Hong Kong: ESG Comparative Guide

1 Legal and enforcement framework

1.1 What regulatory regimes and codes of practice primarily govern environmental, social and governance (ESG) regulation and implementation in your jurisdiction?

Hong Kong does not have specific laws setting out ESG or sustainability objectives for companies or investors, but there are longstanding laws covering the three aspects of ESG, such as:

• environmental laws on pollution, use of resources and conservation;
• social laws on employment and labour, health and safety and anti-discrimination; and
• governance laws on anti-bribery and corruption and anti-money laundering.

At the regulatory level, there are increasingly stringent ESG disclosure rules for both companies and investment funds (retail and mandatory provident funds), and more climate-related disclosure requirements for banks. More guidelines have been introduced on what can be considered a ESG or green product through initiatives such as:

• the Government Green Bond Programme;
• Securities & Futures Commission (SFC) guidelines for ESG funds; and
• the setting up of STAGE – the Sustainable & Green Exchange.

Since the first Strategic Framework for Green Finance was published by the SFC in 2018, the setting up of the Green and Sustainable Finance Cross-Agency Steering Group (‘GSF Steering Group') in May 2020 (co-led by the SFC and the Hong Kong Monetary Authority (HKMA)) and the strategic plan announced in December 2020 all point towards a more unified regulatory approach to how to grow sustainable finance in Hong Kong. With Hong Kong's pledge to achieve carbon neutrality by 2050 in response to the Paris Agreement and the publication of its Climate Action Plan 2050 in October 2021, we can expect more and broader regulatory steps announced in Hong Kong for companies and investors in the coming years as Hong Kong establishes itself as a sustainable finance hub. Carbon trading is the other key development to watch.

1.2 Is the ESG framework in your jurisdiction primarily based on hard (mandatory) law and regulation or soft (eg, ‘comply or explain') codes of governance?

Hong Kong has laws governing various aspects of ESG issues (from environmental to labour laws); but if we look only at ESG or sustainability integration or disclosure frameworks, we are mainly looking at regulations. The three main ESG frameworks are all disclosure frameworks with both mandatory and ‘comply or explain' components – one for listed companies , one for investment fund managers and one for ESG funds specifically. The Environmental, Social and Governance Reporting Guide (‘ESG Reporting Guide') of the Listing Rules that applies to companies listed on the Hong Kong Stock Exchange (HKEX) (‘listcos') comprises two levels of disclosure obligations (as of January 2022):

• mandatory disclosure requirements in relation to board governance; and
• ‘comply or explain' provisions in relation to the disclosure of policies and compliance and key performance indicators across 12 areas of environmental and social issues.

The Corporate Governance Code of the Listing Rules (‘CG Code') has further mandatory and ‘comply or explain' disclosure requirements in relation to governance and diversity policies for listcos. As for investment funds, there are two relevant guidelines from the SFC:

• the Circular to Management Companies of SFC-Authorised Unit Trusts and Mutual Funds – ESG Funds (ie, funds that identify themselves as ESG-focused) (updated June 2021) (‘SFC ESG Funds Requirements'); and
• the Circular on Management and Disclosure of Climate-related Risks by Fund Managers (August 2021). This amended the Fund Management Code of Conduct (FMCC), which applies to all fund managers within scope, and has two different levels of requirements for investment funds respectively with assets under management below and over HK$8 billion. It will come into effect later in 2022 (‘SFC Climate Requirements').

Listing applicants are also asked by the HKEX to consider the above requirements and put in place mechanisms well in advance that allow them to comply upon listing.

1.3 Which bodies are responsible for implementing and enforcing the rules and codes that make up the ESG framework? What powers do they have?

The HKEX is responsible for enforcing the ESG Reporting Guide and the CG Code in relation to listed companies and listing applicants; while the SFC is responsible for enforcing the two guidelines in relation to investment fund managers and ESG funds specifically. However, given the early stage of these frameworks, it is unclear how non-compliance will be addressed and there is limited guidance on how much disclosure will be considered adequate. That said, the HKEX has stated that it will continue to monitor standards of ESG reporting to provide more guidance; and its reports – such as Analysis of Environment, Social and Governance Practice Disclosure in 2016/2017 – give a taste of how the HKEx might consider what constitutes adequate disclosure. For example:

• a company simply saying it has an anti-corruption policy will be insufficient; and
• non-compliance without giving considered reasons will amount to breach of the Listing Rules.

In general, failure to make mandatory disclosure for listcos will constitute a breach of the Listing Rules, which the HKEx has the power to ‘enforce' – for example, by:

• sending enquiry letters to the issuer in relation to any non-compliance, to make enquiries as to the details, background and reasons for the breach;
• issuing warning letters for material or repeated breaches;
• asking the directors of an issuer to sign an undertaking in relation to the breach;
• demanding the issuer to make rectification by making the necessary announcements/publication; and
• taking further disciplinary measures as HKEX deems fit.

The SFC's powers to mete out disciplinary measures and prosecute offenders to combat misconduct in the securities and futures markets are generally covered by the Securities and Futures Ordinance (Cap 571). Codes and guidelines issued by the SFC generally do not have the force of law; but a breach of the FMCC – the latest version of which sets out the SFC's Climate Requirements – may lead to disciplinary action. There have been no ESG enforcement cases thus far, however.

1.4 What is the regulators' general approach to ESG and the enforcement of the ESG framework in your jurisdiction?

The regulators' general approach to ESG in Hong Kong is more one of encouragement – non-prescriptive and ‘climate first'; but it is clear that the regulations are getting more stringent. For example, the ESG Reporting Guide was voluntary when first introduced in 2013; but in July 2020, mandatory provisions were included for the first time and the timeline for ESG reports is also now aligned with the timeline for financial reports. Likewise, for SFC-authorised unit trusts and mutual funds that identify themselves as ESG funds, the 2019 disclosure requirements have been further enhanced in 2022. With the establishment of the GSF Steering Group – jointly led by the HKMA and the SFC, and joined by the HKEX, the Hong Kong Insurance Authority, the Mandatory Provident Fund Schemes Authority, the Environment Bureau and the Financial Services and Treasury Bureau – we can expect that regulations will continue to expand coverage going forward. In particular, regulators will take more action to align climate-related disclosures with the Task Force on Climate-related Financial Disclosures recommendations. According to the December 2020 strategic plan of the GSF Steering Group, climate-related disclosures will be mandatory across relevant sectors from no later than 2025, including enhanced disclosures for financial institutions such as banks, asset managers, insurance companies and pension trustees.

1.5 What private sector initiatives have been launched in your jurisdiction to complement the ESG framework?

There are a number of private sector initiatives; but one notable initiative is the Hong Kong Green Finance Association (HKGFA), founded in September 2018, which offers channels and opportunities to facilitate the development of green finance and sustainable investments in Hong Kong and beyond. It aims to mobilise both public and private sector resources and talent to develop green finance policies in order to promote green finance business and product innovation within financial institutions. The HKGFA's main goal is to position Hong Kong as a leading international green finance hub by providing greater access and opportunities for financial institutions to participate in green financing transactions locally, in mainland China and in Belt & Road markets. It coordinates the publication of a multitude of policy recommendations in collaboration with private sector participants, including reports on:

• green buildings;
• sustainable infrastructure investment funds;
• the adoption of the Common Ground Taxonomy;
• shipping; and
• green finance.

Another initiative is the Sustainable Finance Initiative, which was set up in June 2018 by a family office in Hong Kong to facilitate learning and action by other families, and which participates actively in policy discussions.

2 Scope of application

2.1 Which entities are captured by the rules and codes that make up the principal elements of the ESG framework in your jurisdiction?

Listed companies: The ESG Reporting Guide of the Listing Rules has mandatory disclosure requirements requiring a public company to disclose:

• its ESG governance structure; and
• the reporting principles and boundaries of its ESG report.

Further, the company must follow ‘comply or explain' provisions that cover disclosures and key performance indicators across 12 environmental and social issues. Also part of the Listing Rules, the Corporate Governance Code of the Listing Rules requires further disclosure in relation to a company's governance in general and specifically in relation to diversity policies.

Fund managers: Under the Securities & Futures Commission's (SFC) Climate Requirements (see question 1.2), fund managers must:

• identify, assess and take into account climate-related risks in their investment management and risk management procedures;
• set up a governance structure to oversee the incorporation of climate-related considerations; and
• make appropriate disclosures to investors (‘baseline requirements').

Fund managers that had assets under management of at least HK$8 billion in any three months in the previous reporting year (‘large fund managers') must further adhere to the enhanced standards to:

• assess and implement scenario analysis;
• identify portfolio carbon footprints associated with the underlying investments; and
• disclose their engagement policy and portfolio carbon footprints.

These criteria are expected to take effect:

• with respect to large fund managers, from 20 August 2022 for the baseline requirements and 20 November 2022 for the enhanced standards; and
• for other fund managers, from 20 November 2022 for the baseline requirements.

Retail funds: Based on the SFC ESG Funds Requirements (see question 1.2), SFC-authorised unit trusts and mutual funds that identify themselves as ESG funds must, among other things, disclose in their offering documents:

• the ESG focus of the fund;
• the ESG investment strategy;
• asset allocation;
• reference benchmark;
• reference to additional information; and
• ESG-related risks.

ESG funds must also make periodic assessment and conduct ongoing monitoring of underlying investments on their ESG focus.

Mandatory provident funds: Under the Mandatory Provident Funds Scheme Authority's (MPFA) Principles for Adopting Sustainable Investing in the Investment and Risk Management Processes of MPF Funds, such funds must focus on the four key elements of:

• governance;
• strategy;
• risk management; and
• disclosure.

The principles are largely similar to the Fund Management Code of Conduct (FMCC) requirements for fund managers, which adhere to the Task Force on Climate-related Financial Disclosures framework.

2.2 How are entities in your jurisdiction that are not subject to specific rules or codes implementing ESG?

Please see question 9.1.

2.3 What are the principal ESG issues in your jurisdiction that are either part of the ESG framework or part of the implementation of ESG?

The principal ESG issues in Hong Kong are the 12 aspects listed under the ESG Reporting Guide, as follows:

3 Disclosure and transparency

3.1 What primary disclosure obligations relating to ESG apply in your jurisdiction?

There are currently a few disclosure frameworks/frameworks with disclosure obligations in place, including:

• the ESG Reporting Guide and Corporate Governance Code of the Listing Rules for listcos and listing applicants;
• the Securities & Futures Commission's (SFC) ESG Funds Requirements and SFC Climate Requirements (see question 1.2);
• the Mandatory Provident Funds Scheme Authority (MPFA) Principles for Adopting Sustainable Investing in the Investment and Risk Management Processes of MPF Funds; and
• the Hong Kong Monetary Authority's (HKMA) Supervisory Policy Manual GS-1 on Climate Risk Management.

The ESG Reporting Guide is the oldest framework, first introduced in 2012. It sets out requirements for disclosure in a listed issuer's annual ESG report, which comprise:

• mandatory disclosure requirements in relation to the board's oversight of ESG issues (introduced in July 2020); and
• ‘comply or explain' provisions in relation to 12 environmental and social matters, where issuers are expected to disclose related policies and compliance and key performance indicators on the ESG issues that are considered ‘material' to their business.

Other frameworks (eg, those of the SFC, the MPFA and the HKMA) allow entities to consider and demonstrate how climate risks and ESG are integrated into their operations, covering the four key elements of:

• governance;
• strategy;
• risk management; and
• disclosure.

3.2 What voluntary ESG disclosures are also commonly made in your jurisdiction?

The United Nations Principles for Responsible Investment constitute a popular framework among asset owners and investment managers in Hong Kong; the HKMA is also one of 80-plus signatories. Another framework is the Task Force on Climate-related Financial Risks Disclosure recommendations, which have 45-plus supporters among both regulators and the private sector in Hong Kong. Hong Kong's community of B corporations is also growing: about 18 companies have now progressed through the voluntary certification system.

3.3 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?

Board governance is emphasised as a critical component of all regulatory disclosure frameworks. For example, under the ESG Reporting Guide, the mandatory board statement should contain the following elements:

• disclosure of the board's oversight of ESG issues;
• the board's ESG management approach and strategy, including the process used to evaluate, prioritise and manage material ESG-related issues (including risks to the listed issuer's businesses); and
• how the board reviews progress made against ESG-related goals and targets, with an explanation of how these relate to the listed issuer's business.

The SFC Climate Requirements set out baseline requirements on the roles and responsibilities of both the board and management. For example, the board must define its role, and that of any board committees, in:

• overseeing the incorporation of climate-related considerations into investment and risk management processes; and
• overseeing progress against goals and the process for doing so.

Meanwhile, management is required to assign roles and responsibilities for managing climate-related risks to management-level positions or management committees which report to the board, including:

• setting up the management and reporting process; and
• allocating sufficient human and technical resources for the proper performance of the duty to manage climate-related risks (eg, provide training to staff, engage subject experts and acquire climate-related data from external sources).

‘Management' include the company secretary, who already plays a key role in ensuring that companies are compliant in general.

3.4 What best practices should be considered in relation to ESG reporting and disclosure?

Disclosure should ultimately reflect the company's (or investment fund's) philosophy in relation to ESG. Therefore, if a company truly believes in the need to understand how ESG considerations impact on its business, and its own impact on people and the planet, ESG should be part of the usual business opportunities and risk discussion – something that it does as a matter of course. Best practices to consider in this regard include:

• a stakeholder engagement exercise to gauge what ESG considerations are material to the business;
• a thorough understanding of relevant climate risks;
• recruitment of the right talent internally and engagement of the right external advisers as necessary; and
• regular internal monitoring and reporting.

Also, if entities are reporting on multiple frameworks because of investor demands, or because they work in specific industries or regions, it may be helpful to consider all these frameworks together to ensure that the right people, policies and processes are in place. Disclosure should not be seen as a separate exercise from the rest of the ESG integration process.

4 Strategy and governance

4.1 How is ESG strategy typically designed and implemented in companies in your jurisdiction?

There is no good data source on how ESG strategy is typically designed and implemented among companies in Hong Kong. However, guidance from the Hong Kong Stock Exchange (HKEX) is useful in this regard. According to its Leadership Role and Accountability in ESG: Guide for Board and Directors (March 2020):

• the board is expected to take a leadership role in all aspects of ESG, from strategy to governance, monitoring and disclosure (mandatory board statement); and
• management's role (including the company secretary) is to provide all necessary and accurate information to facilitate the board's discussion.

Specifically, steps board should take include:

• bringing together sustainability, operations, finance, compliance and investors relations colleagues to agree on respective roles; and
• considering ESG not as a separate strategy, but rather in terms of how it affects the company's overall strategy, including risk management.

4.2 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?

In addition to the role of the board as described in question 4.1, it is becoming more common to establish an ESG committee to advise and assist the board in managing policies, initiatives, performance and reporting relating to ESG. The ESG committee commonly include selected members of the board and representatives of different functions of a corporate, such as business, operations, finance and compliance.

4.3 What mechanisms are typically utilised to monitor the implementation of ESG strategy in your jurisdiction?

While the board always has oversight and responsibility for monitoring and implementing the company's ESG strategy, it will inevitably rely on management – such as the ESG committee mentioned in question 4.2 – to provide confirmations to the board on the effectiveness of the company's ESG system. Good indicators of effective implication of ESG include responses from investors and talent, with the latter more inclined to work for companies that have developed ESG values and priorities (eg, those that value diversity and understand the need for flexible work arrangements). Engaging external ESG specialists or seeking third-party certification as appropriate will also add to the ESG credibility of the company.

4.4 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?

On top of the role of the board and management (including legal and compliance) in monitoring the implementation of ESG, the ESG committee is also increasingly important, as is the human resources function. As more corporates become more ESG aligned, human resources must:

• have a good understanding of the objectives and ESG strategy of the company, to ensure that this is increasingly reflected in the performance reviews of employees in key ESG roles and beyond, and that the right talent is hired to fill any gaps; and
• be able to identify when third-party assistance is needed (eg, for employee training or recruitment).

4.5 How is executive compensation typically aligned with ESG strategy in your jurisdiction?

A recent survey by PwC and the Hong Kong Trade and Development Council, entitled ESG Investing: Challenges and Opportunities for Hong Kong and published at the Asian Financial Forum 2022, revealed that in order to incorporate ESG elements into their organisational strategy and operation, some companies are linking senior executive pay to ESG performance. However, this was the last on a list of 11 such actions, with only 10% of respondents selecting this option. By contrast, the top actions indicated were:

• increasing stakeholder engagement;
• setting and publishing tangible goals on ESG management; and
• implementing a staff career development programme in this area.

That said, it is widely recognised that there is an ESG talent gap. The Hong Kong Green Finance Association and Hong Kong University of Science and Technology Certificate in Sustainable Finance was launched earlier this year and registration is already complete. The mismatch between supply and demand should drive up the remuneration of ESG.

4.6 What best practices should be considered in relation to the design and implementation of ESG strategy?

Please see question 3.4, as the disclosure, design and implementation of ESG strategy are closely linked.

5 Financing

5.1 What is the general approach of lenders towards ESG in your jurisdiction? What internal and external information regarding a prospective borrower will they typically consider in this regard?

According to the Climate Bond Initiative's Green and Sustinable Debt Market Briefing 2021 (issued in July 2022), a total of US$14 billion in green, social sustainability, transition bonds and sustainability-linked debt instruments (GSS+) labelled debt originated from Hong Kong issuers in 2021, with three-quarter in the green theme. This has boosted the cumulative value of green issues in Hong Kong to US$20 billion, with half issued in 2021 – a fourfold increase year on year. In total, US$57 billion in GSS+ debt was arranged and issued in Hong Kong in 2021, with US$31.3 billion in bonds and US$25.4 billion in loans.

These figures confirm that the GSS+ bond market is growing fast in Hong Kong, while other loan and structured finance products are also becoming popular.

The three-year Green and Sustainable Finance Grant Scheme launched by the Hong Kong Monetary Authority in May 2021 provides subsidies for eligible bond issuers and loan borrowers to cover their expenses on bond issuance and external review services. This has helped to attract more bond issuers and borrowers to use Hong Kong's fundraising platform and professional services, which has further boosted green finance activities in Hong Kong.

5.2 Are bonds/loans that are marketed as green bonds/loans, social bonds/loans, sustainability bonds/loans or similar a feature of the markets in your jurisdiction?

Green bonds are leading the way in the market as the dominant type of ESG financing product.

The city's financial secretary first announced the government's green bond programme (GGBP) in the 2018-19 budget. The GGBP aims to position Hong Kong as an international green finance hub while also combating climate change. In May 2019, the Hong Kong government issued the largest sovereign green bond to date, valued at US$1 billion. In January 2021, the government completed the sale of a second batch of green bonds totalling US$2.5 billion that was closed to retail investors.

Hong Kong issued its first retail green bond, worth HK$20 billion (US$2.56 billion), in April 2022 – the largest retail green bond issuance globally to date.

Further, banks are increasingly:

• providing diversified financial services such as the offering of green loans and sustainability-linked loans (SLLs);
• proactively promoting green and sustainability development; and
• developing various green finance products and services.

All these developments have fuelled ESG offerings across the market. For instance, on 15 June 2022 Sun Hung Kai Properties Limited signed a five-year SLL facility with 16 major international and local banks. The credit facility received an overwhelming market response, being oversubscribed more than four times over. The final size of the syndicated loan came to HK$20.7 billion, making it the largest of its kind for the real estate sector in Hong Kong, following the HK$12 billion SLL signed by Link Asset Management Limited in March 2022.

5.3 What key developments have taken place in the structuring of these instruments in your jurisdiction?

The Hong Kong government published a Green Bond Framework in 2019, as part of the GGBP. The framework is aligned with the Green Bond Principles 2018 of the International Capital Market Association.

5.4 What best practices should be considered in relation to ESG in the financing context?

As ESG products diversify, avoiding greenwashing will be key. This requires lenders and bond issuers to adopt meaningful ESG KPIs and to be transparent about processes and outcomes. Successful ESG products could have a market standard-setting effect and distinguish the lender or bond issuer as a market leader. In general, lenders and bond issuers should:

• provide detailed disclosure of ESG governance; and
• include clear information on reporting lines and responsibilities.

Disclosures should also go beyond title and general objectives to cover ESG issues and how these are integrated into business strategies and risk identification and management processes. Lenders and bond issuers should also actively engage their stakeholders to identify key concerns in order to address any potential risks and threats, and ensure ongoing ESG impact.

6 ESG activism

6.1 What role do institutional investors and other activist shareholders play in shaping ESG in your jurisdiction?

The Securities & Futures Commission (SFC) Principles of Responsible Ownership (PROs), introduced in 2016, are the closest thing to a stewardship code in Hong Kong, setting out a voluntary disclosure framework for institutional investors on shareholder engagement. As manager of the Exchange Fund, the Hong Kong Monetary Authority has required external managers of Hong Kong equity portfolios to comply with the PROs since May 2019 and has integrated ESG factors into its assessment of bonds, among various responsible investment commitments. More recently, the Mandatory Provident Funds Scheme Authority's Principles for Adopting Sustainable Investing in the Investment and Risk Management Processes of Mandatory Provident Funds (November 2021) require trustees to report annually on ESG integration.

These are all steps that may lead to institutional investors playing a bigger role in ESG developments in Hong Kong. However, at this early stage, private investors have been a key driver in pushing for ESG developments in Hong Kong. The Sustainable Finance Initiative (SFI), established by a Hong Kong family office, is one of the first sustainable investing co-learning/industry platforms in the jurisdiction. It was set up in 2018 – around the same time as the United Nations Principles for Responsible Investment were issued and the Hong Kong Green Finance Association was established. All of these platforms are active in working with regulators on the development of ESG policies in Hong Kong.

6.2 How do activist shareholders typically seek to exert influence on corporations in your jurisdiction in relation to ESG?

Research has shown that active ownership is growing in popularity as a ESG strategy among investors in Asia. However, we do not have exact figures on how popular this is in Hong Kong or the extent to which shareholder proposals and proxy voting are used in this regard. The SFC's December 2019 Survey on Integrating Environment, Social and Governance Factors and Climate Risks in Asset Management revealed that asset management firms are systematically integrating ESG factors into investment strategies, such as:

• negative and exclusionary screening;
• corporate engagement and shareholder action; and
• ESG integration.

However, there seems to be a gap between the expectations of the asset managers and asset owners surveyed: a majority of asset owners said that asset managers do not engage with them to discuss ESG preferences.

Collective efforts also seem popular among asset owners in Hong Kong, whether through:

• engagement in platforms such as the SFI, the Asia Investors' Group on Climate Change and the Hong Kong Green Finance Association;
• the signing of pledges (Climate Action 100+);
• the submission of feedback to consultations; and
• the drafting of policy papers.

6.3 Which areas of ESG are shareholders currently focused on?

Based on the PwC/Hong Kong Trade and Development Council survey (see question 4.5), ESG is being considered by almost all companies in Hong Kong, but the greatest focus is on:

• the ‘S' elements, covering:
• • employee and customer satisfaction; and
  • community relations; and
• the ‘G' elements, covering:
• • executive compensation;
  • data protection and privacy;
  • the independence of the audit committee; and
  • diversity and inclusion.

6.4 Have there been any high-profile instances of ESG activism in recent years?

Not to our knowledge. Shareholder actions are rare in Hong Kong.

6.5 Is ESG activism increasing or decreasing in your jurisdiction? How and why?

As the climate change debate in Hong Kong becomes more urgent and more ESG regulations are introduced for companies, investors and in other related sectors, we can only expect ESG awareness to increase. It is difficult to say whether this will translate into increased shareholder action; but we expect the general public to engage more in the ESG discourse as the number of ESG specialists and ESG products (eg, the first Hang Seng Index ESG exchange-traded fund and mandatory provident fund product) increase.

Another survey – conducted jointly by Pictet Asset Management and the School of Business and Management of the Hong Kong University of Science and Technology in early 2022, based on 3,770 responses collected across diverse social demographic sectors – revealed that at present, "ESG is currently not a familiar concept among the Hong Kong population with only a very small fraction currently investing in ESG products".

However, consumer activism is already evident and there is more discussion about sustainable businesses. All businesses in the PwC/Hong Kong Trade and Development Council survey (see question 4.5) consider ESG in their strategic decision making – although the key driver remains government policies and regulations rather than value-adding activities. Meanwhile, over 50% of business say that failure to address ESG factors can affect an organisation's ability to attract business opportunities and retain clients; and 39% said it can affect the organisation's public reputation and sustainable development in the long run.

7 Other stakeholders and rights holders

7.1 What role do stakeholders or rights holders (eg, employees, pensioners, creditors, customers, suppliers, and Indigenous communities) play in shaping ESG in your jurisdiction? What influence can they exert on a company?

Hong Kong's company law does not explicitly address stakeholders' interests. There are specific laws protecting employees, creditors, customers and other parties that contract with a company; but otherwise, there are no specific provisions allowing stakeholders such as employees to participate in governance or ownership.

That said, following common law, directors in Hong Kong have a duty to act in the best interests of the company – which leaves room for an interpretation that the consideration of stakeholders' interests is in the best interests of the companies. For example, in January 2021 the B Corp Legal Requirement was adopted by B Lab International for companies certified or seeking certification as B Corporations in Hong Kong. Among other things, this provides suggested language for B Corps to amend their articles of association to explicitly allow directors to consider stakeholders' interests.

Other than amending the corporate constitutional documents, the influence of these stakeholders appears to be limited to reputational impact.

8 Trends and predictions

8.1 How would you describe the current ESG landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Regulations in Hong Kong can only be expected to tighten, especially in relation to climate requirements. Several new requirements (eg, issued by the Securities & Futures Commission (SFC), the Mandatory Provident Funds Scheme Authority and the Hong Kong Monetary Authority) will enter into in force in the next 12 months, with further measures on the way.

In December 2020, the Green and Sustainable Finance Cross-Agency Steering Group (‘GSF Steering Group) unveiled a strategic blueprint to advance Hong Kong's position as a leader in green and sustainable finance and further the transition of its financial ecosystem to carbon neutrality. This includes six focus areas for the long term and five near-term action points, as follows:

• Introduce mandatory climate-relate disclosures aligned with the Task Force on Climate-Related Financial Disclosures recommendations by no later than 2025;
• Aim to adopt the Common Ground Taxonomy developed by the International Platform on Sustainable Finance Working Group on Taxonomies co-led by China and the European Union;
• Support the International Financial Reporting Standards Foundation's proposals to establish a new Sustainability Standards Board for developing and maintaining a uniform global set of sustainability reporting standards;
• Promote climate-focused scenario analysis; and
• Establish a platform to act as a focal point for financial regulators, government agencies, industry stakeholders and academia.

We are already seeing steps taken in relation to the first, second and third points above. The SFC and the Hong Kong Stock Exchange have also set up a Carbon Market Work Stream to assess the feasibility of positioning Hong Kong as a regional carbon trading centre to strengthen collaboration in the Greater Bay Area. The GSF Steering Group has also launched the Centre for Green and Sustainable Finance, with two working groups focused on capacity building and data constraints faced by the financial services sector towards adopting ESG strategies.

All in all, we can see expect to see many more policies and market developments; but there are no new laws or regulations on the horizon.

9 Tips and traps

9.1 What are your top tips for effective ESG implementation in your jurisdiction and what potential sticking points would you highlight?

According to the PwC/Hong Kong Trade and Development Council survey (see question 4.5), companies still primarily view ESG strategic decision making through a compliance lens, rather than seeing it as a value-add for the business. The main challenges to ESG practices identified by respondents are:

• the lack of a homogenous framework or standardised guidelines for measuring ESG factors (53%);
• the lack of expertise in this area within organisations (51%);
• insufficient resources or funding dedicated to ESG (39%); and
• a lack of policy incentives (39%).

These are all ranked higher than a lack of evidence of market demand or profitable returns. Unsurprisingly, then, "update Hong Kong's tax policies and subsidy schemes to encourage more ESG and sustainable investing" is suggested as the top priority for Hong Kong to enhance its competitiveness for ESG investing.

While the environment for ESG implementation is becoming more favourable, it may take some time for most Hong Kong entities to move away from a compliance perspective towards an appreciation of the value of integrating ESG into their operations and business. At the same time, external pressures – including both domestic and international regulations, and consumer and investor demand – are increasing by the day; as are extreme climate events. Unique to Hong Kong, according to the Support and Consultation Centre for Small and Medium Enterprises, as at March 2021, there were over 340,000 small and medium-sized enterprises (SMEs) active in Hong Kong, accounting for more than 98% of the total number of enterprises in Hong Kong. Given that fostering the development of an ESG ecosystem is a key focus in Hong Kong, more policy incentives – especially in relation to support for SMEs – will be crucial to promote ESG implementation in Hong Kong.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.