Earlier this month, a joint statement was issued in relation to the establishment of the Green and Sustainable Finance Cross-Agency Steering Group (the Steering Group). This follows a number of recent announcements aimed at supporting the development of sustainable finance in Hong Kong and highlights that tackling climate change remains a top priority for the financial sector. In this blog, we round up some of the recent regulatory activity relating to sustainable finance as well as some related initiatives in the pipeline.
The Steering Group
The Steering Group’s members comprise of the Securities and Futures Commission (SFC), the Hong Kong Monetary Authority (HKMA), the Hong Kong Exchanges and Clearing Limited, the Insurance Authority, the Mandatory Provident Fund Schemes Authority, the Environment Bureau and the Financial Services and the Treasury Bureau.
The aims of the Steering Group are to co-ordinate the management of climate and environmental risks within the financial sector, accelerate the growth of green and sustainable finance in Hong Kong and support the government’s climate strategies. It plans to do so through:
- examining policy and regulatory issues in green and sustainable finance, particularly those which may have a cross-sectoral impact;
- facilitating policy direction and coordination to ensure Hong Kong has a cohesive and comprehensive green and sustainable finance strategy;
- addressing technical cross-sectoral issues by e.g. forming technical working groups;
- tracking international and regional trends, issues and developments in green and sustainable finance and considering their applicability to Hong Kong; and
- identifying areas where Hong Kong can promote its strengths and thought leadership on green and sustainable finance regionally and globally.
Two work streams has been set up by the Steering Group which will consider cross-sectoral regulatory issues and coordinate cross-agency market development efforts.
Other notable recent developments
(i) Enhanced ESG reporting requirements for listed issuers
In December 2019, the Hong Kong Stock Exchange issued its consultation conclusions on proposals to enhance the environmental, social and governance (ESG) Reporting Guide and related Listing Rules. The consultation conclusions introduced enhanced reporting requirements for listed issuers and will apply to financial years commencing on or after 1 July 2020.
While certain ESG disclosures will become mandatory, some will be required on a ‘comply or explain’ basis meaning that listed issuers will be required to provide explanations for any deviations from requirements. In addition, the Hong Kong Stock Exchange has also shortened the deadline for the publication of ESG reports to five months after a financial year end.
(ii) SFC’s survey on ESG, climate change and asset management
In December 2019, the SFC announced the results of its industry-wide survey on ESG, climate change and asset management, being one of the various initiatives set out in its Strategic Framework for Green Finance published in September 2018.
The survey considered how and to what extent asset managers and institutional asset owners consider ESG risks in their investment and risk analysis processes. The survey (amongst other things) showed that despite 68% of firms that responded to the survey consider ESG factors as a source of financial risk, only 35% consistently integrated ESG factors into their investment and risk management processes.
To encourage wider adoption and consistent practices across the market, the SFC indicated that it will:
- set expectations on governance and oversight, investment management, risk management and disclosure for asset management firms with a focus on environmental risks, and climate change;
- provide guidance on ESG best practices for asset managers; and
- establish an industry group focused on environmental and climate risks, as well as sustainable finance.
Whilst no concrete timeframe has been provided for the introduction of the above initiatives, we are expecting these to be introduced in the near term.
(iii) HKMA’s key measures on sustainable banking and green finance
The HKMA announced in May 2019 three sets of measures to support and promote green finance in Hong Kong. These measures cover:
- Green and sustainable banking: a three-phased approach has been adopted to promote green and sustainable banking in Hong Kong;
- Responsible investment of the Exchange Fund: the HKMA, as the manager of the Exchange Fund, has adopted a principle that priority can be given to green and ESG investments if the long term return is comparable to other investments on a risk-adjusted basis.
- Establishment of the Centre for Green Finance: the Centre for Green Finance will serve as a platform for technical support and experience sharing for green development within the banking and financial industry.
Significant progress has already been made by the HKMA in relation to the first measure above, particularly around the development of the common assessment framework, the final version of which was released by the HKMA yesterday. To read more on this, please see our separate blog post here.