New Hong Kong guidelines on environmental, social and governance-related disclosures by asset managers have been broadly welcomed by industry experts as beneficial for investors.

But some feel the regulator could do more, and should be putting more focus specifically on corporate governance; that is, how companies are run.

“This initial step by the SFC [Securities and Futures Commission] to enhance ESG disclosure of its authorised funds is timely to make sure Hong Kong is catching up with other international financial centres,” said Nana Li, senior research analyst at the Asian Corporate Governance Association.

Admittedly, the new guidelines are only the first step to push the market to be more ESG-orientated, but the commission could focus more on the disclosure requirements for corporate governance issues, Hong Kong-based Li told Asianinvestor. The document, released on April 11, appears more environmentally-orientated, she said (see box below).

Nana Li, ACGA

The SFC move comes amid a rising focus on ESG-focused investment and good stewardship by asset managers and owners. For instance, investment consultancy Willis Towers Watson published a paper yesterday urging asset managers to take more action on stewardship in areas ranging from board quality to climate risk.

There are also widespread concerns about so-called ‘greenwashing’ in the funds industry as more and more firms have jumped on the ESG bandwagon. This term refers to unsubstantiated or misleading claims about the environmental benefits of products or services

Some might see it as unsurprising that the SFC is focusing on the ‘E’ and ‘S’ rather than the ‘G’ in ESG. Hong Kong’s exchange has come under fire in the past year for allowing dual-class shares, as has the SFC for penalising rating agency Moody’s for publishing a negative report on Chinese companies.

Still, the SFC move has been welcomed by industry participants as useful for investors. For instance, asset owners can adopt the guidelines to help them make responsible investments, as investors remain divided over how to do this. 

Eva Law, chairman of the Association of Family Offices in Asia, agreed: “Investors don’t have a concrete approach to evaluate ESG funds, so the [SFC] is trying to help structure that approach for investors in the form of disclosure standards for fund managers.”

And there has been a big rise in the introduction of ESG reporting standards in the past decade, Sandra Carlisle, London-based head of responsible investment specialists at HSBC Global Asset Management, said. Such regulations are a key driver of achieving better ESG standards, she told AsianInvestor.

CALL FOR COLLABORATION

But more can be done, said ACGA’s Li. The commission and the Hong Kong Exchange (HKEx) could team up to drive more ESG adoption, she suggested. “It will certainly help if the SFC and the HKEx could have more collaboration on the implementation and enforcement of their respective rules.”

Sandra Carlisle, HSBC

The SFC could push the initiative further by working with major asset owners in Hong Kong, such as the Hong Kong Monetary Authority, to promote engagements among investors and issuers, said Li. She added that effective communication between asset owners and companies is key to improving disclosure quality.

Such thinking chimes with the commission’s plan to push for more environmental and climate-related disclosures from local listed companies.

Ashley Alder, SFC chief executive, said at a Bloomberg summit on March 22: “There is not much point in regulators discussing any expectations ... if they [asset managers and asset owners] cannot access consistent, comparable corporate information to properly price risks.”

Indeed, some listed companies treat reporting as a routine, box-ticking exercise to fulfil regulatory requirements, the regulator noted in a strategic framework in September last year.

THE AIM AND REQUIREMENTS OF THE NEW SFC GUIDELINES

Hong Kong’s new Securities and Futures Commission guidelines aim to help investors to make better decisions in ESG investments by enhancing the comparability and transparency of these funds. This is important, as most funds don’t disclose how ESG factors are integrated in managers’ selection processes.

“Our preliminary review shows that the quality of disclosure [of ESG factors in funds] varies widely,” said the watchdog in a circular.

The commission's proposal follows that of other regulators to standardise the evaluation process of these investments in their jurisdictions.

For example, the Asset Management Association of China proposed new guidelines in July last year on how ESG managers can be supervised and outlined the desirable underlying assets for green investments.

Under the SFC guidelines, fund managers will be required to include in the offering documents of ESG funds information “necessary for investors to make an informed judgement of the investment”, such as the investment selection process and criteria adopted by the fund.

The disclosure of assessment criteria of the underlying investments could range from reference to any ESG ratings, carbon footprint and environment impact to risks associated with the fund’s investment theme.

The guidelines will be applicable to SFC-authorised funds that incorporate one or more globally recognised green or ESG criteria, such as the United Nations Sustainable Development Goals, as their key investment focus, and that it is reflected by the fund name and the investment strategies.