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[co-author: Sara Troughton]*
The Hong Kong Monetary Authority (HKMA) recently Round Expected standards for the sale and distribution of green and sustainable investment products by Registration Institutions (RIs). This is to ensure that RIs have appropriate controls in place to manage potential risks arising from the sale of sustainable investment products, such as greenwashing.
In developing the expected standards, the HKMA referred to findings and good practices identified in a thematic review of all RIs (including retail, private and corporate banks), as well as international trends. .
Application of standards
The expected standards apply to RIs that sell or classify environmentally friendly and sustainable investment products. RIs must comply with expected standards in all cases as soon as practicable. November 29, 2024 (i.e. 12 months from the date of the circular).
Standard overview
The expected standards and good practices include:
- product due diligence
RIs are expected to take reasonable steps when classifying products as green and sustainable, including reviewing product delivery documentation and reports provided by product publishers. We conduct ongoing product due diligence at appropriate intervals to ensure that our products remain green and sustainable. We will notify customers of any changes in the status of the product.
Examples of good practices identified in the thematic reviews include conducting sustainability-specific surveys for each product and conducting supplementary reviews by reviewing external data (e.g. sustainability ratings) from multiple information service providers. It is included.
- Customer sustainability preferences
Although the HKMA did not specify the standards expected in this area, RI will ask clients for their ESG or sustainable investment priorities in specific areas (e.g. climate change, water, human resources, governance, etc.) We focused on a form of good practice in thematic reviews. , etc.) can be considered along with other factors (such as the customer’s risk profile) when the RI makes recommendations to the customer.
- disclosure
RIs must ensure that representations regarding green and sustainable investment products are accurate and not misleading. Disclosures that communicate the product’s green and sustainable characteristics and specific risks should be made to customers in plain language. If an RI provides a product sustainability score to its customers, the RI must have a clear understanding of what the score means. Upon customer request, RIs must share information about how scores are derived.
Good practices identified in the industry use an in-house built model to assign scores to the ‘E’, ‘S’ and ‘G’ elements and disclose these scores to customers through monthly statements. It is to do.
- Governance and management
RIs must 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 greenwashing risks.
From its thematic review, the HKMA found that some RIs have set up dedicated management committees to review ESG policies and procedures as a matter of good practice.
- staff training
RIs are expected to provide ESG-related training to their staff on sustainable investment concepts, latest trends and market developments, and product knowledge.
The HKMA noted that, as a good practice, some RIs regularly invite external experts to provide training to staff on ESG topics.
- book building activities
In the case of an RI (as defined in Section 21.2.1 of the Code of Conduct for Persons Licensed or Registered by the Securities and Futures Commission) acting as a syndicated capital market intermediary, the issuer’s customers’ It is necessary to carry out a thorough evaluation. This includes taking reasonable steps to accurately understand the background, operations, business and performance, financial condition and prospects of our issuer clients. Additionally, RIs must evaluate green and sustainable debt issuances using applicable market principles and standards and seek external party review as appropriate.
A good practice is the establishment of a dedicated ESG team to evaluate bond issues.
Additional FAQs can be found in Appendix 2 of the circular. In particular, the HKMA recommends that RI may be able to implement simplified arrangements for corporate bonds that fall within the scope of “eligible bonds” as defined in the HKMA’s Circular “Simplified Arrangements for Sales and Distribution of Eligible Retail Entities” dated 31 July 2020. We have made it clear that the arrangement may continue to be adopted.
Next steps for RI
RIs must review their existing policies and procedures and, if necessary, introduce enhancements to comply with the HKMA’s expected standards by November 29, 2024. While the good practices cited in the HKMA circular are helpful, RIs may also adopt other forms of practice that are appropriate for their business. We will accommodate your model and operational needs as long as they meet HKMA’s expected standards.
*Professional support lawyer
You may be interested in:
Sustainability Linked Loans: Recent Changes to the Sustainability Linked Leveraged Loan Best Practices Guide
Greenwashing: Avoiding risks
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