Regulatory and fiduciary duties

Are institutional investors and financial intermediaries legally required to consider ESG factors when making investment decisions? Must any additional non-financial principles and objectives be considered?

There is currently no legislation or regulations in Hong Kong that require institutional investors and financial intermediaries to consider ESG factors when making investment decisions. 

The SFC Principles of Responsible Ownership adopted in 2016 that apply to investors are voluntary and non-binding. Investors are encouraged to adopt the Principles by disclosing to their stakeholders that they have done so, but may either apply the Principles in their entirety and disclose how they have done so, or explain why aspects of the Principles do not, or cannot, apply to them. There are a total of seven Principles, where investors are reminded that to discharge their ownership responsibilities they should engage with investee companies to promote the long-term success of these companies, and that they should: 

  • establish and report to their stakeholders their policies for discharging their ownership responsibilities;
  • monitor and engage their investee companies; 
  • establish clear policies on when to escalate their engagement activities; 
  • have clear policies on voting; 
  • be willing to act collectively with other investors when appropriate; 
  • report to their stakeholders on how they have discharged their ownership responsibilities; and 
  • when investing on behalf of clients, have policies on managing conflicts of interests. 


Since April 2019, SFC-authorised unit trusts and mutual funds that claim to be green or ESG funds must disclose how green or ESG factors are incorporated in their investment strategy and investment selection process, according to the SFC ‘Circular to management companies of SFC-authorised unit trusts and mutual funds – Green or ESG funds’ (April 2019). The Circular applies to SFC-authorised funds that incorporate one or more of the globally recognised green or ESG criteria or principles set out in Annex 1 to the Circular as their key investment focus and reflect such in their name and investment objective or strategy. The current list in Annex 1 is: 

  • Unite Nations Global Compact Principles;
  • United Nations Sustainable Development Goals; 
  • Common Principles for Climate Mitigation Finance Tracking;
  • Green Bond Principles of the International Capital Market Association; and 
  • the Climate Bonds Taxonomy of the Climate Bonds Initiative. 


This list is not meant to be exhaustive, and the Securities and Futures Commission (SFC) has made it clear that ‘other green of ESG criteria or principles recognised globally or nationally, or reference benchmarks or indices which in their construction and management adopted any of the green or ESG criteria or principles above’ may be considered on a case-by-case basis. 

The SFC expects that a green or ESG fund falling with the scope of this Circular should ‘invest primarily’ in investments to reflect the particular green or ESG investment focus that the fund represents, and the Circular notes that green or ESG funds may adopt common ESG investment strategies such as screening (positive or negative), thematic, ESG integration and impact investing. To substantiate ‘invest primarily’, a fund adopting screening or thematic investment strategies should demonstrate that at least 70 per cent of its total net asset value is invested in securities or other investments reflecting the stated green or ESG investment focus; and a fund adopting other strategies should demonstrate to the SFC on a case-by-case basis how it could comply with this requirement.

The Circular requires such green or ESG funds to disclose in their offering documents:

  • a description of the key investment focus and how it is considered green or ESG-related; 
  • a description of the investment strategies adopted, which includes but is not limited to disclosure of the investment selection process and criteria; 
  • a description of whether an exclusion policy has been adopted by the fund and types of exclusion; 
  • a description of risks associated with the green and ESG fund’s investment theme; and 
  • any other information considered necessary by the manager for investors to make an informed judgement of the investment. 


The manager of the green or ESG fund must confirm that it regularly monitors and evaluates the underlying investments, with proper procedures in place to make sure it continues to meet the requirements set down in the Circular, and is required to provide to the SFC either a self-confirmation of compliance or a confirmation on compliance supported by a certification or fund label of an independent third party.

Voluntary standards and best practices

What voluntary standards and best practices are commonly followed in your jurisdiction with regard to integrating ESG factors and other non-financial principles into investment decisions?

According to the SFC Survey on Integrating Environmental, Social and Governance Factors and Climate Risks, in Asset Management (results published in December 2019), a total of 660 firms or 83 per cent of active asset management firms surveyed consider at least one of the ESG factors in their investment decisions, but only 35 per cent have implemented a consistent approach to systemically integrating ESG factors in their investment and risk management processes. The investment strategies most often used include negative and exclusionary screening, corporate engagement, shareholder action and ESG integration, norms-based screening, positive/best-in-class screening, ESG-themed/thematic investing, and impact/community investing. More than half adopt multiple ESG investment strategies, and 63 per cent of these 660 firms practise responsible ownership, through voting and corporate engagement. Specifically in relation to climate risks, only 23 per cent of the 660 have processes in place to manage the financial impact of physical and transition risks arising from climate change.  

According to disclosure documents of (as at writing) 30 SFC-authorised green or ESG Funds in the list published by the SFC following the ‘SFC Circular to management companies of SFC-authorised unit trusts and mutual funds – Green or ESG Funds’, the top international standards referenced are the UN Global Compact Principles, United Nations Sustainable Development Goals (and Green Bond Principles of ICMA. However, many of these SFC-authorised green or ESG Funds are Undertakings for Collective Investment in Transferable Securities, which is a reflection of the standards adopted in the current range of green or ESG funds available to the retail public in Hong Kong (and not a reflection of the voluntary standards or practices currently adopted by investment managers in Hong Kong).  

A better reference may be the number of Hong Kong managers who have signed up as members of the United Nations Principles for Responsible Investment – 49 members at the time of writing. 

Measurement, reporting and disclosure

What voluntary and statutory measurement, reporting and disclosure frameworks are followed in your jurisdiction with regard to ESG and other non-financial factors?

The HKEx ESG Reporting Guide and Related Listing Rules is the most detailed ESG regulatory instrument in Hong Kong at the moment, and serves as a helpful reference on the state of ESG adoption in Hong Kong as the Stock Exchange of Hong Kong (HKEx) carries out extensive public consultation to gauge market appetite every time it reviews the Guide.

The HKEx ESG Reporting Guide provides a framework for companies listed in Hong Kong, which, following the latest update effective July 2020, is made up of two parts: mandatory disclosure requirements in relation to board’s oversight of ESG considerations, and ‘comply or explain’ disclosure requirements in relation to four environmental and eight social aspects.

The mandatory requirements ask board directors to provide a statement disclosing the board’s oversight of ESG issues, its ESG management approach and strategy, and how the board reviews progress made against ESG-related goals and targets and how these relate to the issuer’s businesses. The statement must also explain how the company addresses materiality in selecting ESG factors to report on, and if a stakeholder engagement is conducted, a description of the key stakeholders identified, the process and results. 

Following the latest round of review HKEx has now also elevated disclosure on the social aspects from ‘voluntary’ to ‘comply or explain’, in line with the environmental aspects. The environmental aspects are: 

  • emissions; 
  • use of resources;
  • environment and natural resources; and 
  • climate change. 


The social aspects are: 

  • employment;
  • health and safety;
  • development and training;
  • labour standards;
  • supply chain management;
  • produce responsibility;
  • anti-corruption; and 
  • community investment. 


For each of these aspects, companies would have to make a general disclosure on the policies, compliance with relevant laws and regulations that have a significant impact on the issuer (if applicable), as well as disclosing against specific KPIs.

Issuers are also encouraged to seek independent assurance to strengthen the credibility of their ESG reporting, but unlike in green bond issuance the government has not provided subsidies for obtaining third-party assurance.

While noting that some respondents in last round of public consultation called for aligning the ESG Reporting Guide with international disclosure standards, the HKEx said that prescribing specific standards would go beyond the scope of the Guide and encouraged issuers to voluntarily refer to or adopt international ESG reporting standards or guidelines for their relevant industries or sectors, and provided a list of selected resources on the HKEx ESG webpage. This list currently has a section on ‘International Guidelines/References on ESG Reporting’ which includes the CDP’s Climate Change Questionnaire and Water Security Questionnaire, Climate Disclosure Standards Board’s Climate Change Reporting Framework, Corporate Sustainability Assessment for inclusion in the Dow Jones Sustainability Indices (DJSI), Global Reporting Initiative (GRI)’s Sustainability Reporting Standards, ISO 26000 Guidance on Social Responsibility, OECD’s Guidance for Multinational Enterprises and Principles of Corporate Governance, SASB Materiality Map, Task Force on Climate-related Financial Disclosures (TCFD) – Recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, and the United Nations Sustainable Development Goals. There are also ‘Reference Materials on Specific Topics’, and ‘ESG Resource Providers/Initiatives’ which included the United Nations Global Compact and the United Nations Principles for Responsible Investment. 

Since May 2019, the HKEX has also included in its Guidance Letter on disclosure in listing documents by new applicants to require additional disclosure on policy of board diversity (including gender), and how gender diversity of the board can be achieved in the case of a single gender board. It also sets out the expected disclosure of ESG matters, including material information on an applicant’s environmental policies, and details of the process used to identify, evaluate and manage significant ESG risks.

According to market research from 2018, the GRI Standards are popular among Hong Kong listed companies with almost 30 per cent of the top 200 companies (by market capitalisation) using the GRI Standards in addition to the HKEx ESG Reporting Guide (Survey of ESG Reports in Hong Kong 2018 by Alaya Consulting). Some prominent large companies known for their sustainability commitments have started to report against TCFD recommendations. 

It is noteworthy that the SFC, HKEx and Hong Kong Monetary Authority have all signed up to be supporters of TCFD, indicating intention to gradually align their policies with the TCFD framework. This intention is also reflected in the SFC’s Strategic Framework for Green Finance (September 2018), and the HKMA white paper on green and sustainable banking (June 2020) clearly encouraged TCFD as a core reference for disclosure, while HKEx explained that its new addition of an aspect on climate change is an effort to align with TCFD.

Ratings, indices and guidelines

What ratings, indices and guidelines are used to benchmark adherence to ESG principles and other non-financial factors in your jurisdiction?

Hong Kong has the Hang Seng Corporate Sustainability Index Series, which aims to gauge the performance of companies with outstanding sustainability practice in Hong Kong and mainland China markets. Separately, the Hong Kong Quality Assurance Agency provides a CSR Index Series, as well as Sustainability Rating and Research services and, of increasing importance, Green Finance Certification for green bonds and ESG and green funds.

As for international standards the Dow Jones Sustainability Indices is listed as a reference resource on the HKEx website.

Incentives, benefits and financial support

Are any fiscal incentives or other benefits available in your jurisdiction to encourage institutional investors and financial intermediaries to integrate ESG and other non-financial factors into their investment decision-making?

Not at the moment.

Impact investing

In addition to ESG factors, what considerations and practices are commonly integrated into impact investment strategies?

According to the 2019 Investor Survey by the Hong Kong-based non-profit organisation Sustainable Finance Initiative, ‘An Investor Community Ready for Action’, the United Nations Sustainable Development Goals (SDGs) is a popular framework for impact investment decision-making, while the Survey noted good health and wellbeing, quality education and climate change as the top three SDGs areas where impact investors in Hong Kong want to direct capital towards impact. Other principles and frameworks increasingly considered by private investors in Hong Kong include the UN Principles for Responsible Investment, the Sustainability Accounting Standards Board, Impact Management Project and B Corp. Beyond impact investing, investors are also increasingly expecting their investments to be aligned with TCFD.