Hong Kong widens new fund label from green to ESG

Move reflects broader global trend to incorporate social factors

Funds registered in Hong Kong can now apply for a voluntary ESG Fund label from the city-state’s official standards body.

The newly-announced certification scheme is an extension of an existing certification scheme for green or environmentally-focused funds, launched in September 2019 by the Hong Kong Quality Assurance Agency (HKQAA).

The ESG Fund label will incorporate “broader coverage” of ESG factors by expanding the scheme’s underlying taxonomy for eligible activities and fund objectives. According to a release, the label’s criteria was developed “with reference to a number of international principles and guidance” including the Principles for Responsible Investment, although details did not appear to be publicly available.

Since its launch last year, HKQAA’s Green Fund label has issued pre-issuance certification for 24 and 18 new bond and debt funds respectively, and post-issuance certificates for seven and one existing bond and debt funds. The scheme is yet to certify any equity funds.

To qualify for the Green Fund label, funds must explicitly address at least one environmental target – and its corresponding UN Sustainable Development Goal – in addition to meeting the scheme’s criteria on fund objectives, green asset evaluation and selection, disclosure and reporting, and active engagement and ownership. Upon certification, HKQAA will carry out ongoing monitoring of funds against their stated objectives.

HKQAA is as an observer of the Green Bond Principles, under the International Capital Markets Association, and is an approved verifier under the Climate Bonds Standard. HKQAA is also the Hong Kong government representative to the International Standards Organisation for the development of a global “standard on sustainable finance”.

Hong Kong is not the only jurisdiction with its own green or sustainable fund label. Currently, the EU is developing a label for sustainability-focused retail funds with a final proposal due to be submitted for approval by the European Commission in November. Existing state-backed schemes include Luxembourg’s LuxFLAG, France’s Greenfin, Belgium’s Toward Sustainability and the Nordic Swan.

The announcement from HKQAA comes as Hong Kong starts work on what amounts to a national green finance strategy for the city-state, led by a cross-agency committee of financial market regulators, the Environment Bureau, the Financial Services and the Treasury Bureau, Hong Kong Exchanges and Clearing Limited, the Insurance Authority, and the Mandatory Provident Fund Schemes Authority.

Sustainable finance is increasingly a focus for individual regulators too. The Hong Kong Monetary Authority (HKMA), Hong Kong’s de facto central bank, is currently working on assessing the “greenness” of regulated lenders and incorporating ESG criteria into its own portfolios, while market regulator the Securities and Futures Commission has conducted an industry-wide survey on ESG integration and introduced guidance for disclosures for ESG and green funds. In addition, the Hong Kong Exchange has introduced enhanced ESG disclosures for listed companies.