HK SFC Proposes New Requirements for Fund Managers on Climate Risk

Proposed requirements for fund managers cover four governance, investment management, risk management and disclosure.

Hong Kong’s Securities and Futures Commission (SFC) has launched a consultation on proposed requirements for fund managers to take climate-related risks into consideration in their investment and risk management processes.

The SFC has engaged with the asset management industry to develop expected standards and industry practices for integrating climate-related risks into fund management processes as part of its strategic framework to develop Hong Kong’s green finance sector, published in September 2018.

The results of this engagement, published in December 2019, suggested that most asset managers generally considered ESG factors, including the risks arising from climate change, but did not take a consistent approach to disclosing this information and integrating climate-related risks into their investment decisions.

The SFC also found that only a limited number of asset managers had processes in place to manage the financial impact of climate-related
risks, which may not meet asset owners’ expectations and are not on par with international developments.

The SFC proposes to amend the FMCC (Fund Manager Code of Conduct) to require fund managers to take climate-related risks into consideration in their investment and risk management processes, and to make appropriate disclosures to meet a growing demand from investors for climate risk information and to combat greenwashing.

Greenwashing is the tendency for some asset managers to market themselves as “green” or “sustainable” without fully integrate these factors into the investment process.

The SFC also proposes to issue a circular setting out baseline requirements, enhanced standards, and more detailed disclosures for larger fund managers, i.e. those with AUM of HKD 4 billion or above. “These measures can improve the comparability of information across different fund managers to help investors make more informed decisions,” the regulator said.

The proposed requirements would apply to fund managers which manage collective investment schemes (CIS), but initially would not be mandatory for fund managers which manage discretionary accounts in the form of an investment mandate or a pre-defined model portfolio.

Global fund managers may make reference to groupwide policies and disclosures to satisfy the SFC’s requirements, provided that they are subject to similar or higher standards and they explain how the group-wide policies and practices are being adopted locally.

The consultation accounts for physical risks stemming from the direct impact of extreme weather events and long-term shifts in climate patterns, transition risks associated with the move to a low-carbon economy, and liability risks that may be triggered by the responsibility to compensate financial losses related to physical or transition risks.

The SFC makes reference to the TCFD (Task Force on Climate-related Financial Disclosures) Recommendations in the proposed requirements and standards.

The consultation, available here, is open for comment until 15 January 2021.

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