Asia-Pacific

HK’s Climate-first Strategy to Balance Global and Chinese Standards

Hong Kong will incorporate ISSB standards into its climate disclosures framework, while accounting for mainland regulations. 

The Securities and Futures Commission (SFC) is working actively toward the integration of global sustainability disclosure standards into Hong Kong’s listing requirements, but says it must also accommodate Chinese standards and regulations.

SFC Chairman Tim Lui outlined the role of the International Sustainability Standards Board’s proposed standards in Hong Kong’s evolving regulatory framework for sustainable finance at Regulation Asia’s ESG Risk & Investment Asia 2022 conference.

Credible mechanism

Lui indicated there was some eagerness for the SFC to see the finalised ISSB standards, so that they can be assessed for formal adoption in Hong Kong. The SFC has previously announced its support and the potential adoption of the ISSB standards for sustainability reporting in Hong Kong.

Lui described the ISSB as “the most credible mechanism for setting a comprehensive global baseline for climate disclosure standards” – noting that it is based on best practices, “proven content”, and developed using the most widely used frameworks and standards.

“The growth of green finance depends on the availability of accurate, relevant and reliable information from both financial and non-financial companies on climate related risks and opportunities,” he said. “Consistency and comparability of such information are essential to inform pricing. They can also channel financing towards sustainable products and activities.”

Lui said the ultimate aim is for there to be an aligned global approach, to “replace the confusing myriad of existing initiatives and requirements.”

Climate-first approach

The SFC is taking a “climate-first approach”, he said, pointing to its work with Hong Kong Exchanges and Clearing (HKEX) to develop a regulatory framework for listed company climate-related disclosures that will be “based on the ISSB standards”.

The SFC and HKEX had solicited feedback on the ISSB exposure drafts from Hong Kong listed companies, investors, associations, and professional bodies – seeking to better understand the expectations of investors, and to gauge the potential challenges listed companies will face and their state of readiness for adoption of the ISSB standards, Lui said.

Given that many Hong Kong listed companies are mainland-based, a key consideration for the SFC will be to ensure a “proportionate approach” that takes into account Mainland standards and regulations. To ensure it can address any potential issues with implementing the ISSB standards, the SFC engages in regular dialogue with the China Securities Regulatory Commission (CSRC).

Incorporating the ISSB standard into the local reporting requirements will ensure more relevant data is available for investors, while also serving as an example for emerging markets. “Our successful implementation will have global significance,” Lui said.

Investors to benefit

As part of these efforts, the SFC has been cooperating closely with the International Organization of Securities Commissions (IOSCO), chaired by SFC CEO Ashley Alder. IOSCO is in turn in close dialogue with the ISSB on the path forward.

“Although there are challenges ahead, if the final version of the ISSB standards meets IOSCO’s expectations, then IOSCO could endorse the standards for its more than 130 members, sending a strong signal that many jurisdictions, both developed and emerging economies, should examine how they might adopt the standards in their own disclosure frameworks,” said Lui.

“A baseline standard will help to address concerns about asset mispricing, capital mis-allocation and greenwashing risks that arise from the lack of comparable and reliable real economy data. With corporate disclosures in sync, investors stand to benefit.”

SFC Deputy CEO Julia Leung is also closely involved in IOSCO’s sustainable finance initiatives, as co-vice chair of its sustainability task force, and co-chair of the workstream tasked with assessing the ISSB standards on behalf of the IOSCO board.

Common taxonomy

Lui also spoke about efforts underway in Hong Kong to develop a green classification framework for the local market. This work has been taken up by Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group, which is co-chaired by the SFC and Hong Kong Monetary Authority (HKMA).

The steering group is currently working towards proposing the structure and core elements of the framework for consultation. Part of this work is to figure out ways to adopt the China-EU CGT (Common Ground Taxonomy) in Hong Kong, Lui said.

The CGT, first published in November 2021 and updated in June 2022, is an analytical tool for identifying what activities would be considered ‘green’ under both China’s and the EU frameworks – initially focusing on climate change mitigation.

“The CGT is a milestone, reflecting close cooperation between the EU and China to analyse their green taxonomies and identify commonalities,” Lui said, adding that the adoption of the CGT in Hong Kong will ensure consistency between green activities and complement existing regulatory and supervisory measures.

Carbon markets

The SFC also leads the Steering Group’s carbon markets workstream, together with HKEX. in March this year, a preliminary assessment of common market opportunities for Hong Kong was published, following which work began to develop a roadmap for launching a trading venue for mainland and overseas carbon credits.

Lui said Hong Kong – as an international finance and risk management centre – can play a significant role to help expand mainland China’s carbon markets, including by becoming a regional hub for the certification of carbon credits.

“Carbon trading can be a key tool for mobilising finance for the green transition. There is significant potential for expansion of mainland China’s carbon markets,” Lui said.

Currently, the SFC is focused on identifying an appropriate framework to regulate any proposed business models, and will also continue to participate in IOSCO’s carbon market work, supporting international developments and considering their relevance to Hong Kong.

Anti-greenwashing

On the SFC’s approach to deterring greenwashing risks, Lui discussed requirements for ESG funds, pointing to enhanced disclosure requirements set out in June 2021 guidance.

The SFC was also one of the first in Asia Pacific to require fund managers to factor climate risk into their investment and risk management regimes, and to make proper disclosures on climate risks – through amendments to the fund manager code of conduct in August 2021.

Fund managers are required to comply with baseline requirements covering governance, investment management, risk management and disclosure. Larger fund managers have to meet high standards. The first phase of the new rules came into effect in August, and the second will come into effect in November this year.

“This has established Hong Kong’s leadership as an ESG asset management hub,” Lui said. Going forward, the SFC will monitor implementation, step up supervision, provide further clarification and guidance when needed, and “keep a close eye” on the data underpinning asset manager disclosures, he said.

 

 

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