Some pushback is expected on the proposed mandatory disclosure requirements on climate change for asset managers because of the challenges involved in securing some of the data that will be required for disclosure.
The Securities and Futures Commission (SFC) of Hong Kong is currently undertaking a consultation that proposes amendments to the fund manager code of conduct that would require fund managers to consider climate-related risks in their investment and risk management processes.
The challenge is that asset managers will have to rely on their investee companies to provide them with some of the carbon intensity data required for disclosure. And while many investee companies are presently trying their best to disclose and provide the necessary data, there are still gaps between what they have and what will be required for disclosure.
“I can understand why they would push back on some of these carbon intensity figures because they’re reliant on their investee companies to disclose those data to a large extent,” says Mary Leung, head of advocacy for Asia-Pacific at the CFA Institute. “But having said that, many listed companies, not just those in Hong Kong, but in the region and around the world, are disclosing.”
There are three levels of climate risk disclosure that the SFC is eyeing. Asset managers must recognize climate risk as an important element of risk management, be considering climate risk and opportunities in their portfolio, and integrate climate risk management into their portfolio allocation.
“They have to disclose their governance structure, their climate risk strategy, and how the strategy translates into investment in their management process and how it translates into their risk management process,” Leung adds. “You have to tell your potential and current investors how you do it.”
Asset managers will also have to disclose the climate risk factors affecting their businesses at both the company and fund levels. For the larger fund managers, the proposal requires that they disclose the weighted average carbon intensity (WACI) at the fund level. WACI is a portfolio-level metric that calculates the carbon intensity of each asset in a portfolio and then weighs that intensity by portfolio exposure.
“If you’re large enough, then at the fund level, you should also be disclosing the WACI,” Leung notes. “These are the two different types of disclosures. One directed at the company at the entity level and another, at the fund level.”
Meeting the climate risk disclosure requirements in the proposal will be more challenging if asset managers are investing in unlisted securities, infrastructure and other assets that may not be forthcoming with carbon intensity figures.
Another challenge, in addition to the fact that environmental indicators are not the same for every market in which asset managers invest, is that many global fund managers regulated by the SFC do not invest in Hong Kong.
“The Hong Kong stock exchange has upgraded the rules on environmental indicators, but not every market has the same sort of rules,” Leung points out. “Also, a number of times, non-financial disclosure by companies is voluntary.”
In March, the CFA conducted a survey to gauge how open its global membership was to the integration of environmental, social and governance (ESG) and climate change factors, what its level of awareness was, what exactly it was doing, and what were some of the drivers and challenges it was facing.
“Globally, we received just under 3,000 responses and, unfortunately, what we found was that there was not that much pressure from external regulators and investors to motivate a change,” Leung explains. “But I always say that asset managers are very practical, especially the ones in Asia-Pacific.”