ESG Regulations in Hong Kong

Hong Kong Exchanges and Clearing Limited (“HKEX”) released an ESG Reporting Guide that, as of July 2020, contains certain mandatory disclosures and other “comply or explain” provisions for listed companies.

Hong Kong’s mandatory disclosures cover issues related to a corporation’s governance and reporting. They specifically address:

1. Governance Structure (including how the corporation and its board oversee, manage, and track ESG issues/goals);

2. Reporting Principles (including how the ESG report is compiled, how material issues are identified, and quantitative standards (e.g., for emissions or energy consumption) are calculated); and

3. Reporting Boundary (discussing the process used to identify which operations are included in the ESG report).

Hong Kong also has several “comply or explain” provisions (which require companies to report or explain why they are unable to do so), cover a dozen different environmental and social issues. These include a description of company policies concerning:

1. Emissions

2. Use of resources

3. Environment and natural resources

4. Climate change

5. Employment

6. Health and safety

7. Development and training

8. Labor standards

9. Supply chain management

10. Product responsibility

11. Anti-corruption

12. Community investment

With regard to climate issues, the HKEX has issued guidance to its companies on reporting consistent with the Task Force on Climate-Related Financial Disclosures (“TCFD”) recommendations. As of July 2020, HKEX’s Reporting Guide has been amended “to incorporate elements of the TCFD recommendations such as requiring board’s oversight of ESG matters, targets for certain environmental KPIs and disclosure of impact of significant climate-related issues.” And, in light of the ESG Steering Group’s intention to require TCFD-aligned climate reporting by 2025, the exchange has encouraged its listed companies to get familiar with the new International Sustainable Standards Board (“ISSB”) climate disclosure standards and “commence reporting with the TCFD recommendations the soonest.”

In April 2023, the HKEX announced that it plans to make current ‘comply or explain” climate-related provisions mandatory for all listed companies. This new regulation is undergoing a three-month consultation period, but is expected to be finalized by mid 2023 and include strategy, risk management, metrics and targets.

In Hong Kong, ESG Funds are required to make several specific disclosures pursuant to the Circular to Management Companies of SFC-Authorized Unit Trusts and Mutual Funds – ESG Funds (the “ESG Fund Circular”). First published by the SFC in 2019, and updated in January 2022, this circular applies to SFC-authorized funds that “incorporate ESG factors as their key investment focus and reflect such in the investment objective and/or strategy.”

The circular requires ESG funds to disclose, in their offering documents:

1. The ESG focus of the fund and the criteria used to measure that focus

2. The ESG investment strategy (including any exclusion policies)

3. The fund’s asset allocation (what proportion of securities are ESG focused)

4. Information regarding the fund’s use of any reference benchmarks

5. The risks or limitations associated with the fund’s ESG focus

6. Where investors can find additional information about the fund.

Beyond the offering documents, ESG Funds are required to disclose, as appropriate, information regarding how the ESG focus is measured and monitored, the due diligence conducted by the manager, the fund’s engagement and proxy voting policies, and the ESG data used by the fund. The ESG circular requires covered funds to conduct an assessment (at least annually) of how the fund has achieved its ESG focus. And it states that ESG funds should regularly monitor and evaluation their investments to ensure they continued to meet the funds’ articulated ESG focus.

The SFC has issued a Circular to Licensed Corporations Management and Disclosure of Climate-Related Risks by Fund Management. In doing so, the SFC has generally sought “to implement [TCFD] recommendations for Hong Kong’s fund management sector.”

Effective August 20, 2021, this circular requires managers of collective investment schemes (“CIS”) to consider climate risks and make climate disclosures as part of their investment. This circular specifically addresses: (1) governance, (2) investment management, (3) risk management, and (4) disclosure. Funds with more than HK $8 billion under management are subject to additional requirements.

Pursuant to the circular, all covered fund manages most address the following issues:

1. Governance (defining the board’s role in incorporating climate-related considerations)

2. Investment Management (identifying physical and transition climate-related risks, factoring them into the investment process, and assessing the impact of such risks on investment performance)

3. Risk Management (identifying and managing climate-related risks, including quantitative assessments)

4. Disclosure (making appropriate disclosures at least annually regarding the fund’s governance structure, the board’s climate risk oversight role, and the manager’s role in monitoring such risks)

In addition to the above requirements, large fund managers (funds with more than HK $8 billion) must also assess the relevance and utility of scenario analysis in evaluating the resilience of investment strategies to climate-related risks, and if relevant and useful, develop a plan to implement such an analysis. If climate-related risks are relevant and material to a large fund, its managers must also identify the carbon footprints associated with the funds’ investments and define the calculation methodology pursuant to a formula described in the circular. Large fund managers are also required to describe their engagement policy, or how they are evaluating ESG risks and implementing policies to mitigate these risks, at the entity level. As part of their engagement policy, large fund managers should provide the portfolio’s carbon footprint of GHG emissions (where data is available and can be reasonably estimated) and the proportion of investments that are assessed or covered by the fund’s engagement policy.

In addition to the above regulatory requirement, Hong Kong is continuing to explore other steps to promote sustainability.

For example, the ESG Steering Group is working on a local green classification system aligned with the EU-China Common Ground Taxonomy policy.

And, although Hong Kong has not yet established a carbon pricing scheme , the ESG Steering Group has acknowledged the need to build a Guangdong-Hong Kong-Macao Greater Bay Area (“GBA”) platform for emissions rights trading and financial services.

With regard to banking, the Hong Kong Monetary Authority (“HKMA”) launched a climate risk stress test (“CRST”) in January 2021 to “assess the potential impact of climate change on the Hong Kong banking sector, ”focusing on one physical risk scenario of worsening climate risks and two transition risk scenarios. To address these climate risks, participating banks have developed plans to strengthen their climate strategies and risk governance frameworks. It is reported that the HKMA will conduct a second CRST in 2023 with a more prescriptive approach.