On 29 October 2020, Hong Kong’s Securities and Futures Commission (SFC) issued a consultation paper (the Consultation Paper) on proposed amendments to the Fund Manager Code of Conduct (FMCC) that would require fund managers to consider climate-related risks in their investment and risk management processes. The amendments would also require fund managers to make appropriate disclosures to meet investors’ growing demands for climate risk information and to combat greenwashing.

The Consultation Paper builds upon the SFC's December 2019 "Survey on Integrating Environmental, Social and Governance (ESG) Factors and Climate Risks in Asset Management", which found that many asset managers consider ESG factors in some fashion, but they fail to take a consistent approach in disclosing and integrating climate-related risk factors into investment processes. The proposals in the Consultation Paper seek to address these gaps and align practices in Hong Kong with international developments, similar to the Monetary Authority of Singapore's recent consultation on environmental risk factors for asset managers and a range of other market participants.

This Legal Update will summarise key aspects of the Consultation Paper and outline the next steps in this significant development on the journey toward sustainability for Hong Kong fund managers.


The Consultation Paper proposes amendments to the FMCC addressing climate-related risk in four key areas: governance, investment management, risk management and disclosure. In developing these requirements, the SFC has referred to the Recommendations of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD) to foster a "more consistent disclosure framework and minimise the industry's compliance burden." This alignment with a leading international standard is noteworthy, as the global sustainable finance landscape is developing at a rapid pace with an increasing risk of problematic regulatory fragmentation.

The SFC defines "climate-related risk" with reference to two risk categories from the TCFD Recommendations, physical and transition risks, as well as a third category that is equally important for fund managers: liability risks.

  • Physical risks arise from the impact of extreme climate-related weather events and progressive, longer-term shifts in climate patterns, which can damage assets, disrupt supply chains and reduce productivity.
  • Transition risks are associated with the ongoing viability of a business in the transition to a low-carbon economy, which will be marked by reduced demand for commodities, goods and services with a high carbon footprint.
  • Liability risk is the risk that a person or company may seek compensation for losses caused by climate change. The failure to properly manage physical and transition risks can give rise to liability risk.


The SFC’s proposed requirements incorporate governance, investment management, risk management and disclosure features to address climate-related risks and would broadly apply to fund managers that manage Collective Investment Schemes (CISs). At the initial stage, however, they would not be mandatory for those managing only discretionary accounts in the form of an investment mandate or a pre-defined model portfolio. Further, the disclosure requirements would only apply to fund managers responsible for the overall operation of a fund, while the governance, investment management and risk management requirements would apply to fund managers that have any discretion over investment and risk management processes.

Recognising the importance of proportional application to reduce compliance burdens, the SFC has proposed a two-tiered system of requirements, including:

  • "Enhanced standards" for "Large Fund Managers", or fund managers with monthly total fund assets and discretionary account assets under management that equal or exceed HK$4 billion for any three months during the prior 12 months; and
  • Less stringent "baseline requirements" for all other fund managers covered by the proposed amendments to the FMCC.

The SFC seeks to reduce compliance burdens even further by allowing fund managers to rely on existing group practices to meet these new obligations, provided that local senior management takes appropriate steps to ensure that practices and standards adopted by overseas affiliates align with the SFC's proposed requirements and are applied appropriately.


The Consultation Paper sets out new requirements for the board and management, respectively, to address climate-related risks. At a high level, the proposals would require the board to oversee the incorporation of climate-related considerations into investment and risk management processes, as well as their firm's progress against goals for addressing climate-related issues. Management would be required to maintain an appropriate structure for managing climate‑related risks and reporting to the board and develop related action plans, controls and procedures. The SFC also expects management to set specific goals for addressing climate-related issues.

In practice, fund managers might consider addressing these requirements by issuing public sustainability statements including specific climate-related action plans and goals. For example, a sustainability statement posted to a fund manager's website might include a commitment to reduce CO2 emissions by a certain percentage among some or all portfolio companies over a period of time. Fund managers could also establish board or management committees to define climate and broader ESG strategies, as well as ESG teams with a climate mandate and executive-level oversight.

Investment Management

The revised FMCC would explicitly state that fund managers "should ensure that climate-related risks are taken into account in [the] investment management process for funds." Practically, fund managers will need to identify climate-related risks, perform relevance and materiality assessments and factor climate-related risks into investment processes.

  • Identifying climate-related risks: Fund managers are asked to consider physical, transition and liability risks relevant to their investment strategies and funds, assess their impacts and prioritise material risks in investment processes. The Consultation Paper refers to the TCFD Recommendations for assistance in identifying specific risks, including physical risks like rising temperatures and sea levels, as well as transition risks like changing customer behaviour and enhanced emissions-reporting obligations.
  • Relevance and materiality assessment of climate-related risks: In determining materiality, fund managers should consider climate risks on medium- to long‑term time horizons and apply both qualitative and quantitative assessment methods. If a fund manager determines that climate-related risk is irrelevant to any of its investment strategies or funds, the SFC proposes to require the fund manager to disclose those decisions at the applicable entity or fund level.
  • Factoring material climate-related risks into the investment process: If a climate-related risk is considered material, fund managers can apply a range of methods and strategies to address the risk in the portfolio construction process. The SFC highlights various options including exclusionary screening, best‑in‑class screening, norms‑based screening and impact investing strategies. Whatever options they choose, fund managers should disclose how they consider material climate-related risks in their portfolio construction processes.

Risk Management

The proposed amendments to the FMCC specify that fund managers "should implement adequate procedures for identifying, assessing, managing and monitoring material climate‑related risks". Fund managers can apply a range of tools and metrics to assess and quantify climate-related risks, including carbon footprint-related metrics, forward-looking metrics or physical climate-related metrics (e.g., portfolio warming potential and weather-related losses for real assets). The SFC directs fund managers to the methodologies used in international reporting frameworks, including the Sustainability Accounting Standards Board and UN Principles for Responsible Investment, for additional guidance.

All covered fund managers should adopt appropriate risk management measures, including reallocating assets under management and exercising stewardship through engagement and voting. Further, fund managers are expected to monitor any risks that they determine to be immaterial, and re-evaluate materiality assessments periodically.

Here, the SFC mandates additional, specific risk management processes in enhanced standards for Large Fund Managers. At the initial stage, Large Fund Managers would be required to make "reasonable efforts" to acquire or estimate the weighted average carbon intensity (WACI) of direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions for certain funds. WACI is a measure of a portfolio's exposure to carbon-intensive companies recommended by the TCFD.

Large Fund Managers would also be required to assess the relevance and utility of scenario analysis for evaluating the climate resilience of their strategies and keep internal records of those assessments. If an assessment proves to be relevant and useful, Large Fund Managers will also be required to develop a plan to implement the related scenario analysis within a reasonable timeframe. The SFC refers Large Fund Managers to the climate scenarios and data provided by the Network of Central Banks and Supervisors for Greening the Financial System in developing scenario analyses.


The proposed FMCC amendments will require fund managers responsible for the overall operation of a fund to adequately disclose governance arrangements for the oversight of climate-related risks and describe how climate-related risks are taken into account during investment and risk management processes. Fund managers would also be required to disclose the types of investment strategies or funds under their management for which they have determined climate-related risks to be irrelevant.

Large Fund Managers would be subject to enhanced disclosure standards, including a requirement to describe their engagement policy. The SFC has also included a number of specific disclosure requirements for Large Fund Managers, including:

  • Fund-level disclosures of the WACI for funds where climate-related risks are determined to be material;
  • Scope 1 and Scope 2 greenhouse gas emissions data, together with the applicable calculation methodology, underlying assumptions and limitations, as well as the proportion of investments assessed or covered; and
  • Other relevant metrics to supplement a portfolio's WACI, including Leadership in Energy and Environmental Design (LEED) and National Australian Built Environment Rating System (NABERS) ratings for real estate. 

With the exception of the WACI, which should be disclosed at the fund level, the SFC proposes that fund managers should, at a minimum, make appropriate disclosures regarding governance, investment and risk management at an entity level. The Consultation Paper includes information on the format of disclosures, which can be made via websites, newsletters and reports, and clarifies that covered fund managers that are subsidiaries of overseas fund management groups can, in certain instances, cross-reference group policies and practices.

Implementation Timeline

For Large Fund Managers, the SFC proposes a nine-month transition period to comply with the baseline requirements and a 12-month period to comply with the enhanced standards.

For all other fund managers, the SFC proposes a 12-month transition period to comply with the baseline requirements.

Next Steps

The consultation closes on 15 January 2021, following which the SFC will issue consultation conclusions along with the final form of proposed requirements in due course. It intends to issue a circular setting out the baseline requirements and enhanced standards for fund managers, together with sample industry practices based on inputs from members of the European Commission's technical expert group on sustainable finance and other standard setters.

Importantly, the Consultation Paper indicates that the SFC will issue similar requirements with respect to other non-financial ESG risks in the future. The Consultation Paper notes that the "SFC acknowledges the importance of ESG factors and we encourage fund managers to consider a broader spectrum of sustainability risks. However, we propose to focus initially on the climate-related risks relevant to each investment strategy and fund . . . ."

Fund managers who wish to better prepare for the future by addressing the broader spectrum of ESG risks may refer to our comprehensive article, "Private Equity for the Public Interest: The Evolution of ESG and Considerations for Asset Managers and Investors".