Hong Kong’s Securities and Futures Commission (SFC) has announced details of requirements for fund managers to address climate change in their investment and risk management processes and make appropriate disclosures.

Where are the requirements set out?

On 20 August 2021, the SFC issued:

• Consultation Conclusions on the Management and Disclosure of Climate-related Risks by Fund Managers with amendments to the Fund Manager Code of Conduct (FMCC) set out in Appendix B and C.

• A circular on Management and disclosure of climate-related risks by fund managers together with Appendix 1 which provides a flowchart illustrating the applicability of the requirements and Appendix 2 which includes practical examples of how to comply.

• FAQs on the Application of the climate-related risk requirements under the FMCC.
  
  

The circular and the FAQs are key reading materials – they provide clear guidance on the regulatory framework.

Who needs to comply with the requirements?

Type 9 licenced corporations (LCs) with investment management discretion in respect of collective investment schemes (funds) are required to comply with baseline requirements (summarised below). Managers of authorised and unauthorised funds are equally in scope. However, LCs that are not exercising investment discretion in relation to the management of funds are not caught by the new requirements. LCs that simply manage discretionary accounts are not required to comply with the new requirements at this stage.

LCs with funds under discretionary management equal to or in excess of HK$8 billion (Large Fund Managers) need also to comply with enhanced standards (summarised below). Assets under discretionary account management are not included in this calculation.

The flowchart in Appendix 1 to the Circular (linked above) provides further guidance on applicability.

LCs are required to assess whether climate-related risks are relevant and material to their investment strategies being employed in relation to funds under discretionary management. In making such assessment, LCs should adopt an approach which is appropriate and proportionate to the particular circumstances having regard to qualitative and/or quantitative factors. Internal records should be maintained evidencing the basis of an LC’s determination.

Where an LC determines that climate-related risks are irrelevant to its investment and risk management process having regard to the nature of the fund’s investments or strategy, it must disclose such determination. In such circumstances the LC must include disclosure in the fund’s offering document or other medium available to investors (e.g. its website), the type of investment strategies or funds for which it considers climate-related risks to be irrelevant.

LCs should re-evaluate the relevance of climate risks at least annually and update the disclosures as required.

How do the requirements differ from the SFC’s previous proposals?

The SFC issued a consultation on its proposals in October 2020. The requirements cover four key elements: governance, investment management, risk management and disclosure. Our article which summarises key elements of the previous proposals and how they would apply to fund managers is available here: Climate-related risks alert.

The key differences between the previous proposals and the final requirements as set out in the SFC’s Consultation Conclusions are as follows:

1. The threshold for calculating whether an LC is to be classified as a Large Fund Manager is HK$8 billion AUM instead of the proposed HK$4 billion.
   
   
2. Assets under discretionary management accounts are excluded from the Large Fund Manager calculation.
   
   
3. The SFC has clarified that whilst the board of directors or board committees should have oversight, management is required to supervise and monitor compliance with the standards.
   
   
4. The SFC has further clarified that local fund managers may use group resources to assist in satisfying the SFC’s requirements.
   
   
5. The SFC has revised the enhanced standards in relation to disclosure of greenhouse gas emissions – Large Fund Managers are expected to “make a reasonable effort, where data is available or can reasonably be estimated” rather than the SFC mandating a quantitative disclosure or specific metric.
   
   
6. The implementation timeline has been extended, see details below.
   
   

What are the baseline requirements applicable to LCs under the new requirements?

The baseline requirements cover the following areas:

1. Governance, i.e. requirements on the role and responsibilities of the board and management-level positions; implementation of policies and procedures to comply with the amendments to the FMCC in respect of climate change.
   
   
2. Investment Management, i.e. identification and incorporation of climate-related risks for each of the LC’s investment strategies.
   
   
3. Risk Management, i.e. implementation of risk management procedures to identify, assess, manage and monitor climate-related risks for each of the LC’s investment strategies.
   
   
4. Disclosure, i.e. LCs who are responsible for the overall operation of a fund are required to make appropriate disclosures to investors in respect of the LC’s governance and risk management roles and responsibilities; climate-related risks relevant to the investment strategies; and risk management policies and procedures.
   
   

LCs who qualify as Large Fund Managers are subject to additional obligations to assess the relevance and utility of scenario analysis in measuring the resilience of investment strategies against climate-related risks and if relevant, to develop a plan to implement scenario analysis within a reasonable period of time. In addition, Large Fund Managers are required to take reasonable steps to identify and calculate the portfolio carbon footprint of Scope 1 and 2 greenhouse gas emissions associated with the relevant funds’ underlying investments where the date is available or can be reasonably estimated. Such calculation must follow a prescribed formula set out in the SFC’s requirements.

When is the deadline for compliance?

Large Fund Managers have until 20 August 2022 to comply with the baseline requirements and 20 November 2022 to comply with the enhanced standards.

Other fund managers falling within the new requirements must comply with the baseline requirements by 20 November 2022. The SFC plans to hold a briefing session for the industry in October 2021.