HKMA introduces standards for sale of sustainable investment products | Perspectives and events

Another author Sarah Troughton, Professional Solicitor (Litigation)

The Hong Kong Monetary Authority (HKMA) recently announced in a circular its expected standards for the sale and distribution of green and sustainable investment products by registered institutions (RIs). This is to ensure that adequate controls are in place in RI to manage potential risks arising from the sale of sustainable investment products such as greenwashing.

In formulating the expected standards, the HKMA refers to the findings and good practices identified in its thematic review of all RIs (covering retail banks, private banks and corporate banks) as well as international developments.

Implementation of the standards

The expected standards apply to RIs that offer or classify investment products as green and sustainable. RIs must meet the expected standards as soon as possible and in any case by November 29, 2024 (ie 12 months from the date of the circular).

Standards at a glance

Expected standards and examples of good practice include:

  1. Product due diligence

    RIs are expected to take reasonable steps when classifying products as green and sustainable, such as reviewing product offering documentation and reports provided by the product issuer; performing ongoing product due diligence at appropriate intervals to ensure products maintain their environmental and sustainable status; and notifying customers of any change in the status of such products.

    Examples of good practice identified in the thematic review include having a specific sustainability questionnaire for each product and conducting additional review by reviewing external data from multiple information service providers, e.g. sustainability ratings.

  2. Customer preference for sustainability

    The HKMA did not prescribe an expected standard for this area, but noted a form of good practice from its thematic review where an RI would request a client’s ESG or sustainable investment preference in specific areas (eg climate change, water, people, governance, etc. .n.) which the RI can then consider along with other factors (eg the client’s risk profile) when making recommendations to that client.
  3. Disclosure

    RIs must ensure that claims made about green and sustainable investment products are accurate and not misleading. Disclosures communicating the product’s environmental and sustainability characteristics and specific risks must be made to the customer in clear language. If the RI provides the customer with the product sustainability score, the RI must have a clear understanding of the meaning of the score. If requested by the client, RIs must share information about how the result is derived.

    Good practice identified by the industry is to use an internally created model to assign a score for each of the ‘E’, ‘S’ and ‘G’ factors and disclose these scores to the client through monthly reports.

  4. Management and Control

    RIs should ensure that appropriate policies and procedures are in place to monitor the risks that may arise from the sale of green and sustainable investment products, in particular the risks of environmental cleaning.

    The HKMA noted from the thematic review that some RIs have, as a matter of good practice, established dedicated management committees to review ESG policies and procedures.

  5. Personnel training

    RIs are expected to provide ESG-related training to staff on sustainable investment concepts, the latest trends and market developments, and product knowledge.

    The HKMA noted that some RIs, as a matter of good practice, will periodically invite external professionals to provide training on ESG topics to their staff.

  6. Bookmaking activities

    For RIs that act as syndicated capital market intermediaries (as defined in paragraph 21.2.1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission), an adequate client issuer assessment must be performed, before committing to a debt offering for that client issuer, including taking reasonable steps to obtain an accurate understanding of the client issuer’s history, operations, business and results, financial conditions and prospects. In addition, RIs should evaluate green and sustainable bond offerings using applicable market principles and standards and seek external review where appropriate.

    An example of good practice is the creation of a dedicated ESG team to evaluate bond offerings.

Additional FAQs can be found in Appendix 2 of the circular. In particular, the HKMA has clarified that RIs may continue to accept simplified arrangements for bonds that fall within the scope of “Eligible Bonds” as defined in the HKMA’s circular dated 31 July 2020 on “Simplified Sales and Distribution Arrangements of eligible retail organisations’.

Next steps for RI

RIs should review their existing policies and procedures and, where necessary, introduce improvements to comply with the HKMA’s expected standards before 29 November 2024. Although the good practices cited in the HKMA circular are useful, RIs can to adopt other forms of practices that suit their business model and operational needs, provided they meet the expected standards of the HKMA.

Mayer Brown lawyers are available to assist clients with the requirements of the HKMA circular discussed in this client update. For more thought leadership on ESG topics, please visit our Eye on ESG blog and related articles listed below.

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