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Insight

Hong Kong | Management and disclosure of climate-related risks by fund managers

Insight 13 September 2021

Hong Kong | Management and disclosure of climate-related risks by fund managers

Read our latest briefing note on the circular issued by the Securities and Futures Commission (“SFC”) on management and disclosure of climate-related risks by fund managers.

On 20 August 2021, the Securities and Futures Commission (“SFC”) issued a circular on the Management and disclosure of climate-related risks by fund managers.

With transition periods varying from August 2022 to November 2022, it is important for asset managers to understand the requirements to prepare in advance.

Who is impacted?

  • Managers of Collective Investment Schemes (CIS)
  • Managers of Collective Investment Schemes (CIS) with over $8Bn fund assets (for any three months in the previous reporting year)

First, managers will need to assess whether they have discretion over the investment management process. The SFC Flowchart in this update may also provide additional detail on scope.

Additional points:

  • A manager which delegates the investment management to a sub-manager or advisor, ultimately retains the overall responsibility for compliance with the SFC requirements.
  • If a licensed corporation (LC) solely provides investment advice to a separate team of an affiliate or acts as a distributor of funds with no investment management discretion, the LC will not be expected to comply with the SFC’s requirements.
  • Fund Managers may leverage on group resources and staff, adopt group policies and procedures, and rely on group disclosures to satisfy the SFC’s requirements provided that they are subject to similar or higher standards than SFC’s requirements.

What are the requirements? When do they apply?

The SFC created two sets of requirements:

Applicability

Transition Period

  • Fund Managers
  • Large Fund Managers
  • Fund Managers: 20 November 2022
  • Large Fund Managers: 20 August 2022

The SFC divided the baseline requirements into three buckets:

1. Governance

Board’s roles and responsibilities: 

  1. define the board’s or the board committee’s role in overseeing the incorporation of climate-related considerations into the investment and risk management processes;
  2. oversee progress against goals for addressing climate-related issues; and
  3. determine how the board executes this role, including the process and frequency by which the board is informed about climate-related issues.

Management’s roles and responsibilities: 

  1. assign roles and responsibilities for managing climate-related risks to management-level positions or management committees which report to the board, and determine the appropriate management structure;
  2. determine how the management will monitor the status and progress to manage climate-related risks;
  3. establish a process for the management to be regularly informed about the status and progress of efforts to manage climate-related risks;
  4. devote sufficient human and technical resources for the proper performance of the duty to manage climate-related risks (e.g., staff training, subject experts and climate-related data from external sources);
  5. establish satisfactory internal controls and written procedures to ensure compliance with internal policies and procedures as well as regulatory requirements related to the management of climate-related risks; and
  6. set goals for addressing climate-related issues and develop action plans for managing climate-related risks.

2. Investment Management

  1. identify relevant and material physical and transition climate-related risks for each investment strategy and fund managed;
  2. where relevant, factor the material climate-related risks into the investment management process (e.g., include climate-related risks in the investment philosophy and investment strategies and incorporate climate-related data into the research and analysis process); and
  3. take reasonable steps to assess the impact of these risks on the performance of underlying investments.

Where a Fund Manager assesses that climate-related risks are irrelevant to certain types of investment strategies or funds, it should disclose these exceptions when it discloses how it incorporates climate-related risks into its investment and risk management processes. Fund Managers should also maintain appropriate records which explain why climate-related risks are irrelevant. It must be noted these requirements shall not prohibit or restrict a Fund Manager from complying with applicable laws and discharging their fiduciary duties.

3. Risk Management

Take climate-related risks into consideration in risk management procedures and ensure that appropriate steps have been taken to identify, assess, manage and monitor the relevant and material climate-related risks for each investment strategy and fund managed.

Fund Managers must also determine the process and frequency by which the board is informed about climate-related issues

3.1 Managers are also expected to apply appropriate tools and metrics to assess and quantify climate-related risks.

Applicability

Transition Period

  • Large Fund Managers only
20 November 2022

Large Fund Managers will be required to comply with enhanced requirements:

  1. assess the relevance and utility of scenario analysis in evaluating the resilience of investment strategies to climate-related risks under different pathways.
    1. If the assessment result is deemed to be relevant and useful, fund managers are required to develop a plan to implement scenario analysis within a reasonable timeframe; and
  2. if climate-related risks are assessed to be relevant and material, identify the portfolio carbon footprints of the Scope 1 and Scope 2 greenhouse gas (GHG) emissions associated with the funds’ underlying investments1 and define the calculation methodology and underlying assumptions.

Formula for Portfolio carbon footprint

The SFC also provided a formula for the calculation of the portfolio carbon footprint.

Large Fund Managers can refer to the PCAF Standard3 which provides guidance on methods to estimate and calculate the GHG emissions of various asset classes.

    1. where data is available or can be reasonably estimated
    2. Fund managers are encouraged to include Scope 3 GHG emissions if data is available
    3. https://carbonaccountingfinancials.com/standard

Disclosures

Fund Managers will need to make the appropriate disclosures to investors via various channels, such as websites, newsletters or reports and ensure investors’ attention is drawn to the information.

They should also observe the following when making the disclosures:

  1. adopt an approach proportionate to the degree climate-related risks considered in the investment and risk management processes;
  2. make adequate disclosures of information in writing and communicate to fund investors through electronic or other means; and
  3. review disclosures at least annually, update them when appropriate and inform fund investors of any material changes as soon as practicable.

Level: Entity   |   Field: Governance

  1. Describe the governance structure;
  2. Describe the board’s roles and oversight, including:
    - whether the board will review the risk management framework covering climate-related risks; and
    - the process and frequency by which the board is informed about climate-related issues;
  3. Describe the management’s roles and responsibilities, including:
    - how the management will monitor the status and progress of efforts to manage climate-related risks; and
    - the process for the management to be regularly informed about the status and progress of efforts to manage climate-related risks.

Level: Entity   |   Field: Investment Management and Risk Management

  1. Disclose the steps taken to incorporate relevant and material climate-related risks into the investment management process; and
  2. Describe the processes for identifying, assessing, managing and monitoring climate-related risks, including the key tools and metrics used.

If climate-related risks have been assessed to be irrelevant to certain types of investment strategies/
funds under their management, exceptions’ disclosures are required at the entity or fund level.

Level: Entity or fund level   |   Field: Risk Management

  1. Describe the engagement policy at the entity level and provide examples to illustrate how material climate-related risks are managed in practice, including how the engagement policy is implemented; and
  2. Provide the portfolio carbon footprints of the Scope 1 and 2 GHG emissions associated with the funds’ underlying investments at the fund level, where data is available or can be reasonably estimated, and indicate the calculation methodology, underlying assumptions and limitations, and the proportion of investments (e.g. funds NAVs) which are covered.

Fund Managers applicability flowchart

Click here to view the flowchart

How can Sanne assist?

Let's talk...

Should you require our expert services and need assistance on the implications of above new developments, we would be delighted to speak with you to discuss how Sanne can assist. Please contact Catherine, Karlien or Paul directly.

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Catherine Law Head of Business Development, APAC - Hong Kong
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Karlien De Bruin Global Head of ESG - South Africa
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Paul Séjournant Associate Director, Product Development - United Kingdom
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