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Navigating Hong Kong’s ESG: Regulations, Trends, and Opportunities

Hong Kong, positioned at the crossroads of finance and sustainability, emerges as a key player in the global ESG landscape. With robust regulatory frameworks, strategic green finance initiatives, and a surge in demand for ESG expertise, Hong Kong offers a vibrant ecosystem for sustainable finance.


Nestled in the heart of Asia, Hong Kong emerges as a vibrant financial powerhouse, uniquely positioned to propel sustainable finance and serve as the gateway to an unparalleled multi-trillion-dollar green investment opportunity in Mainland China.

With a robust corporate governance framework and progressive Environmental, Social, and Governance (ESG) requirements, Hong Kong is leading the charge in fostering a sustainable ecosystem.

In this article we highlight the regulatory landscape, emerging trends, and burgeoning opportunities within Hong Kong's dynamic ESG environment, providing insights into the city's financial prowess and commitment to sustainability.

Background

Hong Kong has established its climate objectives in alignment with global initiatives such as the Paris Agreement and the Central People’s Government’s decarbonization agenda.

In January 2017, the Hong Kong Special Administrative Region (HKSAR) Government unveiled the Climate Action Plan 2030+, targeting a 65 percent to 70 percent reduction in carbon intensity by 2030 compared to the 2005 baseline.

Building on this commitment, in November 2020, the Chief Executive declared an ambitious goal for Hong Kong to achieve carbon neutrality before 2050. Further details and concrete strategies were outlined in the Climate Action Plan 2050, with the government earmarking around HK$240 billion (US$31 billion) for climate change mitigation and adaptation over the next 15 to 20 years.

This robust commitment positions Hong Kong as a proactive player in the global ESG landscape, offering a foundation for exploring the vast opportunities within the city's evolving ESG framework.

Hong Kong's ESG regulatory framework

The existing regulatory framework for ESG in Hong Kong primarily targets listed companies, banks, and asset managers.

Listed companies in Hong Kong are obligated to report on various aspects of ESG – environmental, social, and governance – predominantly following a comply-or-explain approach. Additionally, initial measures have been initiated by financial regulators to mandate banks and specific asset managers to address climate-related risks and disclose their climate-related initiatives.

Hong Kong regulatory bodies have also actively communicated upcoming ESG regulatory developments to the market. On May 27, 2022, Ashley Alder, the CEO of the Hong Kong Securities and Futures Commission (SFC) and chairman of the International Organization of Securities Commissions (IOSCO), offered insights into the regulatory priorities surrounding ESG-related matters in Hong Kong.

Similarly, the June 2022 Listing Newsletter of the Hong Kong Stock Exchange (HKEX) detailed recommendations for listed companies to proactively address forthcoming requirements related to ESG reporting.

Another significant development is exemplified by the recent consultation paper released by the HKEX on April 14, 2023, proposing changes to the current ESG Reporting Code. Aligned with ISSB S2 Climate-related Disclosures, the proposals announced in the paper center on enhancing climate reporting. The move towards mandatory disclosure, for example, underscores a commitment to heightened transparency, with changes set to take effect from January 1, 2025. This extended implementation date offers companies valuable extra time to prepare themselves for evolving ESG reporting standards, emphasizing the need to stay informed and responsive to regulatory changes.

ESG reporting in Hong Kong: key requirements

The region's regulatory framework, spearheaded by institutions such as the HKEX and the Securities and Futures Commission (SFC), outlines specific rules and requirements for ESG disclosure. The table below provides a concise overview of the key focus areas and compliance mechanisms established by each regulatory body.
Key ESG Reporting Rules and Requirements in Hong Kong
Regulatory Body Reporting Rules and Requirements Focus Area Compliance Mechanism
HKEX (Hong Kong Stock Exchange) In 2016, introduced the requirement for listed companies to publish annual ESG reports, upgraded in 2020 and 2022. Requires specified mandatory disclosures and other comply or explain disclosures. The ESG reporting requirements are outlined in the "ESG Reporting Guide" in Appendix 27 of the Main Board Listing Rules and Appendix 20 to the GEM Listing Rules.
  • ESG management approach
  • Progress toward ESG-related targets
  • Mandatory disclosure requirements (Part B of the ESG Reporting Guide)
  • "Comply or explain" provision for deviations or failures (Part C of the ESG Reporting Guide)
SFC (Securities and Futures Commission) Separate from HKEX, implemented ESG requirements for SFC-authorized unit trusts and mutual funds focusing on ESG factors. Guidance on ESG disclosure is provided for these funds.
  • Key investment focus on ESG factors
  • Use of ESG investment risks and opportunities as a primary objective or strategy
Guidance on ESG disclosure for SFC-authorized unit trusts and mutual funds
Hong Kong's Biodiversity Strategy and Action Plan (BSAP) BSAP is an action plan to enhance biodiversity conservation and support sustainable development. While it does not institute formal ESG reporting obligations, organizations and funds in Hong Kong may consider including biodiversity reporting in their ESG disclosure.
  • Biodiversity conservation
  • Sustainable development
N/A (BSAP does not impose formal ESG reporting obligations)
The latest directives, particularly those from the HKEX, emphasize the following three key areas:
  • Strengthening the board’s responsibility: Hong Kong's ESG reporting framework places a significant responsibility on board members. By assigning boards the oversight of ESG disclosures, the framework underscores the pivotal role of leadership in the process. This approach also facilitates the allocation of resources for effective ESG implementation.
  • Improving ESG management: Hong Kong's ESG reporting stands out by focusing on future-oriented issues. Companies are required to anticipate sustainability challenges and proactively devise strategies to address them. This forward-looking approach ensures that investors and customers can evaluate disclosures to identify brands committed to responsible and sustainable practices.
  • Promoting integration between companies and shareholders: ESG sustainability reporting is regarded as a valuable tool to enhance stakeholder engagement. By involving stakeholders in the materiality assessment and key opportunities and risks review, companies can strengthen connections and create a more transparent and responsible image.
 Given the complexity and length of the ESG reporting process, companies must navigate it effectively. The following steps outline the process for correct disclosure in alignment with ESG principles:
  • Board and ESG Working Group: Start the ESG reporting process with the board of directors commissioning the initiative.
  • Reporting assessment: Review the company’s processes and conduct a materiality assessment to identify reporting topics.
  • Drawing ESG reporting strategy: Define objectives based on selected reporting topics and craft a comprehensive strategy, addressing both current and anticipated challenges.
  • Writing the report: Generate the sustainability report, presenting it to stakeholders clearly and comprehensively.

Impact on businesses

Proactive response to evolving climate reporting standards

With Hong Kong regulators gearing towards mandatory Task Force on Climate-related Financial Disclosures (TCFD) reporting by 2025, it's imperative for companies, particularly those listed on HKEX, to conduct comprehensive assessments against TCFD recommendations. The recently issued HKEX recommendations serve as a valuable resource for aligning reporting practices with TCFD principles.

Simultaneously, anticipating the finalization of the new International Sustainability Standards Board (ISSB) Climate Standard, companies should prepare compliance work plans and provide relevant training to directors and employees. The ISSB standard, known for its specificity, requires detailed disclosures on Scope 3 emissions, transition plans, carbon credits usage, and their impact on financial positions and performance.

Strengthening consistency between financial and sustainability reporting

The SFC Speech highlights the need for auditors and Chief Financial Officers (CFOs) to focus on the relevance of sustainability disclosures to financial statements.

Companies are encouraged to connect the two areas, ensuring that capital expenditures for emissions reduction or carbon offset purchases are reflected in financial statements. ISSB's proposals emphasize the importance of enhancing connectivity. ISSB mandates companies to explain linkages, use consistent assumptions, and publish financial statements and sustainability disclosures simultaneously, covering the same reporting period and entity.

Collaboration at all organizational levels

Action and collaboration are encouraged at all levels within corporate organizations. Boards are urged to integrate climate risks and opportunities into their strategic decision-making processes, actively monitoring progress toward set targets. Collaboration between sustainability, finance, and communications teams is crucial.

Sector-specific opportunities: green and sustainable finance

Hong Kong stands out as a thriving hub for green and sustainable finance, experiencing remarkable growth in its debt market. Diving into the diverse product offerings, Hong Kong showcases a dynamic range of green investment products, including green bonds, sustainability bonds, social bonds, and sustainability-linked bonds.

The robust performance of green and sustainable finance (GSF) in Hong Kong's debt market underscores its resilience and significance. In 2022, the SAR played a pivotal role in the Asian GSF landscape, arranging green and sustainable bonds totaling US$27.8 billion, constituting 35 percent of the regional market. Notably, amidst an overall decline in bond issuance, the GSF segment demonstrated resilience with only an 11 percent decrease in issuance. Private sector entities, particularly corporations beyond real estate and financial institutions, contributed significantly, accounting for around 90 percent of the total issuance.

Beyond bonds, the flourishing realm of green and sustainable loans further propels Hong Kong's position as a dynamic hub for environmentally conscious financing, contributing to a total GSF debt volume of US$80.5 billion in 2022.

Government policies and incentives driving Hong Kong’s green bond market

The growing Hong Kong’s green bonds market. is intricately woven into the proactive policies and strategic initiatives undertaken by key entities, notably the HKSAR Government and the Green Bond Programme (GGBP), as illustrated in the table below.
Policies and Incentives Driving Market for Green Bonds in Hong Kong
Entity/Initiatives Key Contributions
HKSAR Government
  • As of July 31, 2022, the HKSAR government has issued nearly US$10 billion in green bonds under the Green Bond Programme (GGBP).
  • The proceeds from the green bonds are allocated to the Capital Works Reserve Fund, which saw an expanded scope and borrowing ceiling of HK$200 billion (US$25.6 billion) in July 2021. This expansion allows funding for a broader range of green projects, including public works projects.
  • In January 2023, a successful offering of US$5.75 billion worth of green bonds marked the first triple-currency offering in Asia, making it the largest ESG bond issuance in the region. The issuance attracted over US$36 billion equivalent in orders, showcasing strong global institutional investor demand.
Green Bond Programme (GGBP)
  • The GGBP is a pivotal component of the government's efforts to foster green finance.
  • The program aims to align regulatory standards with international best practices, particularly those established by the International Capital Market Association (ICMA).

Demand for ESG roles and skills in Hong Kong

Fueled by an escalating focus on sustainability across the corporate spectrum and mirroring a wider global shift towards responsible business practices, Hong Kong is experiencing a noteworthy surge in the demand for ESG jobs.

Notably, ESG role hiring has surged by 25 percent between 2020 and 2022.

To meet the demand for ESG expertise, companies in Hong Kong are looking to attract top-tier talent. Offering salary premiums exceeding 30 percent, these businesses are aligning their recruitment strategies with sustainability goals. This approach reflects a commitment to environmental and social responsibility while positioning Hong Kong as a hub for ESG professionals.

Amidst this trend, there's a heightened demand for expertise in key areas such as ESG reporting, climate change, and carbon emissions.

Moreover, the surge in demand for ESG expertise is notably pronounced in the financial sector, with a particular emphasis on green finance professionals. Institutions in Hong Kong, especially banks and investment funds committed to sustainability investing, are actively seeking and prioritizing the right ESG talent to meet the evolving needs of the industry.

Insights highlight the intentional focus organizations put on securing individuals with a targeted skill set, underscoring the nuanced demands of the ever-changing ESG job market. This also reflects the industry's commitment to nurturing a workforce adept at addressing the diverse challenges posed by ESG considerations.

What makes Hong Kong a strategic hub for ESG opportunities

Hong Kong's firm commitment to climate goals positions it as a crucial hub for ESG opportunities in the region.

As Asia's premier international financial center, Hong Kong plays a pivotal role in green and sustainable finance, offering economic growth opportunities and contributing significantly to climate change mitigation. The Hong Kong Monetary Authority's (HKMA) initiative to develop a green classification system aligns with international standards, minimizing greenwashing risks and ensuring conformity with global ESG frameworks. Notably, the focus on integrating resilience into green investments acknowledges Hong Kong's susceptibility to extreme weather events, reflecting a comprehensive approach to ESG considerations.

While being a gateway to China, Hong Kong is strategically positioned to harness the green finance prospects emerging from the advancement of the Guangdong-Hong Kong-Macao Greater Bay Area and China's Belt and Road Initiative.

Capitalizing on its well-established strengths, including extensive financial and professional services, substantial capital, and a pool of skilled talent, Hong Kong is actively cultivating an ecosystem for verification and certification. The local taxonomy, Government Green Bond Programme, and evolving green finance infrastructure all contribute to Hong Kong's ability to scale access to international finance for China's sustainable development.

The call to action is clear: businesses should seize the vast opportunities within Hong Kong's evolving ESG framework, align with global sustainability

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