Keeping up to date with Hong Kong regulatory developments in the ESG space

15 December 2021 | Applicable law: Hong Kong

The global economic downturn caused by the COVID-19 pandemic and unprecedented spread of wildfires across five continents have reinvigorated scrutiny from investors and consumers of ecological and social considerations when investing in products that claim to meet environmental, social and governance (ESG) standards.

Regulatory developments are evolving to enhance transparency and consistency in the market and ensure that investors are well-informed of the ESG credentials and criteria of investment products available.

Enhanced disclosures for ESG funds

The Securities and Futures Commission (“SFC”) maintains a list of green and ESG-approved funds that meet certain requirements regarding investment threshold, disclosure requirements, and ongoing monitoring. A new circular was issued by the SFC on 29 June 2021 to provide further guidance on enhanced disclosure regarding all SFC-authorised funds with ESG factors as a key investment focus.

From 1 January 2022 onwards, any reference to ESG or similar terms in the fund’s name and marketing materials should accurately reflect the ESG features in proportion to other features of the fund and should not overstate or over-emphasize the ESG features.

ESG funds will be required to include a description of the fund’s focus, a list of ESG criteria, and its investment strategy in the offering document. Furthermore, a summary of the risks or limitations associated with the ESG focus must also be highlighted to investors.

Fund managers must ensure the ESG focus continues to be met. In addition, they must inform investors of how the fund is attaining its ESG focus and the actual proportion of underlying investments that are commensurate with the ESG focus through annual reports or other appropriate means.

Where the fund is tracking an ESG benchmark (e.g. an index fund), details of the benchmark must be disclosed and a comparison of the performance of the fund’s ESG factors against the benchmark should also be made available to the investors annually. If ESG is no longer the focus of a fund’s investment strategy, investors and the SFC must be informed as soon as reasonably practicable.

Management and disclosure of climate-related risks by fund managers

In line with international regulations, such as the EU’s Sustainable Finance Disclosure Regulation, the SFC published the consultation conclusions on its earlier proposals which require fund managers to take climate-related risks into consideration in their investment and risk management processes, and make appropriate disclosures.

The new requirements are structured in two tiers, namely (i) baseline requirements, which will be applicable to all SFC-licensed fund managers and (ii) enhanced standards, which will be applicable to large fund managers with assets under management that equal or exceed HK$8 billion for any three months in the previous reporting year. The requirements cover the following four key elements:


The board of the fund manager should steward the management of climate-related risks by setting out strategic objectives, and assigning roles and responsibilities to management-level executives or management committees. They are recommended to review the firm’s climate management approach on an annual basis and keep abreast of the implementation progress.

Investment management

Fund managers are required to identify relevant and material climate-related risks for each investment strategy and factor the material climate-related risks into the investment management process. Where a fund manager assesses that climate-related risks are irrelevant to certain investment strategies, it should disclose these exceptions and maintain appropriate documentation.

Risk management

Fund managers are required to take climate-related risks into consideration in risk management procedures, and apply appropriate tools and metrics to assess and quantify climate-related risks. Recommended practices include establishing appropriate processes for timely escalation and conducting ongoing assessments of climate-related risks by updating the fund’s ESG scores regularly.


As detailed above, fund managers are responsible for making appropriate disclosures to investors in respect of their governance and risk management roles and responsibilities, as well as risk management policies and procedures as delineated by their jurisdiction.

The push by the Hong Kong Stock Exchange and listed issuers

In line with global social and market trends, ESG is becoming a growing priority for the Hong Kong Stock Exchange and listed issuers.

In December 2019, with general support from market participants, the Stock Exchange concluded that it would amend the existing ESG reporting requirements for listed issuers in Hong Kong, with the amendments to take effect in financial years beginning on or after 1 July 2020. The amendments enhance the robustness of ESG reporting requirements of listed issuers and require the board of listed issuers to expressly take leadership and accountability for the company’s ESG objectives and strategy. Moreover, they are required to assess which ESG issues are material in respect of its business and proactively incorporate ESG considerations into their decision-making.

The Stock Exchange has since followed up with further suggested amendments in a consultation paper issued in April 2021, offering concrete proposals to enhance governance standards and other ESG considerations. Notably, listed issuers would be required to disclose numerical targets and timelines to achieve gender diversity in the boardroom and workplace. Single-gender boards would be given a 3-year transition period after the amendments take effect to appoint at least one director of the other gender onto their boards.

With a combination of strict requirements and softer disclosure incentives, these proposals motivate fund managers and listed issuers to put ESG in its matrix of business considerations. Given current market and social trends, this is, on the whole, a step in the right direction. Market participants that abide by the new requirements and take the initiative to go further will find themselves warmly received both by their peers and in communities generally, and attract the interest and capital of ESG-minded investors.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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