To achieve a sustainable future, a huge investment from both public and private sectors will be needed. As a regulator of Hong Kong’s securities and futures markets, the Securities and Futures Commission (SFC) must closely monitor developments and think about how it can contribute to the process, says Christine KUNG, Head of International Affairs and Sustainable Finance of the SFC.
Regulators play a part in the development of green finance in Hong Kong and the Greater Bay Area (GBA) because they are involved in the process of setting standards locally, regionally and internationally.
With this in mind, the International Affairs and Sustainable Finance (IASF) Team of the SFC of Hong Kong has been working hard to roll out initiatives that will help Hong Kong develop into a hub for green and sustainable finance in Asia.
According to Christine Kung, Head of IASF at the SFC, green finance is developing incredibly fast, and is showing no signs of slowing down. The momentum has increased since the announcement by President XI Jinping that China will strengthen its pledge under the Paris Agreement to achieve carbon neutrality before 2060.
Kung says that for this to happen, substantial investments in infrastructure and projects will be necessary. Realistically, she says, such funds cannot come from the public sector alone, and we need the private sector to bridge that gap. It is therefore important that both public and private sectors work together to set standards and address issues.
“The idea is to have finance flows which are consistent with the pathway towards lowering carbon emissions and climate-resilient development,” Kung says.
Hong Kong is in the perfect position to make this happen. “With its involvement in global initiatives, the city is well positioned to intermediate between China and the rest of the world, in particular when it comes to green finance,” Kung says.
As a regulator, the SFC must think about how it can contribute to the process locally and globally, and must closely monitor developments in the regulatory world.
A hot topic
Green finance is a hot topic. At the start of the year, the World Economic Forum released its latest Global Risk Report, identifying some of the risks threatening humanity’s existence. The top five risks were all related to the environment. Extreme climate events, along with the failure to adopt climate change mitigation and adapt to biodiversity loss, pose an existential threat to all life on earth.
There is clear evidence that the environment has a direct impact on our food, water, society, and production lines. And we have seen these emerging risks could evolve into full-blown financially material business risks. Business leaders are now becoming aware that climate, and ESG sustainability, can have a tangible impact on their business, and that the impact goes both ways. So, green finance is rising on the agenda for both public and private sectors.
The role of the SFC, which regulates Hong Kong’s securities and futures markets, is to work closely with the industry to set regulatory expectations, and to also examine risks from an investor protection angle.
“We consider things like physical risks, as well as transition risks,” explains Kung. “Physical risks such as extreme climate can impact businesses, while transition risk is more to do with government policies and how that affects business decisions.”
Disclosure is necessary
Kung says that these issues can be surfaced through necessary disclosure, and that is one of the SFC’s focuses. The organization believes that only through consistent and comparable disclosure can proper information be provided to investors. Investors also need to be armed with the right information to make informed investment decisions.
The regulator published its Strategic Framework for Green Finance in 2018. The framework focussed on several areas: enhancing disclosures for listed companies, investment products and ESG practices of asset managers, especially those relating to climate; facilitating the development of green or ESG-related investment products, supporting investor awareness and capacity building; and promoting Hong Kong as an international green finance centre.
The SFC has its work cut out, given that a survey conducted last year showed that only 35 percent of asset managers consistently integrated ESG factors into their processes.
“At the end of the survey, we decided we should continue the dialogue with asset managers about taking climate and ESG factors into account, given what’s happened internationally,” Kung says.
Positive changes
Investors are becoming more interested in investing in businesses that are committed to incorporating environmental and social considerations into their business decisions. According to Kung, ESG related funds increased significantly between 2019 and 2020, rising from 20 to 33. These numbers are expected to continue to rise rapidly.
In March 2020, the SFC set up the Climate Change Technical Expert Group (TEG), comprising representatives from the asset management sector, information providers, standard-setting bodies and industry associations. The group would provide technical support to help the SFC formulate their regulatory response to manage climate change risks and provide practical guidance to the asset management industry.
Kung says they are seeing the EU establishing many regulatory initiatives, and asset managers in Europe will need to make greater disclosures when the European Union’s Sustainable Finance Disclosure Regulation comes into force next year.
Given ESG and green finance is relatively new, particularly in Asia, education of the investing public is necessary. The regulator’s Investor in Financial Education Council carries out investor education by delivering campaigns via a wide range of media.
Educators also play a key role, Kung says. “Green finance is an interdisciplinary area that cuts across different disciplines and departments, and it is necessary to develop lateral thinking skills and to have all the experts working together,” she says.
Kung recommends that educators continue to have an open mind, and think about collaborations that extend beyond Hong Kong. “Hong Kong actively participates in the international arena which can help to advance green finance in Hong Kong,” she says.
“The role of the SFC which regulates Hong Kong’s securities and futures markets is to work closely with the industry to set regulatory expectations, and to also examine risks from an investor protection angle,” says Christine Kung, Head of the International Affairs and Sustainable Finance at the SFC.
SFC Participates in Various Green Finance Initiatives
Green and Sustainable Finance Cross-Agency Steering Group –The SFC and the HKMA have established a cross-agency steering group to co-ordinate the management of climate and environmental risks to the financial sector, accelerate the growth of green and sustainable finance in Hong Kong, and to support the Government’s climate strategies. Members of the group include the Environment Bureau, the Financial Services and Treasury Bureau, Hong Kong Exchanges and Clearing Ltd, the Insurance Authority and the Mandatory Provident Fund Schemes Authority.
International Organisation of Securities Commissions – The SFC has been collaborating with authorities overseas with Julia Leung, the SFC’s Deputy CEO acting as Vice Chair of the Board-level Task Force on Sustainable Finance (STF), and co-chair of the STF workstream which is looking to address greenwashing and investor protection issues, as well as asset manager disclosures. The SFC also leads the IOSCO Asia-Pacific Regional Committee’s Green and Sustainable Finance Working Group.
Network for Greening the Financial System – The SFC is also involved in the network which aims to strengthen the global response that is required to meet the goals set out in the Paris agreement and to enhance the role of the financial system to manage risks and mobilize capital for green investments.
Task Force on Climate-Related Financial Disclosures - The task force develops recommendations for more effective climate-related disclosures that promote informed investment, credit and insurance underwriting decisions. This enables stakeholders to better understand the concentrations of carbon-related assets in the financial sector and their risks.
“SFC consults on climate-related risks in funds” SFC webpage, Oct 29 2020
The SFC launched a consultation on proposed requirements for fund managers to take climate-related risks into consideration in their investment and risk management processes and make appropriate disclosures to meet investors’ growing demands for climate risk information and combat greenwashing. Under the proposals, the Fund Manager Code of Conduct would be amended and the SFC will set out expected baseline requirements and standards to facilitate fund managers’ compliance.
“Addressing the threat of climate change and the associated risks is becoming a major priority on the global regulatory agenda," said Mr Ashley Alder, the SFC’s Chief Executive Officer. "The proposed requirements will help ensure that fund managers properly handle climate-related risks and promote clear, comparable and high-quality disclosures to help investors make more informed decisions."