Hong Kong publishes draft voluntary code of conduct for ESG ratings and data products providers

The global trend towards the supervision and regulation of ESG-related metrics continues. Following Singapore’s code of conduct for ESG rating and data product providers finalised in early 2024 (see our blog post), and the EU co-legislators reaching political agreement on the ESG Ratings Regulation (see our blog post), it is now Hong Kong’s turn to take the next step. The Securities and Futures Commission (SFC) released its draft voluntary Code of Conduct for ESG Ratings and Data Products Providers in Hong Kong (the Code) on 17 May 2024 (as foreshadowed in our previous blog post). The draft Code is open for consultation until 17 June 2024.

Overview

The Code is intended to be globally consistent, interoperable, and proportionate. It has been developed by an industry-led working group supported by the International Capital Market Association (ICMA) (the Working Group). The Working Group has based the Code on the recommendations from the IOSCO Final Report, and sets out six principles (the Principles) which users of the Code can implement and adhere to, as follows: 

• Good governance – ensure that appropriate governance arrangements are in place;
• Securing quality through systems and controls – adopt and implement written policies and procedures to ensure the issuance of high quality ESG ratings and data products; 
• Management of conflicts of interest – adopt and implement written policies and procedures to ensure that decisions are independent, free from political or economic interference and appropriately address actual or potential conflicts of interest;
• Transparency – ensure adequate levels of public disclosure and transparency, including methodologies and processes;
• Confidentiality – adopt and implement written policies and procedures to appropriately address and protect non-public information received by stakeholders across different circumstances;
• Stakeholder engagement – regularly evaluate information gathering processes and respond to issues raised by stakeholders.

The Code explains each Principle by breaking it down into its context, key actions, and outcome. Collectively, these Principles aim to improve the availability and quality of information, enhance market integrity, and improve competition through better comparability of products and providers. 

Core scope and reach

It is worth reiterating that as this Code is voluntary it will be up to organisations that offer the ESG products to decide whether, and to what extent, they intend to apply the Principles.

By signing up to the Code, users agree to complete, make available publicly (on their own websites), and review at least annually (updating where appropriate), a self-attestation document.

Practical implications

The Code emphasises the importance of transparency and integrity in operations. This ranges from ensuring a robust governance structure, adopting written policies, managing conflicts of interest, to providing greater disclosure and transparency on their ESG ratings and data products. The introduction of the Code may assist enhancing market efficiency and trustworthiness by setting clear standards and clarifying provider interaction with wider market participants. However, it is important to note that the Code is not a substitute for the users of ESG ratings and data products providers conducting their own due diligence to choose an appropriate provider.

Timing and next steps

The Working Group is specifically seeking feedback on whether the Code addresses aspects pertinent to the Hong Kong market, if it is sufficiently clear to ensure adherence and the usefulness of the attestation document. The consultation closes on 17 June 2024.