Hong Kong’s funds industry needs to assess climate-related risks to meet new deadlines

Securities and Futures Commission disclosure requirements on climate risk set to go live on 20 August

Hong Kong, 28 July 2022 – Last year, Hong Kong’s Securities and Futures Commission (SFC) announced new guidelines on how fund managers should manage climate-related risks and how these risks should be disclosed to their investors. These guidelines have been incorporated into the SFC’s Fund Manager Code of Conduct (FMCC) and will need to be followed by all fund managers with at least HK$8bn in assets under management (AUM) from 20 August of this year. Smaller fund managers will need to get on board from November. The approaching deadline may present challenges for fund managers.

“Investment funds are exposed to climate-related risks just as they are exposed to market risk, liquidity risk and counterparty risk,” says Gaven Cheong, Partner and Head of Investment Funds at Tiang & Partners. “Consequently, the SFC now requires funds to take these risks into consideration when making investments. Climate-related risks should be reflected in the fund’s overall risk management processes and in its disclosures to investors.”

The amendments to the FMCC are based on guidelines drawn up by the Task Force on Climate-related Financial Disclosures (TCFD). This global body recommends that funds:

• Ensure board and management-level oversight of climate-related issues;
• Identify climate-related risks relevant to their investment strategies;
• Consider climate-related risks in risk management procedures; and
• Publicly disclose how they manage climate-related risks.

Larger fund managers will need to meet enhanced standards under the FMCC. For example, they should collect and disclose data on the greenhouse gas emissions of the businesses in which they have invested.

“There are challenges for fund managers in meeting the new requirements,” says Loretta Ng, Partner, Asset & Wealth Management, PwC Hong Kong. “This is because there is often a lack of consensus on the best qualitative and quantitative tools for measuring climate-related risk. It can be difficult to assess the potential impact of a climate-related event on a diverse portfolio of assets, for example.”

The guidelines coming into force on 20 August require large funds to determine whether the climate-related risks for their portfolio investments are ‘Irrelevant’, ‘Relevant but immaterial’ or ‘Relevant and material’. Each category then triggers certain governance and disclosure requirements, such as periodically assessing whether the categorisation remains accurate.   

“The categorisation of investment funds will depend on a number of factors, such as investment strategy and time horizon,” says Jessica Broomhall, Associate Director, Asset & Wealth Management, PwC Hong Kong. “The geographical location of investments, the industry, the level of emissions and the quality of management are just some of the issues that may determine if there is material climate-related risk. Funds may need to develop a road map to ensure that they are on top of all these factors so that they can make the appropriate disclosures.”

“Smaller fund managers will have less than four months to manage and disclose climate-related risk leading up to the November deadline. Given the tight timeframe, it’s advisable for those with resources constraints to engage external counsel who could support the legal, regulatory and ESG aspects,” Loretta Ng added.

Lawyers at Tiang & Partners and Advisory and ESG professionals at PwC Hong Kong advise investment funds on how to best meet the SFC’s new requirements and how to develop their climate frameworks and disclosure documentation.