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SFC consultation on changes to the fund manager code in relation to climate-related risks

On 29 October 2020, Hong Kong’s Securities and Futures Commission (SFC) published its Consultation Paper on the Management and Disclosure of Climate-related Risks by Fund Managers (Consultation) which proposes new mandatory requirements for Hong Kong fund managers of collective investment schemes around climate-related risks. The Consultation is a continuation of the SFC’s efforts to create a regulatory framework for the asset management industry to address climate change which has increasingly become a source of extreme risk for businesses and to combat greenwashing.

The proposed new requirements cover four areas, namely governance, investment management, risk management and disclosure. Subject to the Consultation conclusions, amendments will be made to the Fund Manager Code of Conduct (FMCC) and further specific baseline requirements for each of these aspects will be set out in a circular to be issued by the SFC (Circular). The SFC’s proposal includes imposing “enhanced standards” for “Large Fund Managers” (i.e. fund managers with total asset under management of HK$4 billion or above) in areas of risk management and disclosure.

This article provides a snapshot of the key proposed requirements, how they may apply to fund managers and the implementation timeline.


Corporate governance plays a pivotal role in ensuring effective management of climate-related risks in undertaking fund management activities. The SFC proposes to require a fund manager’s board of directors to oversee the incorporation of climate-related considerations into investment and risk management processes. Management is also required to develop action plans, establish internal controls and procedures, and devote sufficient resources (e.g. providing staff training and obtaining climate-related data from external sources) in managing climate-related risks.

There is no proposed new provisions or amendment to the FMCC for this aspect and the existing provisions on organisation and resources, responsibilities of senior management and compliance (i.e. paragraphs 1.2(a)-(d), 1.6 and 1.8 of the FMCC) will extend to the management of climate-related risks. Details of the baseline corporate governance framework required of fund managers will be set out in the Circular.

Investment management

A new provision is being proposed in the FMCC requiring fund managers to ensure that climate-related risks are taken into account in their investment management process for funds. This would require a fund manager to identify the relevant and material climate-related risks for each investment strategy and fund it manages, factor the material risks into the portfolio construction process, and assess the impact of such risks on the performance of the underlying investments.

For certain investment strategies (e.g. forex or futures funds or where the underlying investments are for day trading), a fund manager may take the view that climate-related risks are irrelevant to the investment and risk management processes of such strategies. In this case, the fund manager should ensure that such assessment is justifiable and maintain appropriate records of the assessment process.

Where certain risks are identified as relevant but not material, fund managers are only subject to the provisions on governance and are required to re-evaluate the relevance and materiality periodically. The relevant requirements for investment management and risk management will apply as and when such risks are re-evaluated as being material.

Risk management

Amendments are proposed to the existing FMCC provision (paragraph 3.11.1) on risk management at the fund level and Appendix 2 of the FMCC (the SFC’s suggested risk management control techniques and procedures for funds) to cover climate-related risks. Fund managers will be required to implement adequate risk management procedures to identify, measure, manage and monitor material climate-related risks. The Circular will also further require fund managers to apply appropriate tools and metrics to assess and quantify climate-related risks.

Where climate-related risks are assessed as being material, enhanced standards are proposed for Large Fund Managers, including the requirement to take reasonable steps to acquire or estimate the weighted average carbon intensity (WACI) of greenhouse gas emissions of both Scope 1 (i.e. all direct emissions) and Scope 2 (i.e. indirect emissions from the consumption of purchased electricity, heat or steam) (GHG emissions) associated with the funds’ underlying investments.

Disclosure (applicable to ROOF only)

A new provision is being proposed in the FMCC requiring a fund manager that is responsible for the overall operation of a fund (ROOF) to make adequate disclosures to fund investors covering its governance arrangements for the oversight of climate-related risks and how climate-related risks are taken into account during its investment and risk management processes, including the tools and metrics used to identify, assess, manage and monitor the risks. The Circular will provide further details on the items to be disclosed to fund investors at both the entity and fund level.

Again, additional disclosure requirements at both the entity and fund level are proposed for Large Fund Managers that are ROOF, including disclosure of the engagement policy at the entity level on climate-related risks and where climate-related risks are assessed as being material for the relevant fund, disclosure of the WACI for GHG emissions in respect of the relevant fund’s underlying investments where such data is available or may be estimated by reasonable efforts.

It is worth noting that where climate-related risks are assessed as being irrelevant to a certain strategy or fund, fund managers will be required to list out the type(s) of investment strategies or funds for which such assessment is made.

The SFC has indicated that the required disclosures may be made via various channels such as website, newsletters and reports to investors. Fund managers are expected to review and update the disclosures at least annually and inform fund investors of any material changes as soon as practicable. Global fund managers operating in Hong Kong may make reference to group-wide policies provided that the SFC’s disclosure requirements are fulfilled and an explanation on how such group-wide policies are adopted locally is disclosed.

Fund managers of discretionary management accounts (DMA)

The above proposed requirements in the FMCC and the Circular will not be mandatory for DMA fund managers at this stage. However, if a client has requested that climate-related risks be taken into consideration in the investment mandate, the fund manager should ensure that it acts accordingly.

Implementation timeline

The Consultation will run until 15 January 2021. The proposed transition periods for Large Fund Managers to comply with the applicable baseline requirements and the enhanced standards are nine months and 12 months respectively following the Consultation conclusions. Non-Large Fund Managers will have a 12-month transition period to comply with the applicable baseline requirements. The above proposed requirements and transition periods will be subject to the outcome of the Consultation conclusions.

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