On 17 December 2020, Hong Kong's Green and Sustainable Finance Cross-Agency Steering Group (Steering Group) published its Strategic Plan to Strengthen Hong Kong's Financial Ecosystem to Support a Greener and More Sustainable Future (Strategic Plan). The Strategic Plan sets out six key focus areas to strengthen Hong Kong's financial ecosystem and support the development of sustainable finance in the Special Administrative Region. It is likely that this comprehensive plan will be implemented rapidly given the support of the seven members of the Steering Group, which represent a critical mass of Hong Kong's financial regulatory bodies and include the Hong Kong Monetary Authority (HKMA), Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing Limited (HKEX).
As part of the longer-term Strategic Plan, the Steering Group has agreed to implement five near-term action points including mandatory climate-related disclosures aligned with the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) by 2025 and adopting an international sustainability taxonomy to be developed by mid-2021.
This Legal Update outlines the Strategic Plan and the near-term action points, as well as steps Hong Kong has already taken to progress this ambitious agenda. We also provide insights and implications for various market participants.
The Strategic Plan
The Strategic Plan comprises the following six key focus areas:
- Strengthen the management of climate-related financial risks to consolidate Hong Kong’s position as a global risk management centre
- The Steering Group will encourage asset owners to take the lead in incorporating climate-related risks when managing their own funds and selecting external asset managers. The agencies will also seek to align with globally-recognised standards, principles and taxonomies to assess sustainability and avoid greenwashing.
- Insights and Implications:
- Asset managers should consider incorporating climate‑related risks into their risk management and other processes in the near-term. Indeed, this may soon be required, as the SFC is consulting on requirements for certain asset managers to incorporate climate-related financial risks into their investment and risk management processes. For more information on these proposals, please see our related Legal Update here.
- Regulators around the world are increasingly focused on climate-related risk management. Elsewhere in the region, the Monetary Authority of Singapore recently released risk management guidelines covering all aspects of environmental risk for asset managers, banks and insurers. For more information on climate-related risk management requirements in Singapore, please see our legal update here.
- Promote the flow of climate-related information at all levels to facilitate risk management, capital allocation and investor protection
- The Steering Group will enhance climate-related disclosures and their communication among market players, including by encouraging financial institutions to request climate-related disclosure from companies that they lend to, invest in or insure.
- Insights and Implications: Regulators and governments around the world are primarily focused on climate-related disclosures, and market participants should consider whether existing disclosure processes can meet future requirements. In Hong Kong, market participants may refer to the HKEX ESG reporting guide for listed companies for examples of reporting best practices. Further, the SFC proposals referred to above would require certain asset managers (whether or not they are listed) to disclose information about their governance, investment and risk management processes, as well as specific disclosures of Scope 1 and Scope 2 greenhouse gas emissions for their portfolios.
- Enhance capabilities of market participants and raise awareness among the general public
- The Steering Group will support sustainable-finance capacity building and training, intensify market outreach initiatives and promote collaboration among various stakeholder groups.
- Insights and Implications:
- Market participants should consider their ESG-related capacities, identify gaps and develop near-term plans to improve. The Sustainable and Green Exchange (STAGE) from HKEX, a multi-faceted sustainable finance platform launched on 1 December 2020, provides capacity-building resources and other information on sustainable investment products relevant to a range of market participants. For more information about STAGE and its implications for issuers, investors and other market participants, please see our Legal Update here.
- Capacity-building efforts are underway elsewhere in Asia, as the Securities and Exchange Commission in Thailand recently concluded a consultation on mandatory ESG training requirements for certain capital markets licensees. Regulators around the world will focus on these initiatives going forward.
- Encourage innovation and explore initiatives to facilitate capital flows towards green and sustainable causes
- The Steering Group will encourage greater take-up in the green and sustainable finance market, and support, promote and facilitate the innovation, development and adoption of a growing and diversified range of green and sustainable financial products. The agencies will also look to enhance listing and trading platforms for these products.
- The Steering Group will explore utilising technologies such as big data, artificial intelligence and blockchain to support green and sustainable finance development.
- Insights and Implications: New technologies present numerous exciting opportunities for sustainable finance and may help address significant challenges like the relative lack of reliable ESG-related data. For more information, we discuss the intersection of blockchain technology and sustainable finance in our article, "Blockchain and the Future of Sustainable Investing", available here.
- Capitalise on the opportunities presented by the Mainland to develop Hong Kong into a green finance centre in the Greater Bay Area
- The Steering Group will leverage Hong Kong's status as an international finance centre to contribute to national green development in China and advance financial cooperation with the Mainland.
- Insights and Implications: In Mainland China, the People's Bank of China recently announced four key areas of focus to develop green finance in China, which the Steering Group may support from Hong Kong. These four goals, which are broadly aligned with the Strategic Plan, comprise:
- Improving green finance standards to support China's objective to become carbon neutral by 2060;
- Considering introducing mandatory environmental-related disclosures for financial institutions;
- Enhancing capacity for analysing and managing environmental and climate risk; and
- Providing easier access for international investors to China's green finance market.
- Strengthen regional and international collaboration
- The Steering Group will work with like-minded peers regionally and globally to promote green and sustainable-finance best practices, tackle market constraints and foster regional collaboration.
- Insights and Implications: There is no shortage of “like-minded peers” in the region. In particular, regulators and governments in Australia, India, Indonesia, Japan, Malaysia, New Zealand, Singapore and Thailand continue to develop sustainable finance in their jurisdictions. Market participants can expect increased cross-border collaboration among regulators and governments in 2021, as calls increase for regulatory alignment on ESG standards and other issues.
The Near-Term Action Points
In addition to the Strategic Plan, the HKMA announced that the Steering Group is committed to the following five near-term goals:
- Climate-related disclosures aligned with the TCFD Recommendations will be mandatory across relevant sectors no later than 2025
- In addition to the existing climate-related disclosure requirements for HKEX‑listed companies, the Steering Group will implement mandatory climate-related disclosures in accordance with the TCFD Recommendations. Disclosures will apply to financial institutions including banks, asset managers, insurance companies and pension trustees.
- Insights and Implications: While the Steering Group has committed to implementing mandatory disclosures no later than 2025, market participants should consider that the agencies also determined to "increase the coverage of mandatory disclosure as soon as practicable". Indeed, as noted above, climate-related disclosures are already a part of the SFC's proposals for asset managers. Now is an opportunity for market participants to start addressing gaps in existing disclosure processes before these proposals become regulatory requirements.
- Aim to adopt the Common Ground Taxonomy
- The Steering Group will aim to adopt the "Common Ground Taxonomy" under development by the International Platform on Sustainable Finance. China and the European Union are leading these development efforts and, according to the HKMA, the group will develop the Common Ground Taxonomy by mid-2021.
- Insights and Implications: China recently took steps to align its Green Bond Endorsed Catalogue with global standards by removing clean coal from the list of "green" investment projects. The Common Ground Taxonomy should provide an additional layer of international alignment in the world's second-largest economy.
- Support the International Financial Reporting Standards (IFRS) Foundation’s proposal to establish a new Sustainability Standards Board for developing and maintaining a global, uniform set of sustainability reporting standards
- The Steering Group joins regulators in the United Kingdom, European Union and others in supporting the IFRS Foundation's proposals to promote international alignment on sustainability reporting standards.
- Insights and Implications:
- Importantly, these proposals already have the support of some of the world's leading sustainability reporting standard setters, including the Global Reporting Initiative, Climate Disclosure Standards Board and Sustainability Accounting Standards Board. These organisations recently published a paper along with other leading standard setters that outlines a prototype comprehensive, globally-aligned sustainability reporting system. We expect standard setters to continue efforts to align reporting regimes in 2021.
- For more information on other recent developments in ESG standards, please see our Legal Updates on developments from the UN Development Programme, World Economic Forum and CFA Institute.
- Promote climate-focused scenario analysis
- Scenario analysis initiatives are an integral part of the Steering Group's efforts to require financial institutions to embed climate considerations into their business processes, including risk management, and identify gaps in data and know-how for future enhancement.
- Insights and Implications: The HKMA will soon progress this goal in the stress-testing space. On 4 December 2020, the HKMA released the details of a climate risk stress-testing pilot programming for licensed banks to be conducted in 2021. Further scenario analysis efforts may develop in tandem.
- Establish a platform to act as a focal point for financial regulators, government agencies, industry stakeholders and the academia
- The Steering Group will build a new platform for cross-sectoral capacity building, thought leadership and resources in addition to the new STAGE platform.
- Insights and Implications: This near-term goal illustrates the Steering Group's emphasis on capacity building and the need to educate stakeholders regarding sustainable-finance issues. We expect to see this initiative develop with input from various stakeholder groups.
For more information about any of the developments discussed in this Legal Update, please contact the authors and refer to our comprehensive article covering ESG developments more broadly, "Private Equity for the Public Interest: The Evolution of ESG and Considerations for Asset Managers and Investors".
May 252023Global Financial Markets Podcast