ESG In Hong Kong – The Regulatory Implications
As an international financial centre and a responsible member of the global community, Hong Kong is committed to addressing environmental, social and governance (“ESG”) issues to contribute towards global environmental goals.
In this context, Hong Kong is committed to taking action under the Paris Agreement to achieve carbon neutrality before 2050. While Hong Kong has not enacted any specific ESG focused legislation, Hong Kong’s regulators of listed companies and securities and investment firms –the Stock Exchange of Hong Kong Limited (the HKEX”) and the Securities and Futures Commission (the “SFC”) – have introduced various requirements in recognition of the duty listed companies and their management owe to the wider community in terms of their environmental and social impact and increased investor demand for information on how companies manage their ESG risks. There has also been increasing awareness of the positive impact ESG activities can have on companies’ operations and value. The following provides an introduction to the ESG-related regulations in force in Hong Kong.
Requirements Of The Stock Exchange Of Hong Kong Limited
There is no current legal requirement in Hong Kong for institutional investors and financial intermediaries to take into account ESG factors when making investment decisions. However, commencing in 2016, the HKEX introduced a requirement for listed companies to publish annual ESG reports including specified mandatory disclosures and requiring other disclosures on a comply or explain basis. These requirements were upgraded in 2020 and are currently the subject of a public consultation which includes proposals to elaborate on the linkage between corporate governance and ESG by including ESG risks in the context of risk management.
HKEX’s requirements on ESG reporting are set out in the Environmental, Social and Governance Reporting Guide (the “ESG Reporting Guide”) at Appendix 27 to the Main Board Listing Rules and Appendix 20 to the GEM Listing Rules. Part B of the ESG Reporting Guide sets out the mandatory disclosures for ESG reports which require a statement by listed company boards on their approach to ESG management and how they review the company’s progress towards ESG-related targets. The “comply or explain” provisions are set out in Part C of the ESG Reporting Guide and require listed companies to give considered reasons for any deviation from, or failure to report on, any of these provisions. Reasons for not reporting on a comply or explain provision include confidentiality constraints, lack of materiality or legal prohibition.
Regulations Of The Securities And Futures Commission
In October 2020, the SFC published a consultation paper on the “Management and Disclosure of Climate-related Risks by Fund Managers”, in recognition of the potential financial risks climate change presents for businesses. In the consultation paper, the SFC proposed amending its Fund Manager Code of Conduct to require fund managers to consider climate-related risks in their investment and risk management processes and to make appropriate disclosures to meet investors’ growing demand for climate risk information and to combat “greenwashing”. Initially, the SFC’s proposed requirements would only apply to managers of collective investment schemes (i.e. investment funds) and would not be mandatory for discretionary account management (in the form of an investment mandate or a pre-defined model portfolio). The proposed requirements would cover four key elements: governance, investment management, risk management and disclosure.
In general, the SFC received positive feedback on its proposed requirements focusing on climate-related risks. Respondents to the consultation paper were also in favour of the proposal to refer to the Task Force on Climate-related Financial Disclosures’ recommendations and implement them using a two-tier approach, i.e., with baseline requirements for all fund managers and enhanced standards for large fund managers with assets under management of HK$8 million (roughly US$1 million) or more. The enhanced standards will come into effect in November 2022
This was followed in June 2021, by the SFC’s issue of its “Circular to management companies of SFC-authorised unit trusts and mutual funds –ESG funds” which set out guidelines on enhanced disclosures for funds that incorporate ESG factors as a key investment focus. The circular imposed a new requirement (effective from 1 January 2022) for ESG funds to conduct and disclose periodic assessment and reporting of how ESG factors are incorporated. The SFC also maintains a publicly accessible central database of all SFC-authorised ESG Funds on its dedicated ESG Funds webpage.
Requirements Under The Companies Ordinance (Cap. 622 of the Laws of Hong Kong) (the “CO”)
Unless exempted under Section 388(3) of the CO, Hong Kong companies are required to include the following in their directors’ report (in the business review section) for each financial year under Schedule 5 of the CO:
- a description of the principal risks and uncertainties facing the company;
- a discussion on the company’s environmental policies and performance;
- a discussion on the company’s s compliance with the relevant laws and regulations that have a significant impact on the company; and
- an account of the company’s key relationships with its employees, customers and suppliers and others that have a significant impact on the company and on which the company’s success depends.
General Legal Considerations
In addition to the specific regulatory requirements above, Hong Kong has in recent years strengthened relevant ESG-related laws such as, among others, the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, Prevention of Bribery Ordinance and the Employment Ordinance.
Global attitudes, stakeholder expectations and shareholder activism in relation to ESG issues have changed significantly in recent years, and this is set to continue. As a result, we anticipate that Hong Kong will continue to adopt increasing regulations around ESG.
About the authors:
Clinton Morrow – Clinton Morrow is a partner of Charltons and is admitted as a solicitor in Hong Kong and Queensland, Australia. Clinton’s core areas of practice are M&A, Private Equity and Capital Markets and he has been recognised and listed in various legal publications such as Chambers, ALB and Asialaw.
Kim Larkin – Kim Larkin is a solicitor admitted in Hong Kong since 1993. Her practice areas include advising on applications to list on the Hong Kong Stock Exchange, Securities and Futures Ordinance licensing applications, on-going regulatory compliance for listed companies and SFC-licensed persons, and advising on cryptocurrency-related matters including licensing requirements for crypto exchanges and crypto fund managers and Hong Kong’s regulatory regime for offering digital assets.
Isabella Cheung – Isabella Cheung is an associate at Charltons. Her practice covers general corporate and commercial matters, including regulatory compliance, licensing matters and public and private mergers and acquisitions.