New sustainability rules for Hong Kong MPF schemes

Hong Kong’s Mandatory Provident Fund Schemes Authority (MPFA) has designed a new set of sustainability principles to bring MPF schemes into line with global practice on climate and other issues. MPF trustees must make submissions to the authority by February 2022 explaining where they fall short of the guidelines.

At a symposium in Hong Kong on Friday (November 26) MPFA chairman Ayesha Macpherson Lau said, “We urge MPF trustees to act now to evaluate financial risks and opportunities, so that their schemes are capable of providing sustainable returns for scheme members in their retirement.”

The new principles build on the governance principles issued by the MPFA in November 2018, which stated that “an MPF trustee should establish and maintain an effective risk management framework for its MPF business and operations”. This made it a stewardship obligation and a fiduciary duty on the part of MPF trustees - and fund managers in the MPF system - to be mindful of how ESG risks would impact the interests of MPF scheme members.

In March 2021, the MPFA established a working group with MPF trustees to formulate how trustees should integrate ESG factors in their processes of MPF funds and make disclosure to scheme members.

The resulting principles recommend and provide practical examples to MPF trustees about how to enhance their governance standards. They cover four key elements: governance, strategy, risk management and disclosure.

MPF trustees should have a governance framework to monitor management of ESG risks by investment managers; formulate an ESG integration strategy at the MPF scheme level; consider ESG factors in the investment and risk management processes of MPF funds and disclose their ESG integration strategies and report on implementation progress regularly, including the metrics and targets adopted.

The MPFA states that trustees should disclose the progress made on ESG integration in MPF scheme annual consolidated reports, for all financial years after  November 30, 2022.

Trustees must review and assess whether their existing investment and risk management framework and arrangements are in adherence to the principles. MPFA states that “In areas where gaps are identified, MPF trustees are expected to draw up an action plan and submit it to the MPFA by 25 February 2022.”

That lead time is tight, according to Francis Chung, chairman of Hong Kong-based MPF Ratings, which provides MPF research and ratings. “But it serves to show how serious the MPFA is looking at the issue of sustainable investing.”

Chung told AsianInvestor the MPFA's announcement of sustainable investing principles may give an impression that schemes have been dormant on the issue, “but this would be unfair. Independently, a number of trustees have undertaken positive initiatives which serve to benefit MPF members."

Although the principles are aspirational and only a guide, adoption is likely to be widespread, predicts Chung.  

“Similar to the MPFA’s 2018 governance principles for MPF trustees, all schemes adopted the principles as rules, but the key will be the substance over form. Effective framework development and implementation to ensure an in-depth ability to invest, disclose and review sustainability is complex and costly. It’s a cost which is unlikely to be passed onto members, but more likely to be borne by trustees, whose fee margins continue to be eroded.”