On November 26, 2021, Hong Kong’s Mandatory Provident Fund Schemes Authority (MPFA) advanced the Special Administrative Region’s sustainable finance strategy with new Principles for Adopting Sustainable Investing in the Investment and Risk Management Processes of MPF Funds (the Principles). The Principles lay out a high-level ESG integration framework for trustees of Mandatory Provident Funds (MPF), the investment vehicles for the Hong Kong’s mandatory retirement protection scheme, across four key elements: governance, strategy, risk management and disclosure.

In this Blog Post, we provide a brief overview of the Principles and highlight each element, as well as important next steps for MPF trustees. We also provide guidance on how companies are already implementing ESG frameworks similar to the Principles.

Overview

The Principles generally apply the framework developed by the Task Force on Climate-related Financial Disclosures (TCFD) to ESG topics more broadly. TCFD is a leading international framework for the disclosure of climate-related financial information across governance, strategy, risk management and disclosure topics. The MPFA has explicitly referenced the TCFD in the Principles, noting that all references to ESG factors in the Principles also include climate-related risks.

Importantly, the release of the Principles follows similarly structured climate-related requirements for fund managers finalized by Hong Kong’s Securities and Futures Commissions in August, which also generally adhere to the TCFD framework. With two regulators already adopting this approach to sustainable investment and Hong Kong’s commitment to implement mandatory TCFD-aligned disclosures across relevant sectors by 2025, regulated entities in Hong Kong should consider their approach to climate-related risks and opportunities in advance of potential regulation.

Governance

According to the Principles, MPF trustees should have a governance framework to monitor management of ESG risks by investment managers. More specifically:

  • To be in line with their fiduciary duty, MPF trustees should be mindful of all material financial risks impacting the interest of MPF scheme members. ESG factors could be a source of financial risk with long-term financial impact on the value of MPF investment portfolios.
  • The board of directors of MPF trustees should have oversight of the integration of ESG factors into the investment and risk management processes and assign management with a clear role in reporting progress against goals set
Strategy

MPF trustees should also formulate an ESG integration strategy at the MPF scheme level. According to the Principles:

  • MPF trustees should consider incorporating ESG factors along with all other substantial financial factors that may contribute to achieving the long-term retirement objectives of MPF scheme members and document how ESG factors are treated.
Risk Management

In addition, MPF trustees should ensure that ESG factors are considered in the investment and risk management processes of MPF funds. According to the Principles:

  • MPF trustees should consider ESG factors with no prejudice for the objective of obtaining an appropriate risk-return profile on purely financial grounds.
Disclosure

MPF trustees should also disclose ESG integration strategies and report implementation progress regularly, including metrics and targets that are adopted. According to the Principles:

  • MPF trustees should disclose the MPF schemes’ integration strategies and investment managers’ integration policies and report implementation progress regularly.
  • MPF trustees should describe how ESG factors are factored into the relevant investment strategies by the investment managers and how the investment managers identify, assess, and manage relevant and material ESG factors.
  • MPF trustees should disclose metrics and targets adopted by investment managers where available.
Next Steps

Looking ahead, MPF trustees should report to MPF scheme members, at least annually, on how their ESG integration strategy is put into practice. The MPFA notes that trustees can report through various channels, including their websites and MPF scheme annual consolidated reports. MPF trustees should, nonetheless, disclose their progress on implementing the Principles in MPF scheme annual consolidated reports for all financial years ending on or after November 2022.

In the near term, MPF trustees are required to review and assess existing investment and risk management frameworks against the Principles, identify gaps and submit actions plans to the MPFA by February 25, 2022.

Preparing for ESG-related Regulation

As regulatory attention turns to mandatory ESG governance, strategy, risk management and disclosure requirements in Hong Kong and elsewhere, companies are already applying strategies to preserve and create value by appropriately managing ESG-related risks and opportunities. We highlight certain of these strategies below.

  1. Integrating ESG into corporate governance structures by clearly defining ESG-related roles and responsibilities of the board, senior management and dedicated ESG or sustainability committees;
  2. Adopting ESG-related policies, action plans and targets to ensure group-wide alignment on ESG initiatives and disclosing those policies, plans and targets to the public;
  3. Building ESG-related organizational capacities through stakeholder engagement initiatives, trainings and handbooks;
  4. Incorporating ESG factors into commercial contracts, due diligence processes and procurement practices;
  5. Benchmarking ESG governance, strategy, risk management and disclosures against peers and industry best practices;
  6. Analysing and responding to ESG-related regulatory and legislative developments, including with respect to mandatory ESG disclosures, ESG risk management requirements and “green claims”; and
  7. Assessing ESG-related disclosures in the context of increasing litigation risk, including potential claims under securities laws and consumer protection laws.

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