Hong Kong posts breakthrough for regional ESG development

15 Jul, 2020 12:43
source: Singularity Financial

Singularity Financial Hong Kong July 15, 2020 – Hong Kong needs a more coordinated policy environment and an ESG policy roadmap, to provide greater certainty and foster confidence for institutional investors, the FSDC (Financial Services Development Council) says.

Although the FSDC’s mandate is purely recommendatory, it’s composed of senior representatives from the asset management industry, insurance sector, corporates, and the financial services bureau of the government, all important stakeholders in the development of ESG in Hong Kong.

The report attracted little attention among the general public, coming in a week when Hong Kong was experiencing the third wave of the pandemic. But its recommendations when implemented, will have far-reaching consequences for the financial and corporate sectors.

According to the paper, Hong Kong has entered its growth phase as an ESG investment hub. It maps out the various ESG initiatives of various Hong Kong regulators, and highlights areas where the public and private sectors can be coordinated to further develop the ESG ecosystem.

In this regard, although Hong Kong regulators have been proactive in encouraging ESG investment and practices, the regulators have been working on a “silo” approach with little coordination among themselves.

In terms of disclosures, for example, the Hong Kong Exchange (HKEX) has recently updated its ESG reporting requirement to strengthen the boards’ oversight of ESG issues of the listed companies.

As for ESG incorporation, the Hong Kong Monetary Authority (HKMA) as an asset owner has required certain external managers of equities portfolios of the Exchange Fund to adhere to generally accepted international ESG standards.

In terms of ESG product development, the Securities and Futures Commission (SFC) issued guidance on enhanced disclosures for SFC-authorised green or ESG funds in April 2019.

Although it can be argued that all of these regulatory initiatives are moving along parallel paths, at present, no umbrella entity offers a coordinated or integrated approach for all these initiatives.

Among the recommendations, the paper says Hong Kong needs a more coordinated policy environment and an ESG policy roadmap, to provide greater certainty and foster confidence for institutional investors.

In particular, the paper suggests the Green and Sustainable Finance Cross-Agency Steering Group, set up in May to coordinate the management of climate and environmental risks for the financial sector, could be tasked with developing the ESG policy roadmap, which would help to avoid duplicated efforts among different regulators.

Such a roadmap would include a stock-take of existing policy initiatives of various Hong Kong regulators, while also mapping out action plans and opportunities for the city’s sustainable finance and investment market,  based on regulators’ work plans and followed by a progress tracking.

With regard to ESG disclosures already required of listed companies in Hong Kong, the paper says that while the volume of disclosures has increased, the quality remains deficient. As such, it recommends that regulators commence preparatory work on strengthening oversight of non-financial reporting.

Insurance firms should be encouraged by the Insurance Authority to explain their ESG risk considerations in their policies, and to provide their boards with information on climate-related risk exposures.

Further, the paper says smaller companies need to be provided greater support to carry out ESG reporting in the form of training subsidies, given the shortage of ESG talent available. This can be provided initially on a pilot basis for one year.

Finally, given the rapidly developing global ESG investment landscape, an information-sharing platform should be established to promote best practices, policy harmonisation and capacity-building.

The full report is available here.