How HKMA Exchange Fund evaluates managers on ESG
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The Hong Kong Monetary Authority’s Exchange Fund attaches great importance to the environmental, social and governance (ESG) practices of its external managers, and utilises selection practices with an established assessment mechanism, the de facto central bank said.
“The HKMA places great importance on robust ESG integration and stewardship practices of its external managers, as they are expected to fulfil active ownership responsibilities by exercising voting rights and engaging with underlying investee companies on material ESG matters on its behalf,” a spokesperson told AsianInvestor.
“The HKMA has a well-established request for proposal (RFP) and due diligence mechanisms in place for the selection of external managers in both public and private markets,” the spokesperson added.
“ESG assessment is an integral part of such mechanisms to appoint managers who align with the HKMA’s responsible investment expectations.”
As Hong Kong’s central banking institution, the HKMA plays a leading role in green and sustainable finance in the city’s financial industry. It established a cross-agency steering group with the city’s Securities and Futures Commission (SFC) in 2020 to coordinate capacity building and policy development in the industry.
HKMA's Exchange Fund has a dual mandate: to defend the value of the Hong Kong dollar against the US dollar under the linked exchange rate system, and secondly, to maintain the stability of Hong Kong's monetary and financial systems as well as the city’s status as an international financial centre.
By end-2023, about 29% of the Exchange Fund’s assets were managed by external managers. The fund’s total assets stood at HK$3.98 trillion ($510 billion) as of end-June.
Roughly HK$690 billion of the fund’s public market investments are outsourced to 80 investment managers. In the private markets, the fund invests about HK$517 billion in global private equity and overseas real estate. It mainly appoints internationally renowned investment managers as general partners (GPs).
“The [manager] selection process is holistic and based on a set of criteria such as the professional knowledge of the institutions concerned and the teams, their experience and investment track record, risk management and compliance record, extent of presence in Hong Kong, ESG practices and fees, etc,” Hong Kong Secretary for Financial Services and the Treasury Christopher Hui said in a statement to lawmakers in early July.
LOCAL STANDARDS
Specifically, external managers of Hong Kong and China active equities portfolios are required to comply with the principles of responsible ownership issued by the SFC on a “comply-or-explain” basis, said the HKMA spokesperson.
The SFC’s principles of responsible ownership refer to seven guiding principles that are non-binding and voluntary in design to assist investors in determining how best to meet their ownership responsibilities.
These include approaches to shareholder reporting, engagement with investee companies, exercising voting rights, and managing conflicts of interests.
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In a relevant development, Hong Kong’s stock exchange this year tightened listed companies’ climate-related disclosure requirements in alignment with the latest International Sustainability Standards Board’s (ISSB) accounting standards, making it mandatory for companies to disclose scope 1 and scope 2 greenhouse gas emissions starting in 2025. Hong Kong’s rules are considered to be Asia’s “most stringent ESG requirements”.
For developed market equities portfolios, the Exchange Fund’s managers need to adhere to “generally accepted international ESG standards”, the spokesperson said.
Asset managers and their investee companies in developed markets, especially those located in Europe, often comply with either local regulations or international reporting standards, or a combination of the two. International standards include the United Nations’ Principles for Responsible Investment (PRI), the Task Force on Climate-Related Financial Disclosures (TCFD) framework, and the European Union’s Sustainable Finance Disclosures Regulation (SFDR).
“As ESG assessment is highly situational and investment-specific, the HKMA does not apply a one-size-fits-all threshold or benchmark,” the spokesperson said. “It identifies relevant ESG factors for each investment and incorporates them into the assessment, aiming to achieve sustainable long-term returns.”
The spokesperson didn’t detail HKMA's approach to private asset manager selection.
ESTABLISHED PROCESS
Richard Surrency, head of Asia Pacific at Aviva Investors, sees Asian asset owners’ ESG due diligence in manager selection as being “quite established”, with a competitive and extensive RFP process in terms of both ESG reporting and broader ESG commitments.
“Generally, there's a degree of global alignment around asset manager access. I would have to say that, in a lot of cases, Asia is very competitive. It's not an easy RFP environment,” Surrency told AsianInvestor.
He noted that there are established global data platforms, rating agencies, and consultancies available in the region to help investors evaluate funds and their performance.
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Asia is still more focused on total returns, Surrency noted, whereas in Europe, priorities are more weighted towards sustainability.
“In Asia Pacific, the total return profile still takes the top spot. And I would say that sustainability and ESG credentials are taking the second or third spot,” he said.
As concerns over greenwashing mount globally, Surrency believes it will become more difficult for funds to use the “ESG” label.
“Moving forward, what you're going to find is that institutions are going to get into a lot more detail about what ESG means within a fund,” he said.
Dominic James, a partner at law firm Sidley Austin, also noted that Asian investors have been focusing on climate-related risk management disclosures for private market investments.
He told AsianInvestor that international institutional investors have become increasingly focused on ESG initiatives in due diligence questionnaires, and that, to some extent, has become a gating hurdle for fundraising.