Financial Stability Board and its Task Force on Climate-Related Financial Disclosures
The Financial Stability Board (“FSB”) is an international body that monitors and makes recommendations about the global financial system. Its membership includes most international financial centres such as Mainland China, Hong Kong, Brazil, Canada, France, Germany, India, Japan, Korea, Russia, Singapore, South Africa, the UK and the US, as well as international organizations like the International Monetary Fund, the World Bank, the International Organization of Securities Commissions and the International Accounting Standards Board.
FSB established the Task Force on Climate-Related Financial Disclosures (“TCFD”) to develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions. A stronger concern over the financial system’s exposures to climate-related risks will encourage companies to incorporate climate-related risks and opportunities into their risk management and strategic planning processes. As this occurs, investments will be channelled to sustainable and resilient solutions, opportunities, and business models.
TCFD’s 2017 recommendations
In 2017, the TCFD released its recommendations (“TCFD Recommendations”) on climate-related financial disclosures in four areas that represent core elements of how companies operate:
- Governance – the company’s governance around climate-related risks and opportunities
- Strategy – the actual and potential impacts of climate-related risks and opportunities on the company’s businesses, strategy, and financial planning where such information is material
- Risk Management – how the company identifies, assesses, and manages climate-related risks
- Metrics and Targets – the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material
Hong Kong’s ESG Reporting Guide under the Listing Rules
In Hong Kong, the ESG reporting obligations applicable to listed companies were updated to incorporate the elements of the TCFD Recommendations, and the latest requirements took effect for financial years beginning on or after 1 July 2020. Listed companies are required to make disclosures in annual ESG reports on ESG aspects, including but not limited to climate-related issues. The Hong Kong Stock Exchange has provided an ESG Reporting Guide[1] in the Listing Rules to assist corporations to map their disclosures.
It is essential to disclose (i) the board’s oversight of ESG issues, (ii) the management approach and strategy, including the process used to evaluate, prioritise and manage material ESG-related issues (including risks to the company’s business), and (iii) how the board reviews progress made against ESG-related goals and targets with an explanation of how they relate to the company’s businesses.
The other subject areas covered in the ESG Reporting Guide are “comply or explain” provisions. Each listed company is to make disclosure or explain why a disclosure is not made. While this approach allows flexibility to report on those aspects that are relevant to the company’s business, it helps ensure that the company will address each of the aspects while preparing the ESG report. The reporting areas include emissions, use of resources, environment and natural resources, employment and labour practices such as health and safety, operating practices including supply chain management and anti-corruption, and community engagement. Notably, there is a specific aspect of climate change as well as some key performance indicators on how significant climate-related issues have impacted or may impact the company and the actions taken to manage such issues.
Non-compliance with the ESG Reporting Guide constitutes a breach of the Listing Rules, which may result in investigations or regulatory responses such as disciplinary actions or issuance of warning or caution letters by the Stock Exchange, depending on the facts and circumstances.
“Guidance on Climate Disclosures” published by the Hong Kong Exchanges and Clearing Limited
The Hong Kong Exchanges and Clearing Limited published a “Guidance on Climate Disclosures” [2] on 5 November 2021 to provide practical guidance to assist listed companies in complying with the TCFD Recommendations and fulfilling the mandatory reporting requirements under the ESG Reporting Guide. The Guidance targets companies that are yet to develop substantive in-house expertise on climate-related issues and seeks to mitigate the challenges faced by most companies in relation to these issues.
Disclosure obligations by fund managers in Hong Kong
The Securities and Futures Commission of Hong Kong (“SFC”) issued a circular on 29 June 2021[3] to set out its expectations on SFC-authorized unit trusts and mutual funds which incorporate ESG, climate change and/or sustainability factors (“ESG factors”) as their key investment focus (“ESG Funds”) with a view to improve their comparability, transparency, and visibility. The circular will become effective from 1 January 2022 and re-define ESG Funds and their disclosure and reporting obligations. An ESG Fund must disclose in its offering document information regarding (i) its ESG focus, (ii) its ESG investment strategy, (iii) its expected or minimum proportion of ESG investment in terms of net asset value, (iv) any reference benchmark, and (v) related risks and limitations. The ESG Fund should also conduct periodic assessment of the attainment of its ESG focus at least annually and disclose the result of such assessment to its investors through appropriate means, for example in its annual report. The disclosure should cover how it has attained its ESG focus during the assessment period, the basis of the assessment performed (including any estimations and limitations), and comparison between the current and at least the previous assessment period.
As another initiative, the SFC announced in August 2021 that the Fund Manager Code of Conduct will be amended to require fund managers managing collective investment schemes (“CIS”) to (i) take climate-related risks into consideration in their investment and risk management processes and (ii) make appropriate disclosures. The requirements cover four key elements, namely governance, investment management, risk management and disclosure. Baseline requirements are to be complied with by all those managing CIS, while enhanced standards only apply to fund managers with CIS under management which equal or exceed HK$8 billion (approximately US$1 billion) in fund assets for any three months in the previous reporting year. [4]
The SFC stresses that it will keep abreast of the development of local and international regulations and standards in this area and will refine its requirements and provide further guidance when necessary.
