Sustainable financing and proposed alignment of environmental, social and governance principles with EU regulations

​In recent years, sustainable finance and investment products with investment strategies incorporating environmental, social and governance (ESG) principles have become increasingly popular in Hong Kong with investors and asset managers alike.

Background

In recent years, sustainable finance and investment products with investment strategies incorporating environmental, social and governance (ESG) principles have become increasingly popular in Hong Kong with investors and asset managers alike.

The Hong Kong Investment Funds Association (HKIFA) recently urged the Securities and Futures Commission of Hong Kong (SFC) and asset managers to consider adopting the ESG guidelines which the European Commission proposed and published in mid-2019 to improve consistency amongst market players and to standardise ESG standards and classifications, in order to reduce the greenwashing of investments within the industry.

ESG principles and other proposals in the EU

In a bid to encourage greater consistency and quality of ESG data, the European Commission offered a number of proposals in its report titled 'Action Plan: Financing Sustainable Growth' on 24 March 2018, which includes the following key measures for asset managers:

• Framework regulation: a proposed framework regulation to establish a unified EU taxonomy for sustainable economic activities.
• Disclosures regulation: a disclosures regulation to improve requirements on how institutional investors can integrate ESG factors into their risk processes.
• Low carbon benchmarks regulation: a low carbon benchmark regulation to create new categories of low carbon or positive carbon impact benchmarks, which aims to help investors compare the carbon footprint of investments.

The Framework Regulation is being considered by other EU authorities. Once agreed and finalised, it is expected that a unified green classification framework will be published in late 2019 or early 2020.

Meanwhile, the Disclosures Regulation and Low Carbon Benchmark Regulation were formally adopted by the European Parliament in March 2019 and are now pending final endorsement and publication.

In a parallel workstream, the Commission has mandated a number of EU supervisory authorities to provide technical advice regarding the integration of sustainability risks and sustainability factors for alternative investment funds and UCITS, which is expected to supplement the above proposals.

The Commission also recently published new guidelines on corporate climate-related information reporting, as well as additional reports covering their work on taxonomy, an EU green bond standard and EU climate benchmarks and their ESG disclosures (collectively, Commission Guidelines). Once those proposals and guidelines are finalised and implemented across the EU, they will serve as helpful benchmarks and standards for the SFC in Hong Kong to consider.

Sustainable Financing and ESG Investment

To help our clients keep track of the different work streams of various EU regulators, we maintain an online resource here. The microsite offers an up-to-date and concise overview of the European Commission’s Action Plan, sets out the relevant time frames and tracks the regulatory process, as well as publishes detailed analyses on the major proposals by the Commission. Industry comments on the proposals are also collated to provide a wider picture of the market reaction to the proposals.

Please also see our recent article on the Commission Guidelines here.

Once the proposed measures are finalised and promulgated, asset managers may expect a surge in investor interest in the EU ESG principles and related investment products.

They are therefore advised to keep abreast of the latest developments in the EU as well as equip themselves of the standards currently being scrutinised by the EU regulators for implementation.