On 17 December 2020, Hong Kong's Green and Sustainable Finance Cross-Agency Steering Group (Steering Group) published its Strategic Plan to Strengthen Hong Kong's Financial Ecosystem to Support a Greener and More Sustainable Future (Strategic Plan). The Strategic Plan sets out six key focus areas to strengthen Hong Kong's financial ecosystem and support the development of sustainable finance in the Special Administrative Region. It is likely that this comprehensive plan will be implemented rapidly given the support of the seven members of the Steering Group, which represent a critical mass of Hong Kong's financial regulatory bodies and include the Hong Kong Monetary Authority (HKMA), Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing Limited (HKEX).
As part of the longer-term Strategic Plan, the Steering Group has agreed to implement five near-term action points including mandatory climate-related disclosures aligned with the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) by 2025 and adopting an international sustainability taxonomy to be developed by mid-2021.
This Legal Update outlines the Strategic Plan and the near-term action points, as well as steps Hong Kong has already taken to progress this ambitious agenda. We also provide insights and implications for various market participants.
The Strategic Plan
The Strategic Plan comprises the following six key focus areas:
- Strengthen the management of
climate-related financial risks to consolidate Hong Kong's
position as a global risk management centre
- The Steering Group will encourage asset owners to take the lead in incorporating climate-related risks when managing their own funds and selecting external asset managers. The agencies will also seek to align with globally-recognised standards, principles and taxonomies to assess sustainability and avoid greenwashing.
- Insights and
Implications:
- Asset managers should consider incorporating climate related risks into their risk management and other processes in the near-term. Indeed, this may soon be required, as the SFC is consulting on requirements for certain asset managers to incorporate climate-related financial risks into their investment and risk management processes. For more information on these proposals, please see our related Legal Update here.
- Regulators around the world are
increasingly focused on climate-related risk management. Elsewhere
in the region, the Monetary Authority of Singapore recently
released risk management guidelines covering all aspects of
environmental risk for asset managers, banks and insurers. For more
information on climate-related risk management requirements in
Singapore, please see our legal update here.
- Promote the flow of
climate-related information at all levels to facilitate risk
management, capital allocation and investor
protection
- The Steering Group will enhance climate-related disclosures and their communication among market players, including by encouraging financial institutions to request climate-related disclosure from companies that they lend to, invest in or insure.
- Insights and
Implications: Regulators and governments around the world
are primarily focused on climate-related disclosures, and market
participants should consider whether existing disclosure processes
can meet future requirements. In Hong Kong, market participants may
refer to the HKEX ESG reporting guide for listed companies for
examples of reporting best practices. Further, the SFC proposals
referred to above would require certain asset managers (whether or
not they are listed) to disclose information about their
governance, investment and risk management processes, as well as
specific disclosures of Scope 1 and Scope 2 greenhouse gas
emissions for their portfolios.
- Enhance capabilities of
market participants and raise awareness among the general
public
- The Steering Group will support sustainable-finance capacity building and training, intensify market outreach initiatives and promote collaboration among various stakeholder groups.
- Insights and
Implications:
- Market participants should consider their ESG-related capacities, identify gaps and develop near-term plans to improve. The Sustainable and Green Exchange (STAGE) from HKEX, a multi-faceted sustainable finance platform launched on 1 December 2020, provides capacity-building resources and other information on sustainable investment products relevant to a range of market participants. For more information about STAGE and its implications for issuers, investors and other market participants, please see our Legal Update here.
- Capacity-building efforts are
underway elsewhere in Asia, as the Securities and Exchange
Commission in Thailand recently concluded a consultation on mandatory ESG
training requirements for certain capital markets licensees.
Regulators around the world will focus on these initiatives going
forward.
- Encourage innovation and
explore initiatives to facilitate capital flows towards green and
sustainable causes
- The Steering Group will encourage greater take-up in the green and sustainable finance market, and support, promote and facilitate the innovation, development and adoption of a growing and diversified range of green and sustainable financial products. The agencies will also look to enhance listing and trading platforms for these products.
- The Steering Group will explore utilising technologies such as big data, artificial intelligence and blockchain to support green and sustainable finance development.
- Insights and
Implications: New technologies present numerous exciting
opportunities for sustainable finance and may help address
significant challenges like the relative lack of reliable
ESG-related data. For more information, we discuss the intersection
of blockchain technology and sustainable finance in our article,
"Blockchain and the Future of Sustainable Investing",
available here.
- Capitalise on the
opportunities presented by the Mainland to develop Hong Kong into a
green finance centre in the Greater Bay Area
- The Steering Group will leverage Hong Kong's status as an international finance centre to contribute to national green development in China and advance financial cooperation with the Mainland.
- Insights and
Implications: In Mainland China, the People's Bank of
China recently announced four key areas of focus to develop
green finance in China, which the Steering Group may support from
Hong Kong. These four goals, which are broadly aligned with the
Strategic Plan, comprise:
- Improving green finance standards to support China's objective to become carbon neutral by 2060;
- Considering introducing mandatory environmental-related disclosures for financial institutions;
- Enhancing capacity for analysing and managing environmental and climate risk; and
- Providing easier access for
international investors to China's green finance market.
- Strengthen regional and
international collaboration
- The Steering Group will work with like-minded peers regionally and globally to promote green and sustainable-finance best practices, tackle market constraints and foster regional collaboration.
- Insights and Implications: There is no shortage of "like-minded peers" in the region. In particular, regulators and governments in Australia, India, Indonesia, Japan, Malaysia, New Zealand, Singapore and Thailand continue to develop sustainable finance in their jurisdictions. Market participants can expect increased cross-border collaboration among regulators and governments in 2021, as calls increase for regulatory alignment on ESG standards and other issues.
The Near-Term Action Points
In addition to the Strategic Plan, the HKMA announced that the Steering Group is committed to the following five near-term goals:
- Climate-related disclosures
aligned with the TCFD Recommendations will be mandatory across
relevant sectors no later than 2025
- In addition to the existing climate-related disclosure requirements for HKEX listed companies, the Steering Group will implement mandatory climate-related disclosures in accordance with the TCFD Recommendations. Disclosures will apply to financial institutions including banks, asset managers, insurance companies and pension trustees.
- Insights and
Implications: While the Steering Group has committed to
implementing mandatory disclosures no later than 2025, market
participants should consider that the agencies also determined to
"increase the coverage of mandatory disclosure as soon
as practicable". Indeed, as noted above,
climate-related disclosures are already a part of the SFC's
proposals for asset managers. Now is an opportunity for market
participants to start addressing gaps in existing disclosure
processes before these proposals become regulatory
requirements.
- Aim to adopt the Common
Ground Taxonomy
- The Steering Group will aim to adopt the "Common Ground Taxonomy" under development by the International Platform on Sustainable Finance. China and the European Union are leading these development efforts and, according to the HKMA, the group will develop the Common Ground Taxonomy by mid-2021.
- Insights and
Implications: China recently took steps to align its Green
Bond Endorsed Catalogue with global standards by removing clean coal from the list of
"green" investment projects. The Common Ground
Taxonomy should provide an additional layer of international
alignment in the world's second-largest economy.
- Support the International
Financial Reporting Standards (IFRS) Foundation's proposal to establish
a new Sustainability Standards Board for developing and maintaining
a global, uniform set of sustainability reporting standards
- The Steering Group joins regulators in the United Kingdom, European Union and others in supporting the IFRS Foundation's proposals to promote international alignment on sustainability reporting standards.
- Insights and
Implications:
- Importantly, these proposals already have the support of some of the world's leading sustainability reporting standard setters, including the Global Reporting Initiative, Climate Disclosure Standards Board and Sustainability Accounting Standards Board. These organisations recently published a paper along with other leading standard setters that outlines a prototype comprehensive, globally-aligned sustainability reporting system. We expect standard setters to continue efforts to align reporting regimes in 2021.
- For more information on other recent
developments in ESG standards, please see our Legal Updates
on developments from the UN Development Programme, World Economic Forum and CFA Institute.
- Promote climate-focused
scenario analysis
- Scenario analysis initiatives are an integral part of the Steering Group's efforts to require financial institutions to embed climate considerations into their business processes, including risk management, and identify gaps in data and know-how for future enhancement.
- Insights and
Implications: The HKMA will soon progress this goal in the
stress-testing space. On 4 December 2020, the HKMA released the details of a climate risk
stress-testing pilot programming for licensed banks to be conducted
in 2021. Further scenario analysis efforts may develop in
tandem.
- Establish a platform to act
as a focal point for financial regulators, government agencies,
industry stakeholders and the academia
- The Steering Group will build a new platform for cross-sectoral capacity building, thought leadership and resources in addition to the new STAGE platform.
- Insights and Implications: This near-term goal illustrates the Steering Group's emphasis on capacity building and the need to educate stakeholders regarding sustainable-finance issues. We expect to see this initiative develop with input from various stakeholder groups.
Originally published 22 December, 2020
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