The Hong Kong stock exchange’s stricter reporting rules for socially responsible investments is expected to attract more Western investors to the city and may have spillover effects on other Asian markets, according to fund managers and industry experts.
The rules, which will become effective on July 1, include making boards of directors responsible for environmental, social and governance (ESG), instead of leaving it to a small team led by mid-level executives as is currently the case.
Companies are also required to disclose how climate change will affect their business. They must also have policies on identification and mitigation of significant climate-related issues that may impact their business.
The Hong Kong Exchanges and Clearing Ltd (HKEX) unveiled the new rules in December.
“This is another major step forward in terms of robustness and transparency, which reflect many leading ESG investors’ approaches…I believe we’ve now entered ESG investing phase 2.0 in Hong Kong,” Chaoni Huang, vice president of the Hong Kong Green Finance Association, tells Asia Asset Management.
According to Ms. Huang, who is also executive director and head of sustainable capital markets for Asia Pacific at BNP Paribas, foreign investors will have “better confidence and conviction” about the Hong Kong and Asian capital markets.
“ESG concern has been one of the main barriers for many leading institutional investors from the West” who are keen to invest in Hong Kong and the broader Asian region, she says.
“Until now, we have heard a lot about the ‘chicken and egg’ scenario, under which investors complained about the lack of ESG disclosure, while companies complained that investors’ interest was insufficient to warrant the disclosure,” she says.
Ms. Huang says the market shouldn’t view the new rules in isolation but as part of a consolidated effort by the financial sector to adopt ESG.
She says the rules work in parallel with Hong Kong’s Securities and Futures Commission’s ongoing efforts to encourage investors to integrate ESG into their investments.
According to Kate Ahern, head of ESG and managing director of US-based hedge fund Cartica Management, investors are always searching for high quality information about companies, especially on ESG.
“The revised reporting rules, which require new disclosures, will hopefully provide us with more information on how companies identify material ESG issues, evaluate climate-related risks, and track data,” she says. “The additional information required by HKEX could help to give more investors confidence to invest in the region, especially because it is directly reported by the companies.”
While regulators are doing their part, there are still some challenges for investors, such as the growing number of ESG data and ratings providers.
Ms. Ahern says the real challenge is to analyse a company beyond its score.
Ratings are “a great starting point for more research” but it’s important for investors “to develop a perspective on what they believe to be the material ESG risks and opportunities that could impact the value of a company, and to track relevant metrics over their ownership period”, she says.
There is also the question of how investors can integrate sustainability into their portfolios. There are many approaches available now so it can be challenging for investors to understand which one aligns best with their investment objectives, asset allocation and risk profile, according to Helena Fung, head of sustainable investment for Asia Pacific at FTSE Russell.
“Investors also face challenges around identifying what sustainability means within different organisations. Adequate resourcing and availability of expertise can also be an issue,” she says.
“There is now a growing awareness of sustainability issues and risks, but challenges remain for investors needing to quantify these risks and integrate them into investment models.”