Hongkong Approach on ESG Investing

Back in September 2018, The Securities and Futures Commission of Hong Kong (SFC) first announced the regulation for ESG investing in Hongkong, along with its Strategic Framework for Green Finance. The framework focused mainly on two issues, namely the disclosure of environmental and climate change-related risks, and asset manager integration of ESG factors into the investment process.

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The framework was later followed by a circular in March 2019, which further promoted the development of an ESG survey that pinpoint the integrations of ESG and climate risks in assets management. The survey finds that 83% of fund managers with SFC licenses will consider at least one factor of ESG when assessing a company’s investment potential. Of them, 35% claimed that they pay utmost attention to the governance aspects by implementing ESG policies across the board and defined clear roles to further elevate the development of ESG investments, while 23% focus on the financial impacts of the risks of climate change.

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The SFC and Hongkong Monetary Authority (HKMA) came up with a joint statement on the Green and Sustainable Finance Cross-Agency Steering Group. The group is responsible for providing strategic direction to regulate the policy and market development in Guangdong, Hongkong, Macau, and the Greater Bay area, while also working towards enhancing the country’s position as the leader in Asian sustainable finance.

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By October 2020, there are only 30 unlisted ESG funds registered at SFC. The low number is perhaps due to the difficulties in maintaining the ESG-focused funds while also attracting retail investors, along with the Fund Circular’s complicated and demanding requirements that prevent fund managers to obtain ESG labels for their funds. The Fund Circular targets SFC authorized funds that take globally known ESG metrics and criteria as their investment considerations.  They also aim to enhance the quality of ESG fund disclosures during the ESG factors integration process.

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SFC came up with a new Consultation Conclusion on the Management and Disclosure of Climate-Related Risks by Fund Managers in the upcoming year. It will require fund managers to consider climate change risk when managing investments and the risk management process. A two-tier approach will also be implemented by the SFC to further support the implementation of ESG by fund managers, including the baseline standards and enhanced standards. SFC will also provide further guidance on how fund managers can focus primarily on ESG investment. An ESG fund should demonstrate at least 70% of its total net worth in ESG-related investment, however, the consideration and implementation of ESG factors need to be demonstrated on a case-by-case basis, meaning that the fund manager cannot yield some ESG factors in favor of the others.

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Although SFC's initial focus is on the environmental aspect, as it is considered to be more developed compared to other factors, and is supported with more standardized and measurable metrics, SFC recognizes the importance of other aspects as well and is working towards their development and implementations. Since January 2002, ESG and climate-focused funds will now be required to incorporate ESG factors, reports, and the reference to the named ESG criteria, along with releasing an annual periodic assessment to provide an easier consideration process for ESG investors.

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Understanding the Investors

An online survey with a total of 3770 respondents from various demographic sectors in Hongkong was conducted at the beginning of 2022 to further understand the current ESG environment for investors in Hongkong. It finds that only 30% of the respondents have heard about ESG investing prior to the survey and understand what ESG stands for. On the other hand, the survey also shows that those with higher monthly income have higher awareness regarding ESG investing in comparison to those who earn less, which is perhaps, also in conjunction with their education level. At the same time, there is still a huge gap between the intention and action on ESG investing with only 5% of the respondents are currently investing in ESG products although over 50% of the respondents plan to invest in ESG products within the next year, allocating 10-40% of their current investment to an ESG product.

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Although ESG is yet to be a popular subject in the Hongkong setting, with the rising interest and awareness of ESG, the gross sale of ESG funds has increased by 1.5x in three years by March 2022, with the highest interest seemingly in topics around environmental opportunities and clean energy. It’s important to increase the education and awareness regarding ESG investing as up to 70% of those who have never heard about ESG before are not interested to invest in one. It shows that there is huge interest in the issue when they are given more guidance and understanding, especially considering all the benefits of ESG investing, including the risk management and long-term benefits. Yet at the moment, fund managers are still lacking the much-needed ESG training, sufficient analytical tools, standardized metrics, and incentives.