November 5, 2021, Hong Kong Green and Sustainable Finance Inter-Agency Steering Group expressed support for the goals of COP26 and reaffirmed its commitment to strengthening Hong Kong’s financial ecosystem for a green and more sustainable future. With global focus on COP26 this month and Hong Kong as a key international center for capital markets, asset management and funds, attention should be drawn to the demands of fund managers of Hong Kong in climate risk management and disclosure.
As part of Hong Kong’s green and sustainable financial policy program, in October 2020, the Hong Kong Securities & Futures Commission (SFC) launched a ‘consultation paper on the management and disclosure of climate-related risks by fund managers’, which proposed new requirements for Hong Kong mutual fund managers to take into account the risks related to the investment and risk management processes and to make appropriate information to meet the growing demand for information on climate risks from investors and to combat green laundering. Our team submitted a detailed consultation response to the SFC, which recognized and addressed several key points we raised in the consultation findings released in August 2021. As part of the consultation findings, the SFC released the form final changes to the code of conduct for fund managers (FMCC) to introduce the new requirements, as well as a circular to approved companies on the management and disclosure of climate-related risks by fund managers (Circular on climate-related risks) setting the standards expected to comply with the new requirements of the FMCC.
The FMCC requirements on climate-related risks cover four key elements, namely governance, investment management, risk management and disclosure, which have been developed with reference to the recommendations of the working group for related financial disclosures. to the climate (TCFD) of the Financial Stability Board, the international body for the global financial system. The political intention expressed by Hong Kong is to have mandatory TCFD disclosures for all relevant sectors by 2025. The climate risk circular outlines expected compliance standards involving basic requirements for all managers collective investment funds, while those with collective investment schemes equal or exceed HK $ 8 billion in fund assets for the three months of the previous reporting year (Large fund managers) are also subject to enhanced standards.
The requirements apply to fund managers who have discretion over investment management processes, although when fund managers delegate the investment management function to sub-managers, they retain overall responsibility for complying. to SFC requirements. Discretionary account managers are out of reach under new HSFC requirements.
Basic governance requirements include defining the role of the board or board committee in overseeing the integration of climate considerations into investment and risk management processes, and assigning roles and responsibilities in management positions or on management committees to manage climate-related risks. There are also requirements, among other things, to determine how to regularly monitor and report to management on the status and progress of climate risk management efforts, and to set goals and develop action plans for process and manage them.
In the area of investment management, basic requirements include the need to identify climate-related physical and transition risks, liability risks that may be triggered by physical or transition risks which should also be considered. and, in addition, when the related risks may have implications for other financial risks. The requirements are applicable subject to the relevance and materiality of the climate-related risks to the investment strategies and funds managed by the fund managers, as well as their roles. Fund managers will need to identify relevant and important climate risks for each investment strategy and fund they manage and, where appropriate, consider significant climate risks in the investment management process. This may involve including these risks in investment philosophy and strategies, and integrating climate-related data into research and analysis processes. If it is felt that climate-related risks are not relevant for certain investment strategies or funds, the fund manager should disclose this and keep appropriate records explaining why they are not relevant.
With regard to risk management, the basic requirements include consideration of climate-related risks in risk management processes and ensuring that appropriate measures have been taken to identify, assess, manage and monitor relevant and material climate risks for each investment strategy. and managed funds, and apply appropriate tools and measures to assess and quantify climate-related risks.
To the extent that climate-related risks are assessed as relevant and important for an investment strategy or a fund managed by a large fund manager, strengthened standards would apply, which would involve assessing the relevance and usefulness of scenario analysis to assess the resilience of investments. climate risk strategies along different pathways and taking reasonable steps to identify the portfolio carbon footprints of scopes 1 and 2 greenhouse gas (GHG) emissions associated with the underlying investments of the funds, and to define the calculation methodology and the underlying assumptions. Fund managers are encouraged to include Scope 3 GHG emissions if data is available.
Disclosure requirements apply to fund managers who are responsible for the overall operation of the funds, with basic requirements for entity level disclosures on the governance structure, roles and oversight of the board, the roles and responsibilities of management; and the framework for managing investments and risks and processes. Large fund managers are also subject to enhanced standards that involve disclosure of the entity-level engagement policy and its implementation, as well as the carbon footprints of the scopes 1 GHG emissions portfolio. and 2 associated with the underlying fund investments at the fund level, the calculation methodology, the underlying assumptions and limits, and the proportion of investments that are valued or hedged. The information should be reviewed at least annually (including the relevance and significance of climate-related risks if it has been previously assessed and disclosed as irrelevant), with updates as appropriate, and Fund investors should be informed of any material changes as soon as possible.
Where appropriate, fund managers may leverage group resources and personnel, adopt group policies and procedures, and rely on group disclosures to meet HSFC requirements, provided they are subject to similar or higher standards. Local management in Hong Kong retains responsibility for ensuring compliance with SFC requirements.
There is a transition period of 12 months (i.e. August 2022 for large fund managers) to 15 months (i.e. November 2022 for other fund managers and for standards rules applicable to large fund managers) to comply with the new FMCC requirements on climate-related risks. .