Representatives of the government, asset managers, and insurers are pushing for a more coordinated approach to develop Hong Kong’s environmental, social, and governance (ESG) framework to build the city into a regional ESG centre.

 

On July 8, a breakthrough of sorts was achieved when the Financial Services Development Council (FSDC), a high-level, cross-sectoral advisory body, issued a report with specific recommendations on how to address the outstanding issues and challenges in Hong Kong’s currently fragmented approach to ESG development. The report, entitled  "Hong Kong – Developing into the Global ESG Investment Hub of Asia", offers a roadmap for ESG development in the financial sector, something that is seriously lacking when considering the importance of this endeavour.

 

Although the FSDC’s mandate is purely recommendatory, it’s composed of senior representatives from the asset management industry, insurance sector, corporates, and the financial services bureau of the government, all important stakeholders in the development of ESG in Hong Kong.

 

The report attracted little attention among the general public, coming in a week when Hong Kong was experiencing the third wave of the pandemic. But its recommendations when implemented, will have far-reaching consequences for the financial and corporate sectors.

 

Essentially, the report sets out a total of five policy recommendations for consideration namely: a more coordinated policy environment should be promoted with the development of an ESG policy map; for the Insurance Authority to encourage insurers’ disclosure of their ESG policies; for the regulators to commence preparatory work on strengthening oversight of non-financial reporting; for the government to provide companies with subsidies on eligible ESG training courses to enhance knowledge and skills; and the building of an information-sharing platform to promote best practices.

 

The most urgent is the area, the development of a coordinated policy direction and support for ESG.

 

In this regard, although Hong Kong regulators have been proactive in encouraging ESG investment and practices, the regulators have been working on a “silo” approach with little coordination among themselves.

 

In terms of disclosures, for example, the Hong Kong Exchange (HKEX) has recently updated its ESG reporting requirement to strengthen the boards’ oversight of ESG issues of the listed companies.

 

As for ESG incorporation, the Hong Kong Monetary Authority (HKMA) as an asset owner has required certain external managers of equities portfolios of the Exchange Fund to adhere to generally accepted international ESG standards.

 

In terms of ESG product development, the Securities and Futures Commission (SFC) issued guidance on enhanced disclosures for SFC-authorised green or ESG funds in April 2019.

 

Although it can be argued that all of these regulatory initiatives are moving along parallel paths, at present, no umbrella entity offers a coordinated or integrated approach for all these initiatives.

 

More broadly, the Green and Sustainable Finance Cross-Agency Steering Group 11 was established in May 2020 to co-ordinate the management of climate and environmental risks through facilitating policy direction and coordination to ensure that Hong Kong has a cohesive and comprehensive green and sustainable finance strategy. But it remains to be seen how this body will perform its mandate.

 

In the second area, the development of ESG data and enhancement of disclosure quality, the HKEX, and the SFC have separate initiatives.

 

The HKEX plans to launch its Sustainable and Green Exchange later in 2020, a database that will provide easy access to information on sustainability, green and social bonds, and ESG-related Exchange-traded products.

 

In the case of ESG funds and green funds, a central database of these funds has become available on the SFC’s website since Q4 of 2019. Green or ESG funds may adopt common ESG investment strategies such as screening (positive or negative screening), thematic, ESG integration, and impact investing.

 

While the HKEX platforms focus on fixed income and the SFC platform focuses on mutual funds, there is room for developing an integrated data platform as well as an information-sharing platform.

 

On building professional ESG capability, the government is urged to offer subsidies eligible ESG training courses to enhance knowledge and skills, particularly among corporates.

 

While the FSDC recognises that a considerable number of training workshops and courses are available in Hong Kong to guide corporates in undertaking ESG disclosure, the levels of skills and knowledge cultivated by these offerings vary.