ESG Comparative Guide

• Published date: 21 September 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Employment and HR, Environment, Litigation, Mediation & Arbitration, Real Estate and Construction, Energy and Natural Resources, Corporate and Company Law, Shareholders
• Law Firm: Stephenson Harwood
• Author: Ms Penelope Shen and Tze-wei Ng

1 Legal and enforcement framework

1.1 What regulatory regimes and codes of practice primarily govern environmental, social and governance (ESG) regulation and implementation in your jurisdiction?

Hong Kong does not have specific laws setting out ESG or sustainability objectives for companies or investors, but there are longstanding laws covering the three aspects of ESG, such as:

• environmental laws on pollution, use of resources and conservation
• social laws on employment and labour, health and safety and anti-discrimination; and
• governance laws on anti-bribery and corruption and anti-money laundering

At the regulatory level, there are increasingly stringent ESG disclosure rules for both companies and investment funds (retail and mandatory provident funds), and more climate-related disclosure requirements for banks. More guidelines have been introduced on what can be considered a ESG or green product through initiatives such as:

• the Government Green Bond Programme
• Securities & Futures Commission (SFC) guidelines for ESG funds; and
• the setting up of STAGE - the Sustainable & Green Exchange

Since the first Strategic Framework for Green Finance was published by the SFC in 2018, the setting up of the Green and Sustainable Finance Cross-Agency Steering Group ('GSF Steering Group') in May 2020 (co-led by the SFC and the Hong Kong Monetary Authority (HKMA)) and the strategic plan announced in December 2020 all point towards a more unified regulatory approach to how to grow sustainable finance in Hong Kong. With Hong Kong's pledge to achieve carbon neutrality by 2050 in response to the Paris Agreement and the publication of its Climate Action Plan 2050 in October 2021, we can expect more and broader regulatory steps announced in Hong Kong for companies and investors in the coming years as Hong Kong establishes itself as a sustainable finance hub. Carbon trading is the other key development to watch.

1.2 Is the ESG framework in your jurisdiction primarily based on hard (mandatory) law and regulation or soft (eg, 'comply or explain') codes of governance?

Hong Kong has laws governing various aspects of ESG issues (from environmental to labour laws); but if we look only at ESG or sustainability integration or disclosure frameworks, we are mainly looking at regulations. The three main ESG frameworks are all disclosure frameworks with both mandatory and 'comply or explain' components - one for listed companies , one for investment fund managers and one for ESG funds specifically. The Environmental, Social and Governance Reporting Guide ('ESG Reporting Guide') of the Listing Rules that applies to companies listed on the Hong Kong Stock Exchange (HKEX) ('listcos') comprises two levels of disclosure obligations (as of January 2022):

• mandatory disclosure requirements in relation to board governance; and
• 'comply or explain' provisions in relation to the disclosure of policies and compliance and key performance indicators across 12 areas of environmental and social issues.

The Corporate Governance Code of the Listing Rules ('CG Code') has further mandatory and 'comply or explain' disclosure requirements in relation to governance and diversity policies for listcos. As for investment funds, there are two relevant guidelines from the SFC:

• the Circular to Management Companies of SFC-Authorised Unit Trusts and Mutual Funds - ESG Funds (ie, funds that identify themselves as ESG-focused) (updated June 2021) ('SFC ESG Funds Requirements'); and
• the Circular on Management and Disclosure of Climate-related Risks by Fund Managers (August 2021). This amended the Fund Management Code of Conduct (FMCC), which applies to all fund managers within scope, and has two different levels of requirements for investment funds respectively with assets under management below and over HK$8 billion. It will come into effect later in 2022 ('SFC Climate Requirements').

Listing applicants are also asked by the HKEX to consider the above requirements and put in place mechanisms well in advance that allow them to comply upon listing.

1.3 Which bodies are responsible for implementing and enforcing the rules and codes that make up the ESG framework? What powers do they have?

The HKEX is responsible for enforcing the ESG Reporting Guide and the CG Code in relation to listed companies and listing applicants; while the SFC is responsible for enforcing the two guidelines in relation to investment fund managers and ESG funds specifically. However, given the early stage of these frameworks, it is unclear how non-compliance will be addressed and there is limited guidance on how much disclosure will be considered adequate. That said, the HKEX has stated that it will continue to monitor standards of ESG reporting to provide more guidance; and its reports - such as Analysis of Environment, Social and Governance Practice Disclosure in 2016/2017 - give a taste of how the HKEx might consider what constitutes adequate disclosure. For example:

• a company simply saying it has an anti-corruption policy will be insufficient; and
• non-compliance without giving considered reasons will amount to breach of the Listing Rules.

In general, failure to make mandatory disclosure for listcos will constitute a breach of the Listing Rules, which the HKEx has the power to 'enforce' - for example, by:

• sending enquiry letters to the issuer in relation to any non-compliance, to make enquiries as to the details, background and reasons for the breach;
• issuing warning letters for material or repeated breaches;
• asking the directors of an issuer to sign an undertaking in relation to the breach;
• demanding the issuer to make rectification by making the necessary announcements/publication; and
• taking further disciplinary measures as HKEX deems fit.

The SFC's powers to mete out disciplinary measures and prosecute offenders to combat misconduct in the securities and futures markets are generally covered by the Securities and Futures Ordinance (Cap 571). Codes and guidelines issued by the SFC generally do not have the force of law; but a breach of the FMCC - the latest version of which sets out the SFC's Climate Requirements - may lead to disciplinary action. There have been no ESG enforcement cases thus far, however.

1.4 What is the regulators' general approach to ESG and the enforcement of the ESG framework in your jurisdiction?

The regulators' general approach to ESG in Hong Kong is more one of encouragement - non-prescriptive and 'climate first'; but it is clear that the regulations are getting more stringent. For example, the ESG Reporting Guide was voluntary when first introduced in 2013; but in July 2020, mandatory provisions were included for the first time and the timeline for ESG reports is also now aligned with the timeline for financial reports. Likewise, for SFC-authorised unit trusts and mutual funds that identify themselves as ESG funds, the 2019 disclosure requirements have been further enhanced in 2022. With the establishment of the GSF Steering Group - jointly led by the HKMA and the SFC, and joined by the HKEX, the Hong Kong Insurance Authority, the Mandatory Provident Fund Schemes Authority, the Environment Bureau and the Financial Services and Treasury Bureau - we can expect that regulations will continue to expand coverage going forward. In particular, regulators will take more action to align climate-related disclosures with the Task Force on Climate-related Financial Disclosures recommendations. According to the December 2020 strategic plan of the GSF Steering Group, climate-related disclosures will be mandatory across relevant sectors from no later than 2025, including enhanced disclosures for financial institutions such as banks, asset managers, insurance companies and pension trustees.

1.5 What private sector initiatives have been launched in your jurisdiction to complement the ESG framework?

There are a number of private sector initiatives; but one notable initiative is the Hong Kong Green Finance Association (HKGFA), founded in September 2018, which offers channels and opportunities to facilitate the development of green finance and sustainable investments in Hong Kong...