ESG and Responsible Investment Funds in Hong Kong: Regulatory Framework and Fund Manager Obligations

Introduction to ESG Investing

Environmental, social and governance ("ESG") investing has become one of the most significant trends reshaping the global asset management industry. ESG funds integrate non-financial factors — such as climate risk, social impacts, corporate governance quality, and supply chain sustainability — into their investment processes, with the aim of achieving financial returns alongside positive societal outcomes.

In Hong Kong, the SFC has developed a comprehensive ESG regulatory framework for the fund management industry, building on international standards including the Task Force on Climate-related Financial Disclosures ("TCFD") and the International Sustainability Standards Board ("ISSB") frameworks. This article examines the SFC's requirements for ESG funds, the anti-greenwashing regime, and the practical obligations for fund managers incorporating ESG considerations into their investment processes.

The SFC's ESG Regulatory Framework

Circular on ESG Funds (November 2021 and Updates)

The SFC first issued its circular on management and disclosure of climate-related risks in November 2021, setting out baseline expectations for fund managers. In the same month, the SFC published requirements specifically for ESG funds that are SFC-authorised for public offering in Hong Kong.

For SFC-authorised ESG funds, the key requirements include:

• Clear ESG focus: The fund's name, investment objective, and strategy must clearly reflect its ESG focus, and the ESG investment approach must be a key element of the fund's investment process (rather than a peripheral consideration)
• Description of ESG approach: Offering documents must describe the ESG investment strategy in sufficient detail, including the specific ESG factors considered, how they are assessed, and the methodology used
• Ongoing monitoring and reporting: Funds must implement processes for ongoing monitoring of ESG-related metrics and report to investors at least annually on how the ESG investment strategy has been implemented
• Pre-contractual and periodic disclosure: Key ESG disclosures must be provided to investors before subscription and in periodic reports

Climate-Related Disclosures for Fund Managers

The SFC's updated circular on climate-related risks (August 2023) requires fund managers licensed for Type 9 regulated activity to manage and disclose climate-related risks in their management of investment portfolios. The requirements are aligned with the TCFD framework and cover:

• Governance: Fund managers must have board and management-level oversight of climate-related risks relevant to their managed portfolios
• Strategy: Fund managers must identify and assess climate-related risks and opportunities over short, medium, and long-term horizons
• Risk management: Fund managers must have processes for identifying, assessing, and managing climate-related risks, integrated into their overall risk management frameworks
• Metrics and targets: Fund managers must use appropriate metrics to assess climate-related risks and opportunities, including greenhouse gas emissions data where applicable

The requirements are proportionate, with large fund managers (managing assets above HK$4 billion) subject to more demanding disclosure obligations than smaller managers.

Anti-Greenwashing Obligations

"Greenwashing" — the practice of making misleading claims about a fund's ESG credentials or environmental impact — has become a significant regulatory concern globally. In Hong Kong, the SFC has emphasised that funds using ESG-related labels or making ESG claims in marketing materials must be able to substantiate those claims with robust investment processes and documented evidence.

Key anti-greenwashing obligations for fund managers include:

• Fund names using ESG-related terms (e.g., "sustainable", "green", "climate", "impact", "ESG", "responsible") must accurately reflect the fund's investment approach
• ESG marketing claims must be consistent with the fund's actual investment process and holdings
• Funds must not misrepresent the extent to which ESG factors are integrated into investment decisions
• Claims about environmental or sustainability impact must be supported by credible measurement methodologies

The SFC has indicated that it will take enforcement action against fund managers found to be making misleading ESG claims, including requiring corrective disclosures or reclassification of funds.

ESG Integration in Investment Processes

ESG Investment Strategies

ESG investment strategies range from basic exclusion screens to deep impact investing. Common approaches include:

• Negative/exclusionary screening: Excluding companies or sectors that fail to meet defined ESG criteria (e.g., tobacco, weapons, fossil fuels)
• Positive/best-in-class screening: Investing in companies with the strongest ESG performance within their sector
• ESG integration: Incorporating ESG factors into financial analysis and portfolio construction without necessarily excluding any sectors
• Thematic investing: Investing in specific ESG themes such as clean energy, water, sustainable agriculture, or gender diversity
• Impact investing: Making investments with the explicit intention of generating measurable positive social or environmental impact alongside financial returns

ESG Data and Ratings

Fund managers incorporating ESG factors into their investment processes rely on ESG data from a range of sources, including ESG ratings agencies (MSCI, Sustainalytics, S&P), data vendors, company disclosures, and proprietary research. ESG ratings are not standardised and can vary significantly across providers for the same company, creating significant challenges for managers and investors seeking to assess and compare ESG performance.

The SFC and HKMA have both noted the data challenges faced by fund managers and have signalled potential developments in ESG data infrastructure, including through the Climate Disclosure Taxonomy and the Hong Kong Green Classification Framework.

Green and Climate-Focused Funds

Green funds and climate-focused funds are a rapidly growing category within the ESG fund universe. Common categories include:

• Green bond funds: Funds investing in bonds issued to finance eligible green projects, such as renewable energy, energy efficiency, and sustainable infrastructure
• Clean energy funds: Funds investing in companies engaged in renewable energy generation, clean technology, or the energy transition
• Low-carbon equity funds: Funds targeting equity portfolios with lower carbon footprints than benchmark indices
• Carbon offset and nature-based solution funds: Funds investing in projects that generate carbon credits or protect natural ecosystems

The SFC has not yet introduced a mandatory fund taxonomy or classification system comparable to the EU's Sustainable Finance Disclosure Regulation ("SFDR"), though the development of a Hong Kong Green Classification Framework is under active consideration.

Stewardship and Active Ownership

ESG integration increasingly extends beyond portfolio construction to active ownership — engaging with investee companies on ESG issues and exercising voting rights to promote better corporate governance and sustainability practices. The SFC has issued a Principles of Responsible Ownership ("PRO") framework encouraging institutional investors and fund managers to incorporate ESG considerations into their stewardship activities.

Fund managers are encouraged to disclose their stewardship policies, including their approach to voting on ESG-related resolutions and their engagement with investee companies on material ESG risks.

How Alan Wong LLP Can Assist

Alan Wong LLP advises fund managers on all aspects of ESG compliance and responsible investment fund structuring in Hong Kong. Our services include review and drafting of ESG fund disclosure documents, SFC authorisation applications for ESG funds, climate-related risk management framework design, anti-greenwashing compliance reviews, and advice on stewardship and active ownership obligations.

We work with fund managers across all asset classes — from liquid equity and fixed income ESG funds to impact investment vehicles and green bond mandates — and provide practical, commercially-grounded legal advice on the rapidly evolving ESG regulatory landscape.

Contact us to discuss your ESG fund compliance and regulatory needs.