Hong Kong's SFC announces the development of an industry-led voluntary code of conduct for ESG ratings and data products providers

The Securities and Futures Commission (SFC) has announced that it will be sponsoring and supporting the development of a voluntary code of conduct for ESG ratings and data products providers (ESG service providers) which are providing products and services in Hong Kong (the Voluntary Code). The Voluntary Code will be developed by an industry-led working group, led by the International Capital Market Association (ICMA), and we expect that a first draft will be made available for consultation in early 2024. Once the Voluntary Code is finalised, the SFC plans to issue principles-based guidance to licensed corporations on using the code for their due diligence and on-going assessment of ESG service providers.

The development of a Voluntary Code therefore means that the SFC will not be seeking to extend the regulatory remit to cover ESG service providers, an approach taken in jurisdictions such as the EU (see our blog post). Instead, the SFC wants to nurture the industry and avoid fragmentation and describes the approach as “balanced, flexible and proportionate”. 

Hong Kong is not alone in taking the approach of setting up a voluntary code. In Singapore, the MAS has recently consulted on a voluntary code for providers of ESG ratings and data products (see our blog post), while Japan has already published its own voluntary code (see our blog post). In the UK, the FCA is also supporting the development of an industry-led voluntary code also led by ICMA as well as the International Regulatory Strategy Group. However, in addition to this, the UK government has consulted on whether regulation for providers of ESG ratings should be introduced, and on the potential scope of a regulatory regime (see our blog post). 

It is clear that the intention for the Voluntary Code is that it should be aligned with global standards. One of the objectives for the Voluntary Code, which is set out in the Terms of Reference for the working group, is that it should be a globally consistent, interoperable and proportionate voluntary code. In addition to this, the baseline best practices governing the conduct of ESG service providers will be based on the IOSCO recommendations covering transparency, governance, systems and controls and management of conflicts of interest.

ESG service providers will be encouraged to adopt the Voluntary Code, and the code will include a self-attestation document which ESG service providers can publish to demonstrate they have adopted the code.

The industry will have to wait for further details on the content of the Voluntary Code. The Terms of Reference suggest that a first draft of the draft Voluntary Code should be issued in Q1 2024 for public consultation.

A list of firms taking part in the working group has been published. The observers include the Hong Kong Monetary Authority, the Insurance Authority and the SFC. The SFC also holds the additional role of sponsor which means that it will be able to participate in discussions on the development of the Voluntary Code with the observers and members, but it is also permitted to provide guidance to ensure the Voluntary Code meets its objectives within a suitable timeframe.

Alongside the announcement of the development of the Voluntary Code, the SFC has also published a report looking at some of the SFC’s findings stemming from its recent work on ESG service providers. The SFC has been monitoring international developments in this area and assessing the business models of ESG service providers in Hong Kong and the market practice of local SFC licensed asset managers in engaging with ESG service providers. The SFC focused on asset managers as they are one of the key user groups for ESG ratings and data products. 

We will need to wait for the first draft of the Voluntary Code to see how closely it tracks international principles and recommendations such as those put forward by IOSCO, and what further measures the SFC may introduce. The SFC recognises that the field of ESG ratings and data products is still evolving, and as with other sustainable finance regulatory developments, we can expect that the SFC will be monitoring implementation and the market in order to assess whether additional measures will be needed down the track.