top of page
shutterstock_197867132 (1).jpg


Refer to Chinese article here.

SFi’s Policy Spotlight examines how Hong Kong’s regulatory and policy landscape is changing to encourage and foster sustainable finance.

The Hong Kong Monetary Authority, as the manager of the Exchange Fund, is integrating ESG factors into its investment process as a way to mitigate risks and enhance long term returns. They have developed a practical and nimble approach in the belief that ESG issues are too significant to ignore.

When you are the biggest fish in the pond, every movement causes ripples. That’s the case with the Hong Kong Monetary Authority (HKMA) as it integrates ESG principles into its investment strategy and sets an example for the broader financial industry.










HKMA’s move towards ESG comes at a time when Asian investors lag global counterparts in terms of ESG investment – allocating 10 percent of assets compared to 18 percent of assets globally. But this is shifting, with giants such as Japan’s Government Pension Investment Fund (GPIF) carving out the working model for other Asian countries to replicate. HKMA’s steps towards ESG closely echo that of GPIF’s. HKMA’s ESG investment could catalyse the broader Hong Kong market towards sustainable finance, much like GPIF triggered Japan’s momentum with ESG assets reaching 18% of total assets within three years of GPIF’s move. We are already seeing a positive impact in Hong Kong, with the number of local UN Principles for Responsible Investment (PRI) signatories reaching 37 currently – 16 of which signed within the past year.

“We are one of the largest asset owners in town, and we think what we’re doing is a sign of encouragement for others,” says Kim Chong, head of risk management and compliance for the Exchange Fund Investment Office at the HKMA.

“It is like saying, when even the biggest asset owner can move in this direction, why can’t you?”


Kim’s team manages the HKD4.3 trillion Exchange Fund and serves as HKMA’s ESG specialists. It is not only what they are doing, but how they are doing it, that sets an example. They have taken a direct and practical approach, where concrete steps are valued above adhering to certification standards.

Kim says putting an appropriate emphasis on ESG and sustainable long-term economic performance allows the HKMA to better achieve its investment objectives of the Exchange Fund, and reduces risks associated with ESG-related matters in its underlying investments. Assets or companies with high ESG risk are likely to diminish in value over time and may even become “stranded assets”.

“We are not really an organisation of doing good, and we are not an impact organisation,” Kim says. “Our belief is that if you incorporate ESG and use it as a filter you will find in the longer term that the risk is lower. ESG issues are too significant to be ignored, and if you tackle them correctly your risk adjusted factors will be looked after.”

“We are not really an organisation of doing good, and we are not an impact organisation,”


The HKMA increased the pace of integrating ESG into their investment process in May 2019 when they launched measures to support and promote Hong Kong’s green finance development in the areas of green and sustainable banking, responsible investment and capacity building. HKMA’s guiding principle is that priority will be given to ESG investments if long-term risk-adjusted return is comparable to other investments.


Working with External Managers

The HKMA has developed internal guidelines on ESG covering the process of selection, appointment and monitoring of external fund managers for the Exchange Fund. HKMA employs external fund managers for all of its listed equity portfolio, with managers of Hong Kong equities and China active equities portfolios being required to comply with the Principles for Responsible Ownership (“PRO”) issued by the Securities and Futures Commission, while external managers of developed market equities portfolios need to adhere to generally accepted international ESG standards.

HKMA monitors the development of ESG standards, and actively assesses how these standards can be further integrated into the investment process where it makes sense to do so, noting:


“We’re not so focused on one particular standard in the market, but on how the manager thinks these things through. We engage with leading managers, the global names, so these things are very high on their agendas and are second nature to them.”

Hiring external managers for some of the Exchange Fund’s assets allows the HKMA to tap the best investment expertise and also to keep track of the latest market developments in the ESG space. Qualitative and quantitative factors are used to select managers, with on-site due diligence testing conducted to assess the managers’ ESG qualifications. HKMA asks managers specific questions in relation to troublesome companies, checking if the manager is aware of any controversies, and how the manager has dealt with these situations.

“Sometimes engagement doesn’t work and you simply need to divest from that company,” Kim says.

The managers HKMA appoints are already integrating ESG factors in their investment management approach. “These managers know we are serious about the ESG process, we emphasise ESG right from the request for proposal stage, all the way through to selecting, due diligence and appointing them”.

“We’re not so focused on one particular standard in the market, but on how the manager thinks these things through. We engage with leading managers, the global names, so these things are very high on their agendas and are second nature to them.”

Kim and his team believe it’s important to not only speak to the ESG specialists on the team but also with the portfolio manager, to find out if the manager is proactively integrating ESG into the investment approach.

“If we have concerns that they are ignoring ESG, and the managers do not adjust after we speak to them, and we can see this in their returns, we give them a warning and if they do not comply then the conversation would become more serious,” Kim says. “We assess how managers perform based on returns but also by how they are fulfilling their ownership requirements.”


HKMA expects external managers to take ESG matters seriously and to help HKMA discharge its ownership responsibilities in investee companies through active ownership, voting and engagement activities. Kim notes that European managers still lead the way on ESG practices, but Kim says Asian managers are rapidly catching up.


“Some of the local Asian managers are very savvy. They know companies with a good G perform better than others. E and S need more catching up, they are more of a risk factor, while G is a performance driver.”


HKMA has also included ESG factors in their credit risk analysis of their bond portfolio, and moving forward it will construct ESG-themed mandates in equities investment by adopting ESG equities indices as benchmarks for passive portfolios and engage active equities managers who apply ESG factors.

The Hong Kong Monetary Authority (HKMA) is Hong Kong’s currency board and de facto central bank. It also regulates Hong Kong banks and payment systems. The organisation reports directly to the Financial Secretary.

HKMA manages the Exchange Fund, which had AUM of HKD4.3 trillion at the end of 2019 after recording an investment return of 6.2% for the year. The fund consists mainly of the government’s fiscal reserves, and is invested into equities, bonds, overseas properties and infrastructure.

The HKMA is a member or signatory of the following organisations:

Influencing ESG Standards

The HKMA is using PRO as its most basic guideline for external managers, but Kim says HKMA looks beyond principles alone to assess actual outcomes.

Kim says this is achieved by encouraging managers to consider the impact of their investments and conduct ground-up due diligence to ensure that their allocations meet not only such principles and international standards, but also the asset owner’s standards. Critical thinking and proactive action can help weed out greenwashing.

“We are not there to search for the most stringent policies. We try to be practical and constantly improve,” Kim says. “We get them to start tilting towards ESG. We ask them to do their best to go green, but we’re not so worried about certifications to start with.”

“We are not there to search for the most stringent policies. We try to be practical and constantly improve,”

Identifying material ESG risks cannot be done in a one-size-fits-all approach, Kim says.

“Climate change, cyber security and data protection are all important and each one affects companies differently. Our view is that it is more important how you deal with specific material risks.”

HKMA has plans to develop its own voting policies, with a focus on the long-term, as well as governance issues such as ensuring an independent board of directors. Now it follows the voting policies of its external managers.

HKMA also ensures that all of its real estate assets meet international green building standards, such as BREEAM (Building Research Establishment Environmental Assessment Method). It has also joined numerous international sustainable finance groups, allowing it to share best practices with other institutional asset owners and hold it accountable.


Shaping the Future Through Collaboration

Building ESG principles into investment strategies is steadily becoming easier to do, whether you are a central bank or individual investor. Market forces are bolstering a growing awareness from institutions to individual private investors that ESG investment principles generate superior long-term results, and this is driving more assets towards green investments.

The HKMA organises workshops for Asian GPs to share insights on ESG in order to raise ESG awareness and standards, and Kim emphasises the need for investors and fund managers to learn from each other by sharing best practices and experiences.

Once an investor has begun their sustainable finance journey it is important to continue that development and improvement. One of the HKMA’s goals is to incorporate climate risk more systematically in the future.

“We are still in the growing stages and we are still looking for better practices,” Kim says.

Continued collaboration efforts and information sharing will be needed to propel Hong Kong’s sustainable finance journey. Associations such as Hong Kong Green Finance AssociationUN PRIAsian Corporate Governance Association, Asia Venture Philanthropy Network, Carbon Disclosure Project and SFi among others, will all play a critical role in this effort.


Charting your ESG Journey with Sustainable Finance Initiative 

Institutional assets owners today are applying sustainable finance strategies across all or part of their portfolios. HKMA is one example, with pension funds, sovereign wealth funds insurance companies, family offices, endowments and development finance institutions all allocating more to ESG. What actions can other asset owners undertake to develop or deepen their own ESG journey? At SFi, we recommend taking a step-by-step approach and are proud to introduce our Sustainable Finance Pathway – this can help asset owners at all stages of their ESG journey. Whether you are just starting out on your ESG journey, or looking to enhance and strengthen your approach, asset owners can use this step-by-step approach to ensure you are on the right track.

SFi-Pathway (1).png
IMG_9570-1 (1).jpg
bottom of page