【Certified ESG Analyst Insights Sharing】Delton Lau, CESGA

The ESG (environmental, social and governance) investment market has been growing rapidly in recent years. World-renowned pension funds, such as Japanese pension funds, the California Public Employees’ Retirement System of the USA and the Canada Pension Plan, collectively manage trillions of US dollars and have established strict ESG investment standards. The HKSAR government aims to turn Hong Kong into an ESG investment hub in Asia, as well as assisting Mandatory Provident Fund (MPF) trustees in incorporating ESG elements into MPF schemes through the Mandatory Provident Fund Schemes Authority (MPFA). The objective is to keep up with the global trend of the increasing importance of ESG in pension funds.

As early as November 2021, the MPFA released the Principles for Adopting Sustainable Investing in the Investment and Risk Management Processes of MPF Funds (Principles). The Principles cover ‘governance, strategy, risk management and disclosure’ as four key elements helping MPF trustees integrate ESG factors into MPF investments and risk management processes from a financial risk management perspective, while also making relevant disclosures to MPF scheme members. In January last year, the Hong Kong Securities and Futures Commission (SFC) issued new guidelines to improve the disclosure requirements for ESG funds. According to the 2023 ESG Reporting Study for Hong Kong Listed Companies issued by PricewaterhouseCoopers International Limited (PwC), the disclosure level of all issues relevant to ESG reports submitted by sampled companies tends to be mature, with social issues disclosure reaching a maturity level of 90% (1).

With the continuous improvement of ESG regulations in Hong Kong, more products which are certified by a third party and track various ESG indices are emerging in the market, including products such as Exchange Trade Funds (ETFs). This has a positive impact on MPF trustees, encouraging them to increase the allocation of ESG ETFs within the MPF schemes. On October 3 this year, an ESG ETF which tracks HSI ESG Enhanced Index received substantial subscriptions of nearly 6.9 billion Hong Kong dollars from MPF trustees, leading to a significant increase in the total market value of Hong Kong-listed ESG ETFs to nearly 10 billion Hong Kong dollars (2).

In June this year, the International Sustainability Standards Board (ISSB) also issued IFRS (International Financial Reporting Standards) S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures of IFRS Sustainability Disclosure Standards 1 and 2 respectively. The standards ensure the comparability of information regarding global companies’ sustainability-related risks and opportunities, which facilitates investors’ decision making. They are endorsed by the International Organization of Securities Commissions (IOSCO), and the Hong Kong Exchange (HKEx) stated that it would take into account the final ISSB Climate Standard when finalising the Listing Rule amendments, and will be effective for annual reporting periods beginning on or after January 1, 2025. In this regard, the Financial Services and the Treasury Bureau, the Hong Kong Exchanges and Clearing Limited, the MPFA, the Insurance Authority and the Environment and Ecology Bureau formed the Green and Sustainable Finance Cross-Agency Steering Group, which will develop a roadmap to establish local reporting standards for sustainable development (3).

The two ISSB disclosure standards will further enhance the comprehensiveness of disclosure in ESG reports by local listed companies and lead to more investments in Assets under Management (AuM) in ESG. Local ESG-themed MPF schemes will become increasingly popular. However, though it may be the case that ESG investments generate better returns than non-ESG investments or benchmark indices, there are still problems in ESG assessment, including the lack of unified standards, in transparency and greenwashing. MPF is a long-term investment and ESG investments are relatively new compared to traditional ones. Therefore, the true performance of ESG MPF schemes will require long-term observation.

1. https://finance.mingpao.com/fin/instantf/20231012/1697086919097

2. http://www.stcn.com/article/detail/996194.html

3. https://www.hkex.com.hk/News/Regulatory-Announcements/2023/231103news?sc_lang=zh-HK

4. https://www.sfc.hk/TC/Sustainable-finance/CASG

Article is written by EFFAS Certified Environmental, Social, and Governance Analyst (CESGA). CESGA is highly recognized in Europe and globally which has been steadily increasing in the worldwide. If interested in enrolling, please refer to https://bit.ly/3tFUQ1M.