Consultation conclusions on the management and disclosure of climate-related risks of fund managers

By Michael P. Wong; Jason Chan; Stanley Tiu, Dechert

Published: 30 November 2021


In August 2021, the Securities and Futures Commission of Hong Kong (SFC) published the “Consultation conclusions on the management and disclosure of climate-related risks by fund managers” (consultation conclusions)[1], that sets out the SFC's expectations as to how fund managers should consider climate-related risks in carrying out investment and risk management, and how to make appropriate disclosures of the same. The publication (i) forms part of the SFC's plans, as set out in the 2018 Strategic Framework for Green Finance[2], to enhance asset manager consideration for and disclosure of ESG factors, especially environmental and climate risks; and (ii) reflects the SFC's findings, as set out in the SFC circular dated March 2019 on the Survey on Integrating Environmental, Social and Governance Factors and Climate Risks in Asset Management[3], that climate-related risks are a source of financial risk that need to be considered and managed by fund managers.

The requirements proposed in the consultation conclusions (new requirements) will apply to all fund managers licenced in Hong Kong and will be reflected as amendments to the SFC Fund Manager Code of Conduct. This briefing sets out a summary of the new requirements under the consultation conclusions. The new requirements take effect from as early as 20 August 2022 for large fund managers (as defined below) and 20 November 2022 for all other fund managers.

1.  Scope and applicability

The new requirements will apply to Type 9 (asset management) licenced corporations who exercise discretionary investment management over the assets of investment fund(s) (fund managers), including both authorised and private funds (e.g., private equity, private credit, mutual funds, and hedge funds). Fund managers who only manage discretionary accounts are currently out of scope.

The new requirements are formulated in two tiers, and in-scope fund managers will need to determine the extent to which the new requirements will apply to them. Baseline requirements will apply to all fund managers and enhanced requirements will apply in addition to the baseline requirements to fund managers who qualify as large fund managers[4].

2.  Governance

Baseline requirements

The new requirements require a fund manager to ensure that both its board and management are engaged in the integration of climate-related risks across the fund manager's organisation. The board of the fund manager should be responsible for overseeing the climate-related risks and their incorporation into the investment management and risk management processes of the fund manager. At the management level, the fund manager should also ensure that it has sufficient technical and human resources, as well as governance structures (e.g., internal controls and written procedures), to manage climate-related risk and the ongoing compliance with such governance structures.

The consultation conclusion also clarify that while a fund manager belonging to a group of entities may leverage on group resources and staff (such as via group policies and procedures) and may rely on group procedures, provided that those procedures satisfy the new requirements, the local fund manager retains full responsibility for compliance with the new requirements.

3.  Investment management

Baseline requirements

The consultation conclusions require a fund manager to ensure that climate-related risks are considered in investment management processes. A fund manager will be required to:

  • Identify relevant and material physical and transitional climate-related risks for each investment strategy and fund it manages
  • Where relevant, factor the material climate-related risks into the investment management process. For example, a fund manager can incorporate climate-related risks into its investment philosophy and investment strategies, as well as integrate climate-related data into its research and analysis process
  • Take reasonable steps to assess the impact of these risks on the performance of underlying investments.

To the extent that a fund manager considers that climate-related risks are not relevant nor material to the investment management and risk management processes of the strategies managed by it, it must disclose the basis of this determination in its offering materials. This assessment should be re-evaluated at least annually, and disclosures should be revised accordingly where appropriate.

4.  Risk management

Baseline requirements

The SFC considers climate-related risks as a financial risk, and its expectation is that climate-related risks should be treated in the same manner as other material risks, such as market and liquidity risks. Therefore, a fund manager is required to take climate related risks into consideration in risk management procedures and ensure that appropriate steps are taken to identify, assess, manage, and monitor the relevant and material climate-related risks for each investment strategy and fund it manages. Appropriate tools and metrics, including carbon footprint-related metrics, forward-looking metrics and physical climate related metrics are expected to be used as part of the baseline requirements.

Enhanced requirements

In addition, large fund managers are expected to adopt more robust and systematic approaches to climate-related risk management. In particular, if climate risks are assessed and considered to be material to an investment strategy or a fund that a large fund manager manages:

  • The large fund manager should make reasonable efforts to acquire or estimate the weighted average carbon intensity of Scope 1 and Scope 2 greenhouse gas (GHG) emissions for funds under its management. The large fund manager is also encouraged to include Scope 3 GHG emissions (if data is available) in its calculations
  • The large fund manager should also assess the relevance and utility of scenario analysis in evaluating the resilience of investment strategies to climate-related risks under different pathways and to keep an internal record of the assessment. Such scenario analysis is expected to involve analysis of the risks and opportunities arising from climate change, and evaluation of the exposure of investment strategies to such risks and opportunities in different scenarios. If the assessment result is deemed to be relevant and useful, then the large fund manager should develop and implement the scenario analysis in a way that is commensurate with its size and the nature of its business within a reasonable timeframe.

5.  Disclosure

Baseline requirements

A fund manager responsible for the overall operation of an investment fund is required to make adequate disclosures, such as in its offering documents, relating to climate related risks to allow investors to make an informed judgement about their investments in the fund, including (i) its governance arrangement for oversight of climate-related risks; (ii) the board's and the management's respective roles and oversight; and (iii) how it takes climate related risks into account in its investment and risk management processes, including the tools and metrics used to identify, assess, manage and monitor the risks. If climate-related risks have been assessed and are deemed not to be relevant to certain types of strategies, then the fund manager should disclose such exceptions.

Enhanced requirements

In addition to the baseline requirements, a large fund manager is also expected to comply with the following additional disclosure requirements:

  • Describing the engagement policy at the entity level and preferably providing examples to illustrate how material climate-related risks are managed in practice, including how the fund manager's engagement policy is implemented
  • At a minimum, providing the portfolio carbon footprints of the Scope 1 and Scope 2 GHG emissions associated with the funds' underlying investments at the fund level (where data is available or can be reasonably estimated), and indicating the calculation methodology, underlying assumptions, its limitations, and the proportion of investments (e.g., in terms of the net asset value of funds) which are assessed or covered

Implementation timeline

Large fund managers will have until 20 August 2022 to comply with the baseline requirements, and 20 November 2022 to comply the enhanced requirements. Fund managers who are not large fund managers will need to comply with the baseline requirements by 20 November 2022.

In the meantime, fund managers of funds that are also subject to the Regulation (EU) 2019/2088 of the European Parliament and of the council of 27 November 2019 on sustainability related disclosures in the financial services sector as amended by Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (SFDR) will also need to consider whether an integrated approach to investment and risk management processes, as well as disclosure will be warranted.


The new requirements will have a significant impact on in-scope fund managers. It is important to note that the New Requirements apply to all fund managers, not just those that follow ‘sustainable’ or ‘ESG’ strategies. Further, the SFC has clarified in the consultation conclusions that a ‘comply or explain’ approach will not be accepted, so all fund managers will need to consider the extent to which the new requirements will apply to them.

Although fund managers have until Q3 and Q4 2022 to comply with the baseline requirements and the enhanced requirements, if applicable, the obligations are detailed and potentially complex for fund managers who have until now been unaffected by climate-related or ESG-related regulations. Fund managers are advised to start reviewing policies and processes now to ensure that they are in a position to comply with the mandatory baseline and enhanced requirements – this may require seeking service or data providers (e.g., on GHG emissions) in advance of the deadlines.

Visit Dechert's website for more information. 


[1] The consultation conclusions are available here

[2] The 2018 Strategic Framework for Green Finance is available here

[3] The March 2019 Circular is available here

[4] Large fund managers are defined in the consultation conclusions as fund managers with assets under management (AuM) of HK$8 billion or above for any three months during the preceding 12 months (exclusive of AuM from discretionary accounts)