The International Capital Market Association (ICMA) is to convene a working group tasked with the development of a globally consistent, interoperable and proportionate voluntary code of conduct for ESG ratings and data product providers, sponsored by the Hong Kong Securities and Futures Commission (HK SFC).
Working group members, including Bloomberg, Fidelity International, Invesco and Morningstar Sustainalytics, will set out a baseline best practice governing the conduct of ESG service providers offering products and services in Hong Kong based on the International Organization of Securities Commissions’ (IOSCO) recommendations, covering the four key elements of transparency, systems and controls, governance and the management of conflicts of interest.
The initiative is the culmination of a fact-finding and industry outreach exercise the HK SFC has conducted since mid-2022 to understand matters related to ESG ratings and data products providers. Surveyed asset managers highlighted common concerns about data quality alongside many of IOSCO’s baseline best practice guidelines.
“The voluntary code of conduct will help strengthen the transparency, quality and reliability of ESG information used by licensed corporations in their investment decisions,” said Julia Leung, the SFC’s chief executive officer.
“This is an important initiative to mitigate the risk of greenwashing in investment products.”
According to a survey report from the consultancy firm ERM, published in early 2023, there has been a substantial increase in the use of ESG ratings and data products by investors globally, which tracks with an increase in focus on ESG in the financial industry. In Hong Kong, the number of SFC authorised ESG funds increased to 209 as of 30 September 2023, representing a more then tenfold increase from five years ago.
However, the ESG ratings and data products industry is generally not subject to regulatory oversight. Until recently, there was a lack of globally recognised baseline standards on how ESG service providers were expected to derive their products and services, and what relevant information should be disclosed to end users.
The proposed voluntary code of conduct, therefore, is expected to provide a streamlined and consistent basis for asset managers to conduct due diligence on ESG service providers, with the HK SFC and Hong Kong Monetary Authority sitting as observers of the working groups progress.
Claire Herbert, sustainable investment director for APAC at Schroders, said: “We welcome Hong Kong’s proposition of a voluntary code of conduct for ESG ratings and data product providers. Recognising the growing demand for and use of ESG data and ratings providers, we hope this code of conduct will promote greater transparency around the methodology, governance and robustness of such ratings and data.”
Matthew Gray, associate director of stewardship in emerging markets at Morningstar Sustainalytics, commented: “Hong Kong and mainland China have increasingly been trying to attract green foreign direct investment for some time, with greenwashing a primary concern. The tightening of regulation, therefore, is a welcome positive, and I am heartened by the announcement of who will be among the observers in the room as the working group develop this code of conduct.
“The next big date will be in January 2024, when issuers will have to report against ISSB after the ‘obey or explain’ honeymoon period ends.”