In a recent interview in Global Risk Regulator, Leonie Kelly, director and head of ESG and impact advisory at Ogier Global, discusses Hong Kong's ambitions to become Asia's green financial hub – the progress it has made so far and the hurdles that remain.
What are some of the most important recent steps taken by Hong Kong to realise its ambition of becoming Asia's green finance centre?
The focus on TCFD and the Common Ground Taxonomy are significant steps forward for the local market in transitioning Hong Kong towards a sustainable finance hub. These measures were announced in December 2020 under the Green and Sustainable Finance Cross-Agency Steering Group sustainable finance strategy for Hong Kong. Part of the plan will be to make climate-related reporting aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations mandatory by 2025 for all relevant sectors.
In October 2020, Hong Kong's Securities and Futures Commission (SFC) issued a consultation paper on proposed amendments to the Fund Manager Code of Conduct (FMCC) that would require fund managers to consider climate-related risks in their investment and risk management processes. The consultation period has recently come to a close and the market awaits to see the final results and modifications to the FMCC.
The second significant measure outlined in the strategy relates to the Common Ground Taxonomy - which will be developed by mid-2021 by the International Platform on Sustainable Finance (IPSF) Working Group on Taxonomies, co-led by China and the EU. This taxonomy will greatly enhance transparency for investors. Beyond what's been mentioned above, the Steering Group's support for the International Financial Reporting Standards Foundation's (IFRS) proposal to establish a new Sustainability Standards Board for developing a global, uniform set of sustainability reporting standards is also a big step forward.
We have seen a wave of local and international policy and regulatory developments come into action over the past year or so – the EU financial regulators for example have turned their attention to ESG and climate-related risks and their impact on operations of financial institutions. Asia is certainly in lock-step with these international moves but somewhat behind in creating a consistent language or taxonomy. Regulatory developments in Asia will require a greater convergence towards a principles-based regional taxonomy; I think greater harmonisation is needed with a consistent principles-based approach that enables regional-specific characteristics to be factored in.
Are there any characteristics of the Hong Kong markets that make it easier, or more difficult, to progress a green finance strategy?
Poor data quality remains a hurdle in the APAC region in ESG and sustainable finance. Technology development will partly solve some of the data gaps, however further policies and regulations that support innovation would help make it easier to progress sustainable finance in the region. I also think significant support needs to be provided to support capacity building and growing the next wave of ESG talent across APAC, with a focus on enhancing skills and ESG know-how.
How easily will financial services firms find it to comply and what sort of problems might they face?
In relation to the current proposals set out in the SFC FMCC climate-related requirements, the SFC's proposed requirements in corporate governance, investment management, risk management and disclosure features to address climate-related risks and would broadly apply to fund managers that manage Collective Investment Schemes (CISs). The ease of integration will vary based on the fund manager's size and also investment strategy. The current proposals set out a two-tier plan with Enhanced Requirements for large fund managers (exceeding HK$4bn) and baseline requirements for all other fund managers. Data availability, consistency and comparability of information may prove challenging for managers in the region. In-depth understanding of ESG and associated terminology surrounding climate-related risk mapping, for example, is also in its infancy - so bringing the industry up to speed on why climate-related risk management is in the spotlight will be critical to the success of such regulatory developments. Further refinement of the proposals and education workshops will help facilitate positive engagement by the industry.
How closely will Hong Kong policy align with that of mainland China? Will there be any interesting difference in emphasis?
As set out in the Steering Group strategic plan, it is key to strengthen and enhance regional collaboration to develop Hong Kong as a sustainable finance hub. Work is already underway in this regard, as seen by recent steps to adopt the Common Ground Taxonomy. The Hong Kong Monetary Authority and SFC have now joined the International Platform on Sustainable Finance (IPSF) Working Group on Taxonomies – a working group co-led by the EU and China working towards a "common ground taxonomy" to highlight commonalities between existing taxonomies of economic activities' compatibility with environmental goals.
Does this all fit with China's plan to make Hong Kong the green finance centre of the Greater Bay Area?
Early September 2020 saw the launch of the Guangdong-Hong Kong-Macau Greater Bay Area Green Finance Alliance ("GBA-GFA"). The Alliance aims to facilitate the greening of the GBA. The Alliance aims to promote research and incubating green investments that will benefit the GBA by leveraging the vast green investment demand in Guangdong and green finance capacities in Hong Kong and Macau.
In addition, financial support guidelines for the development of the GBA have been issued by the People's Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange. One of the major measures in the guidelines is to facilitate collaboration on green finance in the Greater Bay Area.
Policies such as establishing a refined green finance cooperation working mechanism and constructing a Guangzhou Futures Exchange in the near future aims to support Hong Kong to become a Greater Bay green finance hub.
All these initiatives underscore the efforts made by the governments in the Greater Bay Area in steering development in green finance, and echo the importance of the establishment of the GBA-GFA.
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