Up to a tenth of almost 2,000 Hong Kong licensed asset management firms will be required to disclose greenhouse gas emissions data of their investment portfolios and investees from November 2022, according to the city’s securities watchdog agency.
Some 100 to 200 companies are expected to meet the threshold for mandatory disclosure of greenhouse gas emission data when the requirement takes effect, out of 1,800 to 2,000 asset management firms licensed in Hong Kong, said Julia Leung, the deputy chief executive of the Securities and Futures Commission (SFC).
Fund managers with at least HK$8 billion (US$1.03 billion) of clients’ assets in Hong Kong must make a “reasonable” effort, where data is available or can be reasonably estimated, to report their investees’ and their funds’ greenhouse gas emissions footprint – from fuel combustion and bought energy, under a new regulation announced last month. They must define their methodology and provide underlying assumptions.
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They, as well as those below the threshold, will also be required to set up in 12-15 months governance structures and policies to assess, disclose and manage climate risks and opportunities.
“This requirement is made in light of rising investor interest in funds that integrate environment, social and governance (ESG) issues into investment decision-making, a need to prevent greenwashing and to enhance Hong Kong’s role as an international financial centre in channelling investment into low-carbon projects to fight climate change,” she said in an interview.
Greenwashing is the creation of an impression of higher than actual sustainability benefits.
The number of funds that met the SFC’s requirements to be listed as green or ESG products nearly tripled to 59 in June, compared with the end of 2018, while assets being managed jumped 91 per cent to US$103 billion.
The Hong Kong units of large international funds are likely to have little difficulty in meeting the requirements, as they can tap into their headquarters’ experience and resources. Local medium-sized funds are likely to face challenges, fund managers and data consultants said.
“Some asset managers, even in the HK$8+ billion range, don’t have a material internal ESG capability and as such, will need to first build [it],” said Bill Kentrup, co-founder of Allinfra, which helps organisations calculate their carbon footprints using software and blockchain technology. “Then the hard work of gathering and reporting in a cost-effective way data that is useful to readers begins … it is quite manual and expensive, with risks of error and limited utility.”
Fund managers are also likely to run into difficulties in obtaining emission data from some companies listed in mainland China and from other Asian markets where the disclosure of emissions data is not mandatory. In Hong Kong, it is required since July.
“Fund managers can’t do the report on their own without the cooperation of their investees,” said Elsa Pau, founder and CEO of BlueOnion, which runs a financial portal that tracks sustainability data on 8,000 companies and 147,000 funds. “A lot of Asian investors, especially in the fixed income space, will find it hugely challenging getting not only climate data, but even basic ESG scores, due to limited power to influence the management of their large number of investees.”
Judy Li, the Asia Pacific financial services sustainability leader and partner at EY, said most fund managers will require help from ESG specialists, who are in short supply.
However, there is a clear trend for regulators in most jurisdictions to make environment data disclosure mandatory, which will make it easier in the long term for fund houses to comply with their own disclosure requirements, she noted.
Suvir Mukhi, the co-chief investment officer of Income Partners which manages around US$2.8 billion of fixed income assets, said it has been able to get some 80 per cent of the carbon emissions data needed to meet SFC requirements for the main funds it manages, from third-party vendor MSCI.
“We will work to improve this by doing some of our own research and we have been engaging with those investees,” he said. “For a small segment of [investee] companies, it may be a bit challenging, especially the smaller and privately-owned ones. But we will give them more time instead of disposing of those investments since there is still time ahead of the rules’ implementation.”