. The firm’s analysis goes on to say that banks will struggle to implement the HKMA’s aims as a result.
The aforementioned TCFD is intended to be a way to coordinate Hong Kong’s financial regulators and its leading trading venue on ESG and climate related risk goals. The TCFD has been tasked with aligning climate-related disclosures in relevant sectors by 2025, as part of a sustainable finance strategy that had previously been announced by a cross-agency steering group. With TCFD bringing Hong Kong’s stock market and regulators together, it appears the country is aligned on standards for disclosing climate risk efforts and how they will be heralded in investment vehicles. Such alignment provides certainty for market participants when planning the ESG-related competencies they need to develop.