Fund managers have 12-15 months to comply with the requirements, which cover governance, investment management, risk management and disclosure.
Hong Kong’s Securities and Futures Commission (SFC) has amended the Fund Manager Code of Conduct (FMCC) to require fund managers managing collective investment schemes (CIS) to take climate-related risks into consideration in their investment and risk management processes and make appropriate disclosures.
The amendments follow an October 2020 consultation which proposed new requirements for fund managers to disclose and annually review the processes they use to take climate risks into consideration in their investment decisions and risk management processes.
In its consultation conclusions, the SFC said it received 52 written submissions which contained generally positive feedback on the proposed requirements, including the proposal to make reference to the Task Force on Climate-related Financial Disclosures (TCFD) recommendations in developing the requirements and to implement them using a two-tier approach.
Under the two-tier approach, baseline requirements will be imposed on all fund managers, while enhanced standards will be imposed for “large fund managers”. The consultation proposed that large fund managers be defined as those having assets under management (AUM) equal to or exceeding HKD 4 billion. In the final rules, this has been amended to HKD 8 billion.
The new requirements for fund managers cover four key elements, namely governance, investment management, risk management and disclosure.
Governance – includes requirements on board oversight, the management’s roles and responsibilities, monitoring of progress to manage climate-related risks, human and technical resourcing, goal-setting, and action plan development.
Investment management – include requirements on identifying climate-related risks, factoring these risks into the investment management process, incorporating climate-related data into the research and analysis process, and assessing the impact of these risks on the performance of underlying investments
Risk management – includes requirements to identify, assess, manage and monitor the relevant and material climate-related risks for each investment strategy and fund being managed, as well as the application of appropriate tools and metrics to assess and quantify climate-related risks
Large fund managers will have to assess the relevance and utility of scenario analysis in evaluating the resilience of investment strategies to climate-related risks under different pathways, and implement scenario analysis within a “reasonable” timeframe. They will also have to identify portfolio carbon footprints on their funds’ underlying investments and on the fund level.
Disclosure – include requirements to describe the governance structure and the roles of the board and management, disclose the steps taken to incorporate climate-related risks into the investment management process, and describe the processes for identifying, assessing, managing and monitoring climate-related risks, including the key tools and metrics used.
Large fund managers will have to additionally describe their engagement policy at the entity level, how material climate-related risks are managed in practice, and the portfolio carbon footprints associated with their funds’ underlying investments at the fund level, including the calculation methodology, underlying assumptions and limitations.
Group disclosures may be adopted if it is determined that group-wide policies and procedures are applied consistently in Hong Kong operations and they meet or exceed the SFC’s requirements.
The SFC said it will give large fund managers 12 months until 20 August 2022 to comply with the baseline requirements and 15 months until 20 November 2022 to comply with the enhanced standards.
A 15-month transition period until 20 November 2022 will be provided for other fund managers to comply with the baseline requirements.
The SFC has issued a circular setting out the expected standards here and a set of FAQs here.