Regulating ESG Ratings and Data Products
The Hong Kong Securities and Futures Commission (SFC) plans to regulate ESG ratings and data products in response to initiatives issued by the International Organization of Securities Commissions (IOSCO).
This supervision is based on a questionnaire survey conducted by the Hong Kong Securities and Futures Commission last year to understand the development of Hong Kong’s ESG rating agencies, data providers and asset management companies that implement ESG investments. Currently, the number of ESG funds approved by the SFC has reached 209, which is more than ten times that of five years ago.
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SFC’s Research on ESG Ratings and Data Products
The SFC found that there are multiple ESG rating agencies and data providers operating in Hong Kong, ranging from small fintech companies to subsidiaries of larger companies. 80% of companies have their headquarters outside Hong Kong. In terms of products and services provided, dispute alerts (80%), ESG scores (70%), raw data (70%), ESG ratings (60%), and ESG indices (40%) are relatively common.
The ESG rating agencies and data product providers interviewed stated that they are developing new products in response to market developments and investor needs. At present, they mainly use artificial intelligence technology to obtain public information, and some directly send questionnaires to listed companies. Many respondents said that due to the imperfect sustainability disclosure standards of listed companies, 80% had to use internal estimates to fill data gaps.
Regarding the charging mode, 60% of the respondents’ income comes from subscribers (investment institutions such as asset management companies), and 30% adopt a hybrid model, in which the company and investors each bear some fees.
SFC’s Research on Asset Managers Implementing ESG Investing
In addition to investigating the supply side, SFC also investigated some asset management companies that implement ESG investments to understand the demand side. Respondents generally use multiple ESG data services (ranging from 2 to 8), mainly to cross-check the accuracy of the data. Asset managers also conduct further analysis of this ESG information internally to obtain more data value. Some companies are also developing ESG frameworks internally.
Some asset managers have also expressed difficulties in using ESG products. For example, data quality and coverage may be difficult to meet investment needs, and some service providers estimate data without providing calculation methods. It is worth noting that although regulators are committed to improving the comparability of ESG data, most respondents do not pay attention to these matters, believing that these differences are different assessments of companies by different service providers.
SFC’s Future Regulatory Plans
The SFC believes that there are some problems with current ESG ratings and data product providers. For example, there are no consistent rules for the accuracy and credibility of ESG data, and there may be conflicts of interest between investors and ESG service providers.
Currently, global regulatory agencies have two approaches to address these issues. One is to follow the example of the European Union and India, expand the scope of supervision, and include ESG service providers in the mandatory supervision system. The second is to follow the example of the United Kingdom and Singapore and formulate a voluntary code of conduct for ESG service providers to refer to and comply with in their business.
The SFC plans to adopt the second approach, proposing a set of voluntary codes of conduct to promote the business development and innovation of ESG service providers and avoid disruptions. The Code will also be as interoperable as possible with major global jurisdictions and facilitate asset managers to conduct due diligence and assessment of ESG service providers. The new standards will be led by the International Capital Market Association (ICMA) and will convene a number of ESG rating agencies, data providers and asset managers to assist in formulating the standards.