New climate rules pose fresh challenge for small Hong Kong funds 

CLIMATE-DISCLOSURE guidelines that go into effect soon in Hong Kong are posing a challenge for small domestic money managers that lack the resources of their global peers to track the data.

Starting Aug 20, fund managers overseeing at least HK$8 billion (S$1.38 billion) must take climate-related risks into account in their investment and risk-management processes for the first time and disclose the results.

The remainder have until Nov 20 to comply, according to a Securities and Futures Commission circular released last year.

"There is certainly a challenge in how to comply with new rules for us, in getting data and the increased fees and manpower incurred," said Paul Pong, managing director of Pegasus Fund Managers, which oversees less than HK$8 billion.

But "if we do it right, there is a good chance to actually attract new clients on board looking for ESG assets," he said.

Hong Kong joins other jurisdictions in imposing requirements on fund managers to integrate environmental, social and governance factors in their investments.

The European Union introduced its Sustainable Finance Disclosure Regulation last year, while in the rival finance hub of Singapore, environmental risk management guidelines went into effect in June.

Hong Kong, which has vowed to become carbon neutral by 2050 and cut emissions in half by 2035, has "focused more on the downside of climate-related risk" compared with Singapore, whose guidelines broadly cover environmental issues such as climate change, loss of biodiversity and pollution, according to Mark Uhrynuk, a partner at law firm Mayer Brown.

The SFC requires fund managers to define the board's role in overseeing climate-related considerations in their investment and risk management processes, and identify physical and transition risks for each strategy and fund.

The rules also require large asset managers to provide investors with the greenhouse gas emissions associated with their underlying investments starting in November.

If managers believe climate risks are irrelevant to their strategies and choose not to incorporate them, they must disclose those exceptions.

Hong Kong's new rule "brings that sense of urgency to the industry," Xuan Sheng Ou Yong, ESG analyst at BNP Paribas Asset Management, said in an interview.

It has helped to "jump start conversations that might have otherwise taken place in the next few years," even if it's "going to be a steep learning curve" for the smaller fund houses, he said.

International funds can rely on group-wide disclosures to satisfy the local requirements, "provided that they are subject to similar or higher standards than our requirements," according to the SFC rules.

Gabriel Wilson-Otto, Fidelity International's Hong Kong-based sustainable investing director, said his firm is in a "slightly advantageous position," having done ESG reporting in other regions.

Since Hong Kong derived its rules from the Task Force on Climate-Related Financial Disclosures' recommendations, "that makes our life a lot easier as you can see a relatively consistent approach that we have seen in other markets," Wilson-Otto said.

To leverage external know-how and save costs, smaller funds tend to cooperate with local universities and startup incubators like the Cyberport or Science Park to collect emissions data on their portfolio companies, said Pong at Pegasus.

He expects to see lower compliance costs as more companies, banks and funds start to collect and disclose climate-related data. BLOOMBERG

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