HKMA Rolls Out Standards for the Sale of Sustainable Investment Products

The Hong Kong Monetary Authority (HKMA) recently announced in a circular its expected standards for the sale and distribution of green and sustainable investment products by registered institutions (RIs). This is to ensure that adequate control measures are in place in RIs to manage potential risks arising from the sale of sustainable investment products, such as greenwashing. 

In formulating the expected standards, the HKMA made reference to the findings and good practices identified in its thematic review of all RIs (covering retail banks, private banks and corporate banks) as well as international developments. 

Application of the Standards

The expected standards apply to RIs that market or classify investment products as green and sustainable. RIs should comply with the expected standards as soon as practicable and in any case by 29 November 2024 (i.e. 12 months from the date of the circular).

The Standards at a Glance

The expected standards and good practice examples include: 

1. Product Due Diligence 
   
   RIs are expected to take reasonable steps when classifying products as green and sustainable, such as reviewing the product offering documentation and reports provided by the product issuer; conducting ongoing product due diligence at appropriate intervals to ensure that the products maintain their green and sustainable status; and notifying customers of any change of the status of such products. 
   
   Examples of good practices identified in the thematic review include having a sustainability-specific questionnaire for each product, and conducting a supplemental review by reviewing external data from multiple information service providers, e.g., sustainability ratings.
   
   
2. Customer’s Sustainability Preference
   
   The HKMA did not prescribe an expected standard for this area, but noted a form of good practice from its thematic review where an RI would ask for a customer's ESG or sustainable investment preference in specific areas (e.g., climate change, water, people, governance, etc) which the RI could then consider along with other factors (e.g., the customer’s risk profile) when making recommendations to that customer. 
   
   
3. Disclosure
   
   RIs should ensure that representations made about green and sustainable investment products are accurate and not misleading. Disclosures communicating the product’s green and sustainable characteristics and specific risks should be made to the customer in plain language. If the RI provides the customer with the sustainability score of the product, the RI should have clear understanding of the meaning of the score. If requested by the customer, RIs should share information about how the score is derived.
   
   A good practice identified from the industry is using an in-house built model to assign a score for each of the "E", "S" and "G" factors and disclosing these scores to the customer through monthly statements. 
   
   
4. Governance and Controls
   
   RIs should ensure that there are proper policies and procedures in place to monitor risks that may arise from the sale of green and sustainable investment products, particularly greenwashing risks.
   
   The HKMA observed from the thematic review that some RIs, as a matter of good practice, established dedicated management committees for reviewing ESG policies and procedures. 
   
   
5. Staff Training
   
   RIs are expected to deliver ESG-related training to staff on the concepts of sustainable investments, latest trends and market developments and product knowledge.
   
   The HKMA noted that some RIs, as a matter of good practice, would periodically invite external professionals to provide training on ESG topics to their staff.
   
   
6. Bookbuilding Activities
   
   For RIs who act as syndicate capital market intermediaries (as defined in paragraph 21.2.1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission), adequate assessment of an issuer client should be conducted before engaging in a debt offering for that issuer client, including taking reasonable steps to obtain an accurate understanding of the background, operations, business and performance, financial conditions and prospects of the issuer client. In addition, RIs must assess green and sustainable bond offerings using applicable market principles and standards and seek external parties’ review as appropriate. 
   
   An example of good practice is the establishment of a specialised ESG team to evaluate bond offerings.

Additional FAQs can be found at Annex 2 of the circular. In particular, the HKMA clarified that RIs may continue to adopt the simplified arrangements for bonds that fall within the scope of “Eligible bonds” as defined in HKMA’s circular dated 31 July 2020 on “Simplified Arrangements for Sale and Distribution of Eligible Retail Organisations”.

Next Steps for RIs

RIs should review their existing policies and procedures and, where necessary, introduce enhancements to comply with the HKMA's expected standards before 29 November 2024. While the good practices cited in the HKMA’s circular are helpful, RIs may adopt other forms of practices that suit their business model and operational needs provided they meet the HKMA’s expected standards. 

Mayer Brown lawyers are available to help clients with the requirements of the HKMA’s circular discussed in this client update. For more thought leadership on ESG topics, please visit our Eye on ESG blog and the related articles listed below.

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