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A checklist for ESG investments in Singapore and Hong Kong

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A much-needed primer on navigating the updated regulatory framework for ESG investments across Singapore and Hong Kong created by Daniel Yong and Daniel Tang, partners at Withersworldwide

The importance of environmental sustainability in the business world has increased rapidly in recent years. For the first time ever, the top five global risks recognised by the World Economic Forum (WEF) in 2020 were all related to the environment. The WEF acknowledged that businesses collectively, as the world’s most powerful economic force, play a key role in addressing the challenges of environmental risk.

There is growing expectation from investors and regulators alike for asset managers to integrate environmental risk into risk management practices. Government authorities have started putting in place regulations around environmental risk management (EnRM). The standard and extent of regulation, however, differs between jurisdictions. For funds that conduct activities in multiple jurisdictions, it is important to properly understand the various regulatory considerations applicable. For example: where investments are made, where fund interests are offered, etc.

This article sets out the key regulatory standards in relation to EnRM applicable to Singapore and Hong Kong SAR respectively, the leading asset management jurisdictions in Asia Pacific.


Daniel Yong, partner – corporate , Singapore, Withersworldwide

The approach taken by the Monetary Authority of Singapore (MAS) is to integrate environmental risk into asset managers’ financing and investment decisions, regardless of whether the fund holds itself out as having an environment, social and corporate governance (ESG) strategy.

The MAS’s approach to EnRM has been set out in its Guidelines on Environmental Risk Management (Asset Managers) (MAS Guidelines). The focus areas are climate change, loss of biodiversity, pollution, and changes in land use. Beyond these guidelines, the MAS recently hinted of its plans to put in place further ESG-specific requirements for the naming of retail funds that hold themselves out as having an ESG strategy, prospectus disclosures, and periodic reporting disclosures.

Presently, the MAS Guidelines apply to all discretionary licensed and registered fund management companies. Where investment management is delegated to sub-managers or advisors, asset managers nonetheless retain overall responsibility. They are expected to assess and monitor their sub-managers’ or advisors’ compliance with the guidelines. For the moment, the MAS Guidelines do not apply to non-discretionary asset managers.

The MAS Guidelines should be applied in a manner that is commensurate with the size and nature of the fund’s individual investment activities, as well as its wider focus and strategies. As the methodologies for assessing, monitoring and reporting such risks evolve, MAS expects asset managers’ approach toward EnRM to mature. Asset managers who are part of global groups may leverage on their group’s governance structure and policies that meet the principles set out in the MAS Guidelines.

The MAS Guidelines broadly cover (a) governance and strategy, (b) research and portfolio construction, (c) portfolio risk management and (d) disclosure of environmental risk. A summary of each is set out below:

a) Governance and strategy

The asset manager’s board of directors and senior management should oversee the integration of environment risk policies into the asset manager’s investment risk management policies, tools and metrics. These should be disclosed and regularly reviewed for continual effectiveness. Such policies should include capacity-building to equip board members, senior management, and staff with adequate understanding and expertise. In this regard, MAS recently highlighted a trend of asset managers incorporating EnRM-related key performance indicators in the remuneration structures of senior management.

At the operational level, EnRM responsibilities should be clearly allocated as follows:

  • Business line staff should consider environmental risks when establishing and managing funds / mandates;
  • A risk management and compliance function should be set up to monitor the implementation of EnRM policies and ensure adherence to applicable rules and regulations; and
  • An internal audit function should be set up to test the robustness of the asset manager’s EnRM framework

b) Research and portfolio construction

The MAS Guidelines require asset managers to integrate assessment of environmental risk into their investment decision-making. Environmental risks should be factored into the evaluation of a potential investment’s returns, and sectors with higher environmental risks should be identified (and some might argue, avoided). Smaller asset managers may initially rely on publicly available information or paid databases to conduct their research on investee companies and identify such sectors. Thereafter, asset managers should evaluate the materiality of such risks. Different considerations apply for different asset classes – the MAS Guidelines set out useful examples of factors relevant to the consideration of various asset classes, including public equities, fixed income, direct real estate, and REIT investments.

Subsequently, at the portfolio construction stage, asset managers should measure and assess all environmental risk factors present on an aggregate basis, where material.

c) Portfolio risk management

Unanticipated developments including natural disasters and changes in regulations could affect the operations and financials of investee companies. To mitigate such adverse impacts, MAS requires that asset managers implement appropriate processes and systems to continually assess, monitor and respond to potential or actual material environmental risk on individual investments and portfolios. Asset managers are encouraged to conduct ESG risk assessments in a consistent manner across their entire investment portfolio.

A process highlighted in the MAS Guidelines is ‘scenario analysis’, based on forward-looking information and conservative assumptions that are regularly reviewed to assess the impact of various environmental risks on investments. Each analysis should be properly documented, including features such as the choice of scenarios, reasonableness of assumptions, assessment of results, considerations on potential action required, and actions taken to address the risk. For smaller asset managers, MAS suggests performing scenario analysis at an individual investment level, focusing on sectors more affected by environmental risk before progressing to analysis at the portfolio level. Asset managers may apply ‘scenario analysis’ results.

Another process noted in the MAS Guidelines in respect of ongoing EnRM is stewardship. Asset managers are expected to shape the corporate behaviour of their investee companies through engagement, proxy voting and sector collaboration. For smaller asset managers, MAS suggests working with like-minded investors to engage investee companies to address common environmental risk concerns and work towards more sustainable business practices over time.

The last process highlighted by MAS is capacity-building, which equips directors, senior management and staff with adequate understanding and expertise to manage environmental risk in their respective roles. Capacity-building programmes should be regularly reviewed to incorporate emerging issues related to EnRM.

d) Disclosure of environmental risk

MAS expects asset managers to make meaningful disclosures regarding their approach to EnRM in line with international reporting frameworks. It accepts disclosures via annual reports, sustainability reports, investor reports and/or websites. Asset managers should evaluate the various means of disclosure and adopt an approach and frequency that best enables them to provide clear, meaningful and timely information to their stakeholders.

For instance, asset managers may consider making differentiated sustainability-related disclosures to their different audiences, ranging from standalone corporate sustainability reports to bilateral client reports.

Hong Kong SAR

Daniel Tang, partner – corporate, Hong Kong, Withersworldwide

Hong Kong’s Securities and Futures Commission (SFC) has taken a similar approach to the MAS in framing the climate-related risks requirements for asset managers operating in its jurisdiction.

In late 2020, the SFC proposed to amend the Fund Manager Code of Conduct (FMCC) to introduce requirements for asset managers to take climate-related risks into consideration as well as to make appropriate disclosures to accommodate growing investor demand for such information. In August 2021, the SFC, with general support from market participants, announced consultation recommendations to amend the FMCC and published a circular setting out the expected standards for compliance.

The new requirements follow a two-tier approach, namely (a) baseline requirements, which will be applicable to all Type 9 licensed asset managers with discretion over the investment management process and (b) enhanced standards, which will be applicable to in-scope large asset managers with AUM that equals to or is in excess of HK$8 billion (over US$ 1 billion) for any three months in the previous reporting year (Large Asset Managers).

Asset managers who solely provide investment advice to a separate team of an affiliate or act as a distributor of funds with no investment management discretion will not be affected by the new requirements.

Large Asset Managers have until 20 August 2022 to comply with the baseline requirements and 20 November 2022 to comply with the enhanced standards. Other in-scope asset managers must comply with the baseline requirements by 20 November 2022.

A snapshot of the key elements of the baseline requirements is set out below:

a) Governance

The board is expected to have general oversight of climate-related issues and set the tone from the top. Management is required to supervise and monitor the integration of climate-related considerations into the investment and risk management processes. This is an ongoing process that includes setting goals, developing action plans, and establishing controls and procedures aimed to address climate-related issues. When managing climate-related risks, asset managers may leverage on group resources but compliance responsibility remains with the management based in Hong Kong.

Asset managers are recommended to have a dedicated team, working together with investment professionals, to oversee the firm’s efforts in the sustainability space, and integrate these considerations across processes. Implementation of such measures should be supervised by designated personnel within the firm.

The SFC reiterates that it does not intend to endorse any specific industry practice which it considers acceptable, given the rapidly evolving nature of climate-related risk management methodologies. The SFC will assess each asset managers’ compliance with requirements on a case-by-case basis in a pragmatic and holistic manner.

b) Investment management

Asset managers are required to identify relevant and material physical and transition climate-related risks for each investment strategy. They should factor these risks into the investment management process, e.g., to include climate-related risks in the investment philosophy and strategies, and incorporate data into the research and analysis process.

The SFC recommends asset managers meet with the management of portfolio companies, analyse their business models towards risks arising from climate challenges, and use ESG scores to identify relatively high risk organisations.

When assessing the materiality of the impact of climate-related risks on an investment strategy, an asset manager may utilise in-house or third-party data tools or adopt the methodologies suggested by international reporting frameworks (e.g., the Sustainability Account Standards Board) and local climate change policies.

Once the asset manager has identified relevant climate-related risks, such considerations may be incorporated in the stock selection or research process from an impact and risk perspective. One practical example suggested by the SFC is that the asset manager could consider assessing and differentiating potential investee companies based on a range of environmental metrics such as carbon emissions, carbon reserves and green revenue with an aim to identifying companies that are particularly exposed to climate risks.

Where an asset manager assesses that climate-related risks are irrelevant to certain types of investment strategies, it should disclose these exceptions and maintain appropriate records explaining why climate-related risks are irrelevant.

c) Risk management

Asset managers should take appropriate steps to identify, assess, manage and monitor the relevant and material climate-related risks for each investment strategy. In assessing the impact of climate-related risks, reference can be made to publicly available methodologies and research. For instance, the Network of Central Banks and Supervisors for Greening the Financial System published an Overview of Environmental Risk Analysis by Financial Institutions in September 2020 which provides a wide range of examples of how to translate environmental risks into financial risks.

To comply with this requirement, asset managers may consider implementing measures such as applying a set of restrictions to limit ESG risks, divesting holdings in coal and tar sand activities, avoiding financing the tobacco industry and reducing positions in or excluding companies with behaviours which deviate from the firm’s strategies.

d) Disclosure

To ensure investors are well aware of the climate-related risks, information such as the governance structure of the asset manager, the board and management’s responsibilities as well as processes for assessing and managing climate-related risks (including key tools and metrics used) is required to be disclosed to investors. Asset managers are expected to regularly review and update the disclosures and inform investors of any material changes as soon as practicable.

The SFC has made amendments to the FMCC clarifying that these disclosure requirements are applicable to the extent climate-related risks are relevant and material. That being said, asset managers are required to disclose the types of investment strategies or funds under their management for which climate-related risks have been assessed to be not relevant.

Enhanced disclosure requirements for ESG Fund

In addition to the above, the SFC has recently taken a step further to enhance disclosure comparability between similar types of green or ESG-labelled funds in order to assist investors’ understanding and assessment of whether these products meet their investment needs. From January 2022, all SFC authorised funds (i.e., retail funds which may be publicly offered in Hong Kong) which incorporate ESG factors as their key investment focus will have to disclose how they incorporate ESG factors, report and reference ESG criteria, showcase portfolio measurement approaches and release periodic assessments annually. A publicly available register of ESG funds currently authorised by the SFC is maintained by the SFC on its website. As of 8 November 2021, there are 116 unlisted ESG funds and five exchange-traded ESG funds included in the register.

Other additional requirements include disclosure of ESG focus, investment strategy and asset allocation, risks or limitations associated with the fund’s ESG focus in offering documents. Asset managers of such SFC-authorized ESG funds will also be required to regularly monitor and evaluate the underlying investments to ensure continuing compliance.


At the heart of the EnRM regulations in Singapore and Hong Kong SAR is the integration of environmental risk in the fund’s investment decision-making processes throughout its life cycle. Each of these jurisdictions permit asset managers to leverage group EnRM frameworks and policies. And so groups that are active in these jurisdictions should consider consulting professional advisors to put together a comprehensive EnRM policy taking into account specific features of their funds to ensure present and future compliance with applicable regulations.

As with any era of disruption, environmental change will invariably drive new opportunities and challenges. Asset managers who respond swiftly and effectively to changes in policy or regulation will lead the way in an evolving investment paradigm where ESG is increasingly an important function.

The above article was created in partnership with Withers Worldwide and was written by Daniel Yong, Partner, Corporate, Singapore; and Daniel Tang, Partner, Corporate, Hong Kong, Withersworldwide. Please visit the official website for more information on how best to take up revised EnRM frameworks and policies