Hong Kong’s SFC introduces climate risk requirements for fund managers

Hong Kong’s Securities and Futures Commission (SFC) will require fund managers to take climate-related risks into consideration in their future investment and risk management processes.

According to Regulation Asia, fund managers will have 12 to 15 months to comply with the requirements, which cover the areas of governance, risk management, investment management and disclosure.

The SFC will amend the Fund Manager Code of Conduct to introduce the new climate-risk requirements. During the consultation process, the SFC said it received up to 52 written submissions which mostly contained positive feedback on the proposed requirements – including implementing the requirements using a two-tier approach.

Under the approach, requirements will be imposed on all fund managers, while enhanced standards would be imposed for ‘Large Fund Managers’.

The new requirements for fund managers will cover the four key areas of governance, risk management, investment management and disclosure.

Governance will include requirements on board oversight as well as the role of management and responsibilities, monitoring of progress to manage climate-related risks, goal-setting, action plan development and human and technical resourcing.

On the topic of investment management, requirements on identifying climate-related risks and factoring these risks into the investment management process will be included. The requirements will also see the incorporation of climate-related data into the research and analysis process – which will assess the impact of these risks on the investment performance.

The risk management area will involve requirements to identify, assess, manage and monitor the relevant and material climate-related risks for each investment strategy and fund being managed, alongside the application of appropriate tools and metrics to measure climate-related risks.

Large Fund Managers will also be required to examine the relevance and utility of scenario analysis in measuring the resilience of investment strategies to climate-related risks under different pathways and implement scenario analysis within a reasonable timeframe. Furthermore, the fund managers must identify portfolio carbon footprints on their funds’ underlying investments.

The final requirement for fund managers is disclosure, including requirements to describe the governance structure and the roles of the board and management who will be required to disclose the steps taken to incorporate climate-related risks into the investment management process.

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