Hong Kong’s market regulator backs development of voluntary code of conduct for ESG services providers

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Hong Kong’s securities regulator is backing the development of a code of conduct for environmental, social and governance (ESG) ratings and data products providers, which is likely to lift the city’s credentials as a green finance hub.

The non-mandatory guidelines will be developed by a 14-member working group comprising representatives from Hong Kong, mainland China and international ESG services providers, as well as key users from the city’s finance industry, according to a statement from the Securities and Futures Commission (SFC) on Tuesday.

“The voluntary code of conduct will help strengthen the transparency, quality and reliability of ESG information used by licensed corporations in their investment decisions,” said SFC CEO Julia Leung Fung-yee. “This is an important initiative to mitigate the risk of greenwashing in investment products.”

The Hong Kong government has been promoting the city to develop into a hub for green and sustainable finance serving mainland Chinese and international companies. Green and sustainable debt issued in Hong Kong, including both bonds and loans, increased by more than 40 per cent year on year in 2022 to US$80.5 billion. The city accounted for a third of such debt issued across Asia in that period.

SFC CEO Julia Leung (centre) said the voluntary code of conduct for ESG services providers is an important initiative to mitigate the risk of greenwashing in investment products. Photo: Sam Tsang

The proposed standards will align with best practices as recommended by the International Organization of Securities Commissions (IOSCO) and relevant expectations introduced in other major jurisdictions, the statement said.

In late 2021, IOSCO had urged securities regulators globally to address the lack of transparency in ESG rating methodologies and potential conflicts of interest between ratings providers and companies being rated.

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In Asia, South Korea became the latest country to publish guidelines for ESG evaluation agencies in May, while Japan and India have already introduced regulatory frameworks for rating providers.

The code of conduct in Hong Kong will have four key elements – transparency, governance, systems of control and management of conflicts of interest, according to the terms of reference for the working group published on the SFC’s website.

The 14-member working group is expected to hold its first meeting in November, and will aim to issue a draft of the guidelines for public consultation in the first quarter of 2024. This will be followed by the publication of a final version of the code of conduct one month after the public consultation.

The members of the working group include CDP, Hang Seng Indexes Companies, HSBC and MioTech. The SFC, the Hong Kong Monetary Authority, the Insurance Authority, CLP Holdings and Swire Properties will sit as observers on the working group.

The International Capital Market Association (ICMA) will act as the secretariat of the working group.

The ICMA has been involved in various green and sustainable finance initiatives such as green bond principles, and also acts as one of the secretariats of an ESG data and ratings working group in the United Kingdom developing a voluntary code of conduct.

When the voluntary code of conduct is finalised, the SFC plans to issue principles-based guidance to companies on using it for their due diligence and ongoing assessment of ESG service providers. Photo: Yik Yeung-man

The working group in Hong Kong will be open for ESG ratings and data products providers to sign up voluntarily, and is expected to provide a streamlined and consistent basis for asset managers to conduct due diligence or ongoing assessments of ESG service providers, the SFC said.

Separately, bourse operator Hong Kong Exchanges and Clearing (HKEX) signed a memorandum of understanding with the China Emissions Exchange Shenzhen on Tuesday to cooperate in accelerating the development of the carbon market ecosystem in Hong Kong and the Greater Bay Area.

The two sides will jointly explore opportunities in cross-border carbon market connectivity and climate finance, and work together to increase awareness to develop the voluntary carbon market in the bay area.

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