Asia-Pacific

HK SFC Targets Adoption of Global ESG Standards

SFC currently evaluating ESG disclosures “much more closely” and looking for more ways to reduce opportunities for greenwashing.

Hong Kong Securities and Futures Commission (SFC) Chairman Tim Lui says the regulator is scrutinising ESG disclosures by listed companies and looking for more ways to prevent greenwashing, including through the adoption of global standards currently under development.

Delivering the opening keynote at Regulation Asia’s ESG Technology and Data Asia 2021 conference on 25 November, Lui highlighted several of the SFC’s initiatives to ensure investors in Hong Kong’s market have access to decision-useful ESG information.

The wide range of ESG standards and ratings in the market can be inconsistent, and confusing for companies and investors, he said, adding that a challenge for securities regulators is that they do not yet have an explicit regulatory remit over such services.

Steps taken

Still, Lui said there are steps regulators can take to make ESG information more comparable and consistent, and ultimately, decision-useful. This has been a high priority on SFC’s regulatory agenda, given the city’s status as an international financial centre, and the impact its efforts can have on the rest of the world.

Lui discussed the SFC’s work with the Hong Kong government and other local regulators to coordinate efforts to develop a greener, more sustainable financial system, including its role in the establishment of Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group in May 2020.

A key priority for the SFC has been listed company and investment product disclosures, which was a focus of the Strategic Framework for Green Finance that was published in September 2018. Under the framework, the SFC sought to understand how asset managers were considering ESG factors, finding that while most saw these factors as a source of financial risk, few were actually integrating them into their investment and risk management processes in a consistent way.

This work paved the way for the introduction of new requirements for fund managers to take climate-related risks into account in their investment and risk management processes and make appropriate disclosures to investors – which will be rolled out in phases starting in August next year.

Sending a message

“Providing clear guidance for asset managers sends an important message,” Lui said. “Asset managers are expected to do more to make it clear to investors how they take ESG factors into account. Fund managers will then expect the companies they invest in to explain clearly how they manage the climate-related risks of their operations.”

He noted that listed companies in Hong Kong were first encouraged to disclose ESG matters on a voluntary basis nearly ten years ago, and that mandatory ESG disclosure requirements were introduced by the Hong Kong Exchanges and Clearing (HKEX), including a requirement for a board statement setting out its consideration of ESG issues.

According to Lui, the SFC is currently evaluating ESG disclosures “much more closely”, as well as looking for more ways to reduce opportunities for greenwashing.

This includes participation in the development of a comprehensive global baseline of sustainability disclosure standards, an initiative led by the newly-formed ISSB International Sustainability Standards Board (ISSB) under the IFRS Foundation.

Best available information

Lui said the SFC is exploring the potential ways the ISSB standards, once developed, can be adopted in Hong Kong, including by incorporating them into the city’s audit framework and listing rules.

“These standards will be a key part of Hong Kong sustainable finance strategy,” he said. “This will set up clear regulatory expectations for the financial sector. It will also help make corporate disclosures more transparent, reliable, and comparable.”

The SFC also plans to adopt the IOSCO recommendations on regulating ESG data providers and ratings services, which Lui said will help to deal with potential conflicts of interest, ensure transparency, and provide clear definitions for users of ESG ratings and information – thereby reducing gaps and inconsistencies in reporting.

“We want investors to have the best available information about the impact of the listed companies and funds they invest in, so they can make more informed decisions,” he said.

“This is just a start. A lot more needs to be done to make sure that companies and fund managers’ green claims are substantiated by clear and transparent ESG data. And a lot more needs to be done to harmonise standards and frameworks, and to channel investments to where they are needed to transition to a more sustainable economy.”

“We look forward to working with all our partners at home and to achieve these goals.”

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