Tag Archives: Green finance

Stewardship & Principles of Responsible Ownership

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Stewardship is about the exercise of shareholders or investors rights, and on investment managers or asset owners as institutional investors as stewards of capital, and that it is part of fiduciary duty to vote as investors or engage with investee companies with a view to generating value or return from investments to clients or beneficiaries.   There may be different names, such as responsible owner or active ownership, but in essence it is about asset owners and asset managers discharging responsible investment, as stewards of capital. 

Hong Kong Securities and Futures Commission (SFC) published the Principles of Responsible Ownership (HK PRO) in 2016.  The HKPRO was issued with the stated objective to guide and assist investors to determine how best to meet ownership responsibilities, encompassing seven principles, though it is a set of voluntary and non-binding principles.

In our previous publication, Hong Kong Green or ESG Investing & SFC Authorised Funds, we focused on green or ESG investing of Hong Kong licensed investment managers, including a reflection on the results of the SFC ESG Survey, and an overview on the current range of SFC authorised green or ESG funds available for public offer, with reference to the SFC requirements on green or ESG funds, and also the range of investment strategies adopted by such funds.

An important element and commonly cited investment approach in green or ESG investment strategies adopted by green or ESG funds is ‘active ownership’.   In this publication, we focus on stewardship and responsible ownership, current market trends and developments, guidelines and standards, and also consider how managers may adopt and implement stewardship and responsible ownership policies. 

Stewardship & Principles of Responsible OwnershipDownload

“Green” or “ESG” Funds? Hong Kong Regulator Issues Guidelines

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An evolutionary force has built momentum in recent years within the global investment management industry and investors community – a greater focus on the power of capital for good and purpose. Beyond “green investing” to fight climate change, it goes from sustainable investing to ethical or impact investing, encompassing objectives to embrace broader responsibilities that take into account environmental, social and corporate governance (ESG) factors.

In the broader context, the investment industry and capital markets are responding to governmental policies and investors demand for capital allocation with these objectives. Yet, there are varying degrees and approaches to addressing ESG factors, with limited regulatory requirements that provide specific framework. What counts as green, or what specific environmental, social or governance issues are being addressed, and how?

With an increase in the offering of investment products or services with proposed green or ESG investment objectives or policies, there is an issue of clarity or sufficiency of disclosures. This makes it difficult for investors to compare and contrast the available choices of products – what exactly are the products purported to be or to what extent are the investment strategies or investment portfolios actually “green” or “ESG” compliant.

On 11 April 2019, the Hong Kong Securities and Futures Commission (“SFC”) issued its Circular to management companies of SFC-authorised unit trusts and mutual funds to address “Green” or “ESG” funds (Circular). The aim is to enhance disclosure comparability between similar types of SFC-authorised Green or ESG funds and their transparency and visibility in order to facilitate investors making informed investment decisions in this evolving investment areas.

The Circular would serve to require and obligate investment managers offering investment products with an expressed green or ESG focus or who intend to do so to carefully consider whether their fund would and is able to comply within the SFC’s expected framework for Green or ESG funds and become designated as such.  An investment manager of Green or ESG funds would also be expected to have a proper and robust investment selection process and assessment criteria in line with its stated investment focus and green or ESG principles, and may seek to obtain a third party certification or fund labeling or would rely on its self-confirmation.

Our legal update outlines the background and context of the growth of Green or ESG funds, Hong Kong’s efforts and SFC’s issued framework for such funds as set out in the new Circular:

Hong Kong Guidelines on Green or ESG FundsDownload

 

Hong Kong SFC increasing focus on Green Finance and ESG

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At a recent luncheon with the Hong Kong Investment Funds Association, Ashley Alder, Chief Executive Officer of the Securities and Futures Commission (SFC), gave an update on the SFC’s strategy for the Hong Kong asset management industry.

Besides reflecting on where things are on the key initiatives of the SFC in recent years – namely the mutual recognition of funds arrangements, retail fund distribution, ETF connect, the newly introduced open-ended fund company structure and the ongoing review of the Code on Unit Trusts, formal references were made to green finance and investing with ESG factors.

As stated in the speech:

“Investors increasingly recognise that strong environment, social and governance (ESG) standards are a proxy for overall management quality and long-term sustainability. Companies with high ESG standards are likely [to] have less exposure to environmental accidents or regulatory breaches which could impose significant costs and harm their brand reputation or other intangible assets.”

“At the same time, many studies have now found that ESG factors actually boost risk adjusted returns, and at worst only have a neutral impact.”

“Growing interest in the area has created a situation where more investors want in, but there is a lack of truly sustainable investment opportunities.”

In this context, it is noteworthy from the speech that the following are key areas the SFC is looking at:

  • Potentially mandating environmental disclosures by listed companies, following the footsteps of Mainland China where such requirements are expected to be introduced in 2020; this is aimed to enhance quality and comparability of ESG data from companies for investment decisions by asset managers;
  • Examining asset manager’s integration of ESG factors into the investment processes, and disclosure of the methodology to investors;
  • Developing consistent disclosures and labelling guidelines for green investment products.

Read the full speech here:

https://www.sfc.hk/web/EN/files/ER/PDF/Speeches/Ashley_20180919.pdf