Guidance to Asset Managers Regarding Due Diligence for ESG Products
The Hong Kong Securities and Futures Commission (HKSFC) releases guidance to asset managers regarding due diligence for ESG products, aimed at providing guidance for the due diligence and ongoing evaluation when applying third-party ESG ratings and data products.
Hong Kong SFC has previously released the Code of Conduct for ESG Ratings and Data Products Providers, providing voluntary compliance guidelines for ESG rating and data product providers.
Related Post: HK SFC Releases Code of Conduct for ESG Ratings and Data Products Providers
Regulations on Due Diligence for ESG Products
The Hong Kong SFC requires in the Guidelines on Online Distribution and Advisory Platforms that platform operators must act with appropriate skills, care, prudence, and diligence when selecting, appointing, and continuously monitoring third-party service providers, in order to reasonably satisfy themselves that the information provided by the service providers is accurate and reliable. Asset managers may need to use ESG ratings and data products to prepare investment advice, which also requires compliance with the requirements of the above guidelines.
The Hong Kong SFC believes that asset management companies need to conduct due diligence and continuous evaluation to have a reasonable understanding of the ESG products provided by third-party ESG service providers, including product preparation methods (product data sources, preparation methods, evaluation methods), restrictions, and expected uses of the products. The degree of due diligence and ongoing evaluation should be in line with the impact of the product on the investment and risk management process, and satisfy regulatory expectations.
How to Conduct Due Diligence for ESG Products
The Hong Kong SFC recommends that asset management companies refer to the principles of the Code of Conduct for ESG Ratings and Data Products Providers, such as governance, transparency, and conflict of interest management, to conduct due diligence on ESG rating and data product suppliers. The Code of Conduct provides a six-month and 12-month implementation period for ESG rating providers and ESG data product providers. Providers who voluntarily comply with the Code of Conduct will disclose their self-assessment documents on the website of the International Capital Market Association (ICMA). ICMA is responsible for hosting and maintaining the Code of Conduct. Asset management companies can refer to these documents to evaluate whether suppliers meet the requirements.
The Hong Kong SFC believes that all companies engaged in Class 9 regulated activities (providing asset management) and engaged in fund management or discretionary account management should meet regulatory expectations. These companies can implement higher standards than those required in Code of Code to conduct due diligence on suppliers. The management of asset management companies has the responsibility to ensure that their activities comply with the regulations of SFC.
Reference:
Circular to Intermediaries Guidance to Asset Managers Regarding Due Diligence Expectations for Third-party ESG Ratings and Data Products Providers
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