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Supporting market progress through public policy engagement: the case for Mainland China and Hong Kong

Background

Recognising that the overall ESG standards in Asia are rapidly evolving, Hermes EOS has stepped up its efforts to engage with regulators to support policy making that meets global best practice. This included strengthening board director training through alternative methods and encouraging stock exchanges and regulators to endorse the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).

To achieve this, we have gone beyond responding to public consultations by conducting small group education seminars, with regular stakeholder dialogue that has an influence on the policy setting agenda. The agenda covers corporate governance and ESG reporting.

Our engagement

Strengthening board director training through alternative methods

In 2017, we discussed the idea of conducting an education seminar sharing engagement best practice and case studies with board directors and senior executives. We recommended this approach because training could be conducted repeatedly at the convenience of board directors.

In 2017 to 2018, the Hong Kong Stock Exchange (HKEX) launched its first web-based director training programme covering four areas: duties of directors, the role and function of board committees; risk management, internal control and ESG reporting; corporate governance – the role of directors and company secretary; and directors’ responsibilities at initial public offering. We were the first institutional investor representative to participate in the online director training programme.

In June 2017, we delivered the first responsible investment seminar in Mainland China, organised by the Asset Management Association of China (AMAC) and shared the idea of a more focused session for local companies and asset owners.

Encouraging stock exchanges and regulators to endorse the recommendations of the TCFD

In the same year, we became a member of the Principles for Responsible Investment (PRI) Sustainable Stock Exchange (SSE) Committee and pioneered a direct dialogue with an executive director and another board member of the Hong Kong Securities and Futures Commission (SFC) to encourage the endorsement of TCFD recommendations by regulators around the world.

Now is an opportune time to engage with the Hong Kong regulator as the chair of the SFC serves as the current chair of the International Organization of Securities Commissions. Upon receiving an invitation from senior executives at the SFC, we contributed to the research of the regulator on non-financial disclosure reporting. We shared our insights into the impact of engagement through our involvement in the UK-China Green Finance Task Force, an initiative backed by two central banks – the Bank of England and the People’s Bank of China. More specifically, we shared our ideas on what makes engagement effective in a Chinese context.

Since 2015, we have maintained a dialogue with the HKEX on ESG reporting. We have shared global best practice examples on reporting in different sectors, and how TCFD reporting could be integrated into the current ESG reporting structure of the exchange.

To deepen our public policy engagement efforts with an objective to support the growth of local asset owners committed to stewardship and sustainable investment, we conducted an experience-sharing session on ESG integration for Hong Kong based family offices hosted by RS Group. We initiated a dialogue with the committee members of the Financial Services Development Council (FSDC) of the Hong Kong government to provide input into the implementation of TCFD recommendations for companies and the relevant reporting frameworks.

Changes

In December 2018, we received positive feedback on HKEX’s online board director training from one of the Chinese state-controlled companies we engage with, who informed us it had been used by its external consultant as best practice materials for director training, which confirmed our contribution to improving stewardship and ESG integration in the region.

Also in 2018, the SFC issued a strategic framework for green finance, endorsing the recommendations by the TCFD and promised to work with stakeholders to implement it. Two main areas of focus are corporate disclosure, which the regulator will work on with the HKEX, and stewardship activities by asset owners and fund managers. In November 2018, the FSDC published a paper on ESG strategy for Hong Kong, recommending the upgrade of stewardship codes to ‘comply or explain’ and improving ESG integration and regulation on investment products.

In February 2019, we conducted the first full day ESG seminar for AMAC with recommendation from the Association (see image below). We delivered the seminar with Professor Robert Eccles from Oxford University who focused on impact investing. We are pleased to be able to support the growth of the responsible investors in Asia.

Next steps

Setting specific goals for public policy engagement have led to positive changes. We continue to drive interest and commitment to stewardship in the region through proactive and timely outreach to regulators, in addition to formal consultation responses.

Our key objectives in China in the next three years will be: supporting the Shanghai and Shenzhen Stock Exchanges on improving disclosure and encouraging shareholder engagement; actively contributing to the UK-China TCFD pilot backed by both the UK and Chinese central banks; and being a leader in collaborative engagements through the Climate Action 100+ and PRI initiatives to share best stewardship practices that suit local culture and yield impactful outcomes.

Case studies are shown to demonstrate engagement, EOS does not make any investment recommendations and the information is not an offer to buy or sell securities.

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EOS Client Service and Business Development

Amy D’Eugenio,
Head of Client Service and Business Development, Hermes EOS