Development of ESG in capital markets: global trends to watch
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Development of ESG in capital markets: global trends to watch

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Janney Chong, Yvonne Tang and Iris Gao of RPC discuss the regulatory initiatives on ESG reporting in Hong Kong SAR, Singapore, the UK and the EU

Investors have become increasingly aware of the importance of environmental, social and governance (ESG) issues while making investment decisions, and ESG topics have also become priorities for leading securities regulators and stock exchanges. However, there remain many organisations holding the belief that the effects of climate change are long-term and therefore are unlikely relevant to their decisions today.

The bankruptcy of Pacific Gas and Electric Company which is also widely known as the first ‘climate change bankruptcy’ demonstrates that climate change has immediate consequences. Failure to effectively assess ESG risks could have negative impact on financial performance due to customer preferences for eco-friendly products, result in higher operating expenses due to rising greenhouse gas (GHG) pricing, and higher compliance costs arising from litigation and enforcement actions.

The absence of comparative information is one of the most significant hurdles faced by investors who desire to incorporate ESG issues into their investment decisions. Given there is no standardised framework for disclosing climate-related risks, it is also challenging for businesses to choose what information to report and how it should be presented.

To address these issues, the Task Force on Climate-related Financial Disclosures (TCFD) released its recommendations in June 2017 which were designed to "solicit decision-useful, forward-looking information that can be included in mainstream financial filings". Based on the TCFD recommendations, the International Sustainability Standards Board (ISSB) launched its proposals to establish a global baseline for sustainability disclosures in March 2022.

Below is an overview of the regulatory landscape on ESG reporting in Hong Kong SAR, Singapore, the UK, and the EU and recent developments in light of the TCFD recommendations.

Hong Kong SAR

Ongoing compliance with ESG by listed companies

Hong Kong SAR companies are required by the companies ordinance to include in their business reviews a discussion of their environmental policies and performance, and key relationships with stakeholders such as employees, customers, and suppliers. In 2016, these requirements were incorporated to the ESG guide under the listing rules of The Stock Exchange of Hong Kong Limited (HKEx).

HKEx first presented the ESG guide in 2012 as an encouraged practice and disclosure on a voluntary basis, and since 2016 it has steadily evolved into a mandatory regime. In 2020, the ESG guide has been substantially improved by incorporating certain TCFD recommendations, such as mandating board oversight over ESG issues, targets for certain environmental KPIs, and disclosure of the impact of significant climate-related issues.

Under the current ESG guide, listed companies are required to disclose a board statement that describes the board's consideration of ESG matters and various ESG issues on a ‘comply or explain’ basis. Listed companies are afforded a great deal of flexibility in identifying important ESG matters to be reported taking into account the views of their key stakeholders. Practical guidance has been provided under the ‘Guidance on Climate Disclosures’ published by the HKEx in 2021 in order to provide practical guidance to listed companies in complying with the TCFD recommendations.

Climate-related disclosures in listing documents

HKEx acknowledges that there is a growing trend for investors factoring ESG in their investment decisions and investors' assessment of an initial public offering (IPO) applicant no longer only focuses on its business or financial performance but also on its governance and environmental and social activities. It is therefore important for private companies planning to go public to take serious considerations on ESG issues at an early stage.

Currently, IPO applicants are required to disclose in listing documents how they manage climate-related risks, their environmental policies and descriptions of the significant impacts of their activities on the environment and natural resources and the actions taken to manage them.

Climate-related risks management and disclosures by funds and banks

The regulatory focus in the finance sector has been on climate-related and greenwashing risks. In August 2021, the Securities and Futures Commission of Hong Kong (SFC) amended its Fund Manager Code of Conduct (FMCC) by introducing new requirements developed with reference to the TCFD recommendations requiring fund managers to consider climate-related risks in their governance, investment and risk management processes and fund managers are given a transition period ranging from 12 to 15 months to comply with the relevant requirements.

The SFC further improved the disclosure requirements of SFC-authorised funds to make appropriate disclosures to investors via various channels (e.g., websites, newsletters or reports, etc.) on how they manage climate-related risks and conducting periodic reviews at least annually on the disclosures and update the disclosures where appropriate.

The SFC has also established a database on its website that displays the ESG funds whose management companies have represented and confirmed that the funds meet the aforesaid requirements. This was done to improve the comparability, transparency, and visibility of ESG funds. The Hong Kong Monetary Authority also released the ‘Supervisory Policy Manual GS-1 – Climate Risk Management’ in December 2021 to provide banks with guidelines on building climate resilience and key elements of climate-related risk management.


Recent Singapore Exchange (SGX) rule amendments indicate a trend toward mandatory ESG reporting in Singapore. The SGX introduced a phased-in climate reporting regime based on TCFD recommendations and a mandatory board diversity-related disclosure in annual reports in 2021.

Beginning in 2022, all companies listed on the SGX are to adopt ‘comply or explain’ climate reporting. This will be followed by mandatory reporting for those industries identified by the TCFD as being particularly impacted by climate change and the transition to a lower-carbon economy.

Mandatory reporting shall be implemented for the financial industry, the agriculture, food and forest products industry, and the energy industry in 2023 and, extended to the materials and buildings industry, and the transportation industry in 2024. Similar to Hong Kong SAR's principle-based approach, SGX's sustainability reporting guide does not mandate specific sustainability reporting frameworks and ESG indicators against which listed companies are required to report, other than climate which should follow TCFD recommendations.

The Monetary Authority of Singapore (MAS) issued three sets of ‘Guidelines on Environmental Risk Management’ (ENRM Guidelines) applicable to banks, insurers, and asset managers in late 2020. To hasten the adoption of the ENRM Guidelines by financial institutions, in 2022, the MAS issued information papers on the environmental risk management practices of banks, insurers and asset managers, which included reports on the progress made in implementing the ENRM Guidelines.

The ENRM Guidelines also outline MAS' expectations and seek to improve financial institutions' resilience to and management of environmental risks by disclosing climate-related information in accordance with international reporting frameworks, such as TCFD recommendations.

Concerning retail funds with ESG investment focus, the MAS, in 2022, released a circular on disclosures and reporting guidelines outlining strengthened requirements to combat retail ESG fund greenwashing. Of particular note, the circular details how the MAS expects the existing Code on Collective Investment Schemes and Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations to apply to retail ESG funds.


The UK ESG disclosures reform can be traced back to the implementation of the Companies Act 2006 which at first requires directors to consider the impact on the community and environment to promote the company’s success.

The UK has mandated all companies (save for small companies) to publish an annual strategic report that includes, if appropriate, information on environmental and employee matters and compels large public-interest entities to disclose certain ESG-related information since 2013. All publicly listed companies are required to report GHG emissions on a ‘comply or explain’ basis beginning in 2013. Since 2019, the same obligation has been extended to all large companies in the UK.

In order to keep its commitment to make TCFD-aligned disclosures mandatory across the UK economy by 2025, the government and regulators have released or consulted on a wide range of TCFD-aligned disclosure rules applicable to listed companies, large private companies, asset managers, life insurers, and pension providers over the past two years.

As the first part of its green finance strategy, the UK government announced in October 2021 its intention to build a new regime that will streamline existing disclosure obligations on sustainability by introducing new economy-wide sustainability disclosure standards (SDR). SDR will incorporate worldwide ISSB standards and expand to encompass sustainability challenges beyond climate change.


The EU has the most stringent ESG reporting regime among the jurisdictions mentioned in this article in terms of breadth, coverage, and assurance. The Corporate Sustainability Reporting Directive (CSRD) will expand the scope of the Non-Financial Reporting Directive (NFRD) to include all companies listed on EU regulated markets (except micro-enterprises), all large companies, and non-EU companies with substantial activities in the EU market.

In-scope companies will be required to report in accordance with the detailed sustainability reporting standards being developed by the European Financial Reporting Advisory Group covering a wide range of ESG issues on a ‘double materiality’ basis, which requires a company to disclose how ESG issues affect it and its external impact on environmental and social aspects. NFRD does not mandate assurance of sustainability information disclosure, although CSRD does.

The Sustainable Finance Disclosure Regulation provides sustainability-related disclosures in the financial services sector in an effort to increase the transparency and comparability of funds' sustainability profiles at both entity and product levels. Asset managers and investment advisors must disclose policies such as their investment decision-making process with the integration of sustainability risks, the principal adverse impacts of their investment decisions on sustainability factors (on a ‘comply or explain’ basis), and additional information, including an explanation of which environmental characteristics the ‘sustainable’ product promotes or which environmental objective it has.

Looking ahead

The recent developments discussed show that global regulatory initiatives are trending towards a harmonised ESG reporting standard worldwide, largely through the incorporation of TCFD recommendations into their respective local regulatory landscapes.

While climate-related reporting remains the key focus of ESG reporting, we notice that the regulatory focus has begun to shift to encompass other ESG concerns. Apart from the jurisdictions mentioned above, it is noteworthy that the Securities and Exchange Commission of the United States recently unveiled a proposal that would provide more prescriptive rules for foreign and domestic public companies to disclose extensive climate-related information in their annual reports and audited financial statements.

In Hong Kong SAR, securities regulators are eager to support the development of a global uniformed set of sustainability reporting standard such as the new standards being developed by the ISSB. In addition, they intend to impose mandatory climate-related disclosures aligned with the TCFD recommendations across the relevant sectors no later than 2025.

Hong Kong SAR listed companies have been afforded a substantial amount of latitude under Hong Kong SAR's existing ESG reporting framework. Disclosures under the ESG guide, for instance, are subject to materiality assessment by listed companies, and other than the mandatory disclosures of a board statement, other disclosures can be made on a ‘comply or explain’ basis.

Assurances from a third party to bolster the credibility of ESG information produced are optional. Listed companies may also implement any worldwide ESG reporting standards commensurate with the ESG guide's minimal requirements. In view of recent global ESG developments, we anticipate that Hong Kong SAR's ESG reporting framework will be expanded to implement assurance requirements in phases and adopt consistent reporting standards for all reporting entities.

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