Hong Kong Monetary Authority publishes guidance to banks on distributing green products

The Hong Kong Monetary Authority (HKMA) has issued a circular with an appendix of FAQs setting out its expected standards in relation to the sale and distribution of green and sustainable investment products. The FAQs are particularly helpful in clarifying the applicability of the circular and consider customer sustainability preferences and how the circular interplays with the suitability requirement. 

For Registered Institutions (RI) who are in-scope of the circular, they should comply as soon as practicable, and ensure full compliance by 29 November 2024.

Expected Standards

Application of the circular - The circular applies only where an RI markets or classifies a product as green and sustainable. The FAQs clarify that in order for an activity to amount to marketing or classifying a product as green and sustainable, there needs to be a representation by the RI that the product is, indeed, green and sustainable. Just mentioning a product name which may suggest the investment product as green and sustainable will not amount to marketing, and neither will the provision of information on ESG ratings / scores or ESG features based on the offering documents to customers.

The one exception to the applicability described is the requirement on bookbuilding, which is covered below.

Product Due Diligence - There is no HKMA definition of what is a green or sustainable product, but in order to market or classify a product RIs must carry out product due diligence (PDD) by making their own assessments of the products, for example by reviewing documentation such as offering documents, product issuer reports and reviews from external parties. Where RIs use information from third party service providers, they should have policies and procedures on their use covering issues such as selection criteria and governance to ensure the reliability of information (the SFC recently announced the development of a voluntary code for ESG ratings and data products providers). The HKMA expects RIs to perform ongoing PDD to ensure the product continues to be green and sustainable. If an RI assesses that a product can no longer be classified as green and sustainable, then it should inform the client and the product can continue to be offered (but not as green and sustainable).

Sustainability preference – The FAQs make clear that it is not mandatory to ask a customer about their sustainability preference. Even where a customer has indicated a suitability preference, the RI can still recommend products with or without sustainability-related features, although RIs should take their stated preference into account and recommend products which align with the preference, where these are available. However, the HKMA notes that the RI should also be considering the other circumstances of the customer.
If a customer does not have or provide any sustainability preference, they can be treated as “sustainability-neutral” and RIs may continue to recommend products with or without sustainability-related features. 

Disclosure – If RIs are marketing or classifying products as green and sustainable, clients should receive information on the green or sustainability characteristics and associated risks in simple and plain language and any representations should be accurate and not misleading.

Staff training– The HKMA expects RIs to keep staff up to date on latest market developments in relation to ESG generally, however where they are marketing or classifying investment products as green and sustainable then staff should receive more targeted training on the concept of sustainable investments, latest trends and market developments and product knowledge. 

Governance –The issues and risks arising from sale and distribution of green and sustainable investment products, particularly greenwashing risks should be subject to management supervision as well as policies and procedures to ensure they are identified and managed.

Bookbuilding – The circular also sets out expected standards on bookbuilding of debt offerings by RIs acting as capital market intermediaries under paragraph 21 of the SFC’s Code of Conduct. These firms should carry out a full assessment of the issuer clients and should assess green and sustainable bond offerings with reference to applicable market principles and standards.

Professional Investor Exemptions 

This circular does not amend the Professional Investor requirements, and therefore RIs may continue to apply the exemptions for Institutional Professional Investors and Corporate Professional Investors and may apply the streamlined approach for Sophisticated Professional Investors. The HKMA also clarifies that it does not require green and sustainable investment products to form a specific product category under the Sophisticated Professional Investors regime.