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

The Hong Kong Code of Conduct for ESG Ratings and Data Products Providers (the Code) was published on 3 October 2024. This is a voluntary code which providers of ESG ratings and data products can sign up to in order to demonstrate their commitment to sound and transparent practices when providing their ESG products. 

The development of the Code is sponsored by the Securities and Futures Commission (SFC) which, in October 2023, appointed the International Capital Market Association (ICMA) to convene an industry working group and provide the secretariat to develop a voluntary code of conduct for the Hong Kong market. The publication of the Code follows the public consultation in May this year (see our previous blog post).

The Code is intended to enhance transparency of methodologies for ESG ratings and data products and improve standards generally across the market. In doing so, the Code should help to improve engagement with rated entities and the ability of asset managers, asset owners and banks to better understand and use ESG ratings and data products. 

In line with recommendations by the International Organization of Securities Commissions (IOSCO), the principle-based approach adopted by the Code focuses on promoting transparency, good governance, management of conflicts of interest, and strengthening systems and controls in the sector. The Code includes a self-attestation document for ESG ratings and data products providers (the Providers) to explain their approach and actions taken to adhere to the principles of the Code. Providers are encouraged to sign up to the Code and implement the relevant self-attestation measures. The Code is available in English and Chinese.

Overview of the Code 

The aim of the Code is to (i) improve the availability and quality of information provided to investors at product and entity levels; (ii) enhance market integrity through increased transparency, good governance and sound systems and controls; and (iii) improve competition through better comparability of products and providers.

The Code sets out six principles (the Principles) with each Principle underpinned by a series of actions, which provide a practical guide to the application and interpretation of the Principle. The six Principles are: 

• Good Governance - Providers should ensure appropriate governance arrangements are in place that enable them to promote and uphold the Principles and overall objectives of the Code.
• Securing Quality (Systems and Controls) - Providers should adopt and implement written policies and procedures designed to help ensure the issuance of high quality ESG ratings and data products.
• Conflicts of Interest – (I) Providers should adopt and implement written policies and procedures designed to help ensure their decisions are independent, free from political or economic interference, and appropriately address actual or potential conflicts of interest that may arise from, among other things, the Providers’ organisational structure, business or financial activities, or the financial interests of the Providers and their officers and employees. (II) Providers should identify, avoid or appropriately manage, mitigate and disclose actual or potential conflicts of interest that may compromise the independence and integrity of the Providers’ operations.
• Transparency - Providers should make adequate levels of public disclosure and transparency a priority for their ESG ratings and data products, including their methodologies and processes to enable the users of the product to understand what the product is and how it is produced, including any potential conflicts of interest and while maintaining a balance with respect to proprietary or confidential information, data and methodologies.
• Confidentiality (Systems and Controls) - Providers should adopt and implement written policies and procedures designed to address and protect all non-public information received from or communicated to them by any entity, or its agents, related to their ESG ratings and data products, in a manner appropriate in the circumstances.
• Engagement (Systems and Controls) – (I) Providers should regularly consider whether their information gathering processes with entities covered by their products leads to efficient information procurement for both the providers and these entities. Where potential improvements to information gathering processes are identified, Providers should consider what measures can be taken to implement them. (II) Where feasible and appropriate, Providers should respond to and address issues flagged by entities covered by their ESG ratings and data products and by users while maintaining the independence and integrity of these products.

Signing up and applying the Code 

Signing up to the Code is voluntary. For those Providers that do sign up to the Code, they agree to complete, make available publicly (on their own websites), and review at least annually (updating where appropriate), a self-attestation document (the Self-attestation Document) – a form of which is provided in Annex 2 of the Code and which outlines their approach to the implementation of the Code. Once published or updated, ICMA should be informed and provided with a hyperlink to the Self Attestation Document. 

Once a Provider has signed up to the Code, they are given an implementation period (6 months for ESG ratings providers and 12 months for ESG data product providers) to apply the Code. At the end of the implementation period, Providers are expected to publish the Self-attestation Document and the Principles should be embedded within the Provider’s organisation.

A few take aways

It is worth reiterating that the adoption of the Code by Providers is voluntary. However, ICMA will maintain a list of signatories to the Code on their website and include links to the Self-attestation Documents published by the signatories. Signatories are also recommended to announce their adoption of the Code on their own websites.

ICMA has given Providers some flexibility in implementing the Code within their organisations - ICMA has emphasised that the Code is intended to allow signatories to meet expectations set out in the principles in a manner aligned to their own business model and structure, instead of setting out a singular approach which signatories are obliged to follow. 

The Code represents an important step in Hong Kong’s efforts to align with the international trend of supervising and regulating ESG-related metrics. Following the IOSCO report, we are seeing numerous jurisdictions globally and in Asia develop and issue legislative proposals and/or codes of conduct addressing the recommendations, including Japan, Singapore (see our previous blog post), EU (see our previous blog post) and the UK (see our previous blog posts).