Oversight: Consultation Conclusions on ESG Requirements for Funds

On 20 August 2021, the Securities and Futures Commission of Hong Kong (SFC) published its Consultation Conclusions on the Management and Disclosure of Climate-related Risks by Fund Managers (Consultation Conclusions). The SFC had issued its Consultation Paper on the Management and Disclosure of Climate-related Risks by Fund Managers (Consultation Paper) almost a year earlier in October 2020. In the Consultation Paper, the SFC proposed to amend the Fund Manager Code of Conduct (FMCC), which is the main set of regulation applicable to Hong Kong-based fund managers, to introduce requirements related to climate-related risks in investment and risk management processes as well as to require certain appropriate disclosures. The Consultation Conclusions set out the approach the SFC will adopt and contains a finalised version of the revised FMCC. To provide practical guidance, at the same time, the SFC issued a new circular (Circular) which sets out baseline requirements and enhanced standards for larger fund managers in respect of climate-related risks, a finalised version of such requirements also being appended to the Consultation Conclusions.

The Consultation Conclusions are intended to develop standards and practice guidance for Hong Kong fund managers with regard to climate-related risks and to formulate a regulatory response to climate change. The SFC first broached the topic of environmental, social and governance (ESG) issues in September 2018 when it published its Strategic Framework for Green Finance (Framework). The Framework identified two key areas of interest: (i) listed companies’ disclosure of environmental information and climate-related risks and (ii) asset managers’ integration of ESG factors into their investment process, enabling investors generally to make informed investment decisions.

The Framework was followed by a circular in March 2019 which heralded the Survey on Integrating Environmental, Social and Governance Factors and Climate Risks in Asset Management (ESG Survey). The results of the ESG Survey were published in December 2019. Prior to this the SFC published, on 11 April 2019, its Circular to management companies of SFC-authorised unit trusts and mutual funds – Green or ESG funds (ESG Fund Circular). The SFC also established a Climate Change Technical Expert Group (TEG) in March 2020 and conducted soft consultations with industry associations on the key proposals for the related ESG consultations.

This Oversight provides an overview of the finalised requirements in the Consultation Conclusions. It first briefly discusses the existing guidance from the SFC and market participants on ESG regulation in the form of the ESG Fund Circular. It then turns to discuss the amendments to the FMCC and the accompanying requirements which are included in the Circular together with the practical implications of the changes.