【SFC released “Survey on Integrating Environmental, Social and Governance Factors and Climate Risks, in Asset Management” 】



Abstract

From March to September this year, Securities and Futures Commission (SFC) conducted an extensive survey to understand Hong Kong asset management firms and asset owners in consideration of environmental, social, and governance (ESG)


The first part of the survey is to understand the extent to which asset management firms' ESG integration in investment and risk management processes (including climate change-related risks), post-investment ownership practices and disclosures, and their expectations of ESG disclosures by Hong Kong listed companies. A total of 1,124 firms responded to the survey, of which 794 firms were active in asset management.


The second part of the survey targeted asset owners, such as sovereign wealth funds, financial institutions, pensions and trusts, with their expectations of asset management firms' ESG practices and climate risk management. A total of 14 asset owners participated in the survey. The survey reveals important findings in six aspects: ESG consideration, governance and oversight, investment management, risk management, information disclosures, and market trends. It shows that asset management firms should improve ESG investment services and climate-related risk management to meet asset owners' expectations.


Moving forward with the survey results from a financial risk perspective, SFC suggested three key steps in enhancing ESG practices of asset management firms through implementation of relevant policies and monitoring regulations.


1. Survey Introduction

On December 16, 2019, Securities and Futures Commission (SFC) released a survey results on “Integrating Environmental, Social and Governance Factors and Climate Risks, in Asset Management”. Under the “Green Financial Strategy Framework”, this survey plays a positive complementary role in encouraging the implementation of ESG investment and risk management, promoting the development of green products, and improving the degree of environmental information disclosure.


In the survey, SFC repeatedly emphasized the significance of "environmental factor and climate change". SFC and other global leading policy makers have publicly stressed the urgency of climate change and it is likely to become an important source of financial risks. As such, asset managers should have a clear understanding of how environment factors and climate change affect their investments.


2. Key Findings


  • Consideration of ESG factors, including climate change


Of the 794 firms surveyed, 660, or 83% of those actively involved in asset management, considered at least one environmental, social and governance factor in order to understand a company's investment potential and facilitate better investment decisions and risk management. Furthermore, 68% of these firms clearly acknowledged that ESG factors could be a source of financial risk and have an impact on investment portfolios. 63% of these firms were taking a more active approach to influence corporate ESG management by exercising their rights as shareholders.


Asset management firms with strong ESG practices pointed out that environmental factors, especially those related to climate change, will become more important in view of the Paris Agreement. The central aim of the Paris Agreement is to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.


Most of the asset management firms surveyed were in favour of strengthening ESG disclosure rules for listed companies, as proposed by The Stock Exchange of Hong Kong Limited (SEHK) in December 2019, so that more high quality, decision-useful ESG and climate change- related information could be available for use in their investment and risk management processes.




  • Governance and Oversight

To improve the financial performance of investment portfolios and satisfy client demand, 35% of the 660 asset management firms which considered ESG factors have implemented a consistent approach to systemically integrate ESG factors in their investment and risk management processes.


Furthermore, some of these firms have processes in place for fundamental analysis and due diligence to ensure that ESG investment recommendations and products align with their own ESG investment approach. Others have ESG criteria and methodologies in place for portfolio construction and monitoring any deviations.


The remaining 65% of the asset management firms did not have any oversight measures in place. This raises questions about how they could apply an ESG investment approach consistently.





  • Investment management

For asset management firm that integrate ESG factors mostly used investment strategies such as negative and exclusionary screening, corporate engagement, shareholder action and ESG integration. More than half adopt multiple ESG investment strategies as their practices mature and more ESG data becomes available.. Further information on ESG investment strategies can be found from our latest article in the “View of ESG Investment” section.


A majority of the asset owners surveyed indicated that asset managers do not engage with them to understand their ESG investment preferences. Also, some are not entirely satisfied with the ESG investment services provided by asset management firms. Discussion of climate risks is almost non-existent in client engagement and suitability assessment. The failure to understand the preferences of asset owners with limited number of ESG products available in the market that can be referenced to, widening the gap between asset owners' expectation and asset managers' implementation of ESG investment.


  •  Risk Management

Incident monitoring mechanism has become a vital method in ESG risk management. Through monitoring to flag major ESG incidents, portfolio managers can adjust investment portfolios as appropriate to enhance financial returns. ESG issues and their impact are also discussed at investment committee meetings.


This survey has shown that of the 660 asset management firms with ESG investment considerations, only 23% have managed and controlled the financial impact of climate change. In contrast, most of the asset owners expect asset managers to identify, assess, and manage climate risks . Among 23% of asset management firms, the survey shows that measures used to manage climate risks may involve the following 5 aspects:


  • Disclosure

Although 660 asset management firms reported giving general consideration to ESG factors, a majority, 68%, indicated that information about their own ESG practices was not available.


However, all the asset owners surveyed agreed that, for the purposes of reducing greenwashing and identifying asset management firms with stronger ESG practices, more disclosure following a prescribed framework is needed from firms. The disclosures which asset owners find most useful go beyond marketing-style narratives of the ESG philosophy and policy statements. Asset owners look for outcomes and evidence of ESG impact in addition to financial performance, consistency between policies and practices, the rationale behind investment decisions and more supported analysis of asset-specific ESG risks, as well as the analytical tools used, results of corporate engagement and voting track records.


  •  Market Trends

Local asset management firms lag behind their counterparts with overseas-based parent companies in terms of ESG practices. The latter generally have stronger ESG investment processes and more of them support international initiatives such as the TCFD and the United Nations Principles for Responsible Investment (UNPRI) . However, 64% of the firms which are actively involved in asset management plan to enhance their ESG practices in the next two years.


The survey results also show contrary to general perception that “developing ESG practices are resource-intensive and only large players can afford the cost”. As small and medium-sized asset management firms have engaged in ESG practices. As shown below, small to medium - sized asset management firms with 0 to 100 million (26%) and 1 to 50 million (18%) AUM in Hong Kong Dollars are the most active organizations in ESG investment.



In addition to the above six aspects, this survey shows asset owners have raising awareness on climate change and asset management firms have strong interest with confident in improving ESG performance and climate-risk management ability.


In terms of climate change risk, information availability is the key challenge affecting asset management firms from analyzing their assets. But before obtaining a more comprehensive set of information, asset managers can clearly express climate-risk concerns to enterprises through active engagement, encourage them to disclose and manage risks in accordance with the TCFD framework. Our "Guidelines for Action on Climate Change-A Framework for Enterprises in Climate-Related Report " posted on November 21 provides recommendations for corporate practices and support the communication process between asset management firms and enterprises .


3. The SFC next steps

Based on the results of this survey and from a financial risk perspective, SFC will assist asset management firms to improve the level of ESG management and help the regulatory system align with international standards. The following three areas are intended to be delivered in the near term :



  • To set expectations of asset management firms in areas such as ESG governance and oversight, investment management, risk management and disclosure, focusing on environmental risks with an emphasis on climate change; 
  • To provide practical guidance, best practices and training in collaboration with the industry and relevant stakeholders to enhance the capacity of asset management firms to meet the SFC’s expectations;
  • To establish an industry group to exchange views amongst the SFC and experts in environmental and climate risks, as well as sustainable finance.



4. CECEP Environmental Consulting Group can provide extensive solutions to the market

The survey released by SFC provides asset management firms with further industry information and encouragement to improve ESG practices. This report contains guidance and high expectations from SFC on future trends in the asset management industry, It also clarifies asset owners expressed concern with climate-change risk factors. All asset management firms should make continuous effort in improving ESG management and supervision, investment management, risk management and information disclosure as well as to raise awareness in climate-risk impact to meet with the requirements and expectations of the society.


Environmental Risk Assessment (ERA), is an ESG risk data product provided by CECEP Environmental Consulting Group (CECEPEC). ERA is a powerful data model that can complement to the ESG practice of asset management firms. This data model covers the analysis of fossil fuel risks, which is one of the key concerns of all asset owners. ERA can assist asset managers in understanding and analysing the transformation risks of their portfolios. With professional experiences, CECEPEC can assist asset management firms to build ESG investment frameworks, support ESG product development , ESG risk assessment and performance analysis, and improve ESG practices, especially for the climate change risk analysis. We aim to help asset management firms to meet the expectations of the asset owners and create greater financial and social benefits.


In the "Climate Change Information Disclosure of the ESG New Regulations of the Hong Kong Stock Exchange" posted on June 20, we briefly described the analysis methods of two types of analysis solutions to climate risks: 1) is from climate change perspective to analyze the impact on corporate value chain transmission to corporate business from the changes in policies, technologies, and market needs. 2) solution is from the perspective of corporate business, analyzing which factors affecting financial items such as revenue, cost, expense, and asset value are affected by climate change. If you have more questions about climate risk analysis, please contact us through the public account.



date：2019-12-23

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