Hong Kong’s financial regulator has warned that asset managers do not have enough awareness of the financial risks posed by climate change, sister publication Private Equity International reported.
Speaking at the territory’s Asian Financial Forum on Monday, Julia Leung, deputy chief executive of the Securities and Futures Commission, told delegates that Asian managers tend to focus more on governance than on environmental concerns.
“A lot of awareness is actually [around] governance in Asia, in particular, and not sufficiently on climate,” Leung said. “In fact, if you take a long-term view […] climate could have quite a number of implications on your portfolio.”
Featured image: Julia Leung, deputy CEO of Hong Kong’s SFC, on stage at the Asian Financial Forum on 13 January (second left)
Credit: Alex Lynn
Leung cited an SFC survey – published in December – which found that only 23 percent of asset management firms licensed in Hong Kong that consider ESG factors had processes in place to manage the financial impact of the physical and transition risks arising from climate change.
This was despite the fact that a majority of the asset owners surveyed – which included sovereign wealth funds, family offices and pension funds – expected asset management firms to identify, assess and manage climate risk. The LPs also said that managers were not engaging with them to understand investors’ processes with regard to environmental, social and governance issues.
The situation looks set to improve: 64 percent of asset managers plan to develop or enhance their ESG practices in the next two years, regardless of whether they already consider ESG factors.
Investors are pushing for expanded due diligence processes related to climate change. Australian sovereign wealth fund Future Fund, for example, actively monitors how its external managers are addressing climate risk as part of its response to changing weather patterns.
Such measures could be critical in Asia which, according to an Asian Development Bank study last year, is particularly vulnerable to extreme weather. At the time of writing, Australia is enduring its worst bushfires in decades and torrential rainfall in Indonesia has killed more than 60 people and left hundreds of thousands displaced.
Accolade Wines, one of Australia’s largest wine producers and a Carlyle Group portfolio company, is understood to have experienced a “limited” impact to its vineyards, PEI reported last week. Fires also pose a threat to Australian supply chains, energy pricing and consumer spending.Such measures could be critical in Asia which, according to an Asian Development Bank study last year, is particularly vulnerable to extreme weather. At the time of writing, Australia is enduring its worst bushfires in decades and torrential rainfall in Indonesia has killed more than 60 people and left hundreds of thousands displaced.
One senior executive at a North American institution that is active in Asia-Pacific told PEI this month that it will not commit to Australian PE funds any time soon due to the “real potential for the destruction of equity value”.
Investors may struggle to understand the extent of the climate threat: 68 percent of asset managers that consider ESG do not share information about these practices with investors. All asset owners surveyed agreed that more disclosure is needed to reduce ‘greenwashing’ and help identify asset managers with stronger ESG practices.
“The industry would actually welcome the regulators, which is a first,” Leung said, citing conversations the SFC has had with asset managers while conducting its survey. “[Intervention would] enable the industry to come out with a more standardised approach, in terms of disclosure, so […] investors can actually do a comparison buying a BlackRock fund and comparing it to a UBS fund.”
As part of its efforts to improve ESG standards in Hong Kong, the SFC said in its survey that it plans to outline its expectations of asset management firms in areas such as governance and risk management, with a particular focus on climate change. It will also provide best practice guidance to help firms meet these standards and launch an industry group for managers to discuss climate risks with the regulator and subject experts.
The SFC surveyed 14 asset owners and all 1,685 firms licensed by the commission for asset management, of which 1,124 responded and 794 were currently active. Its research coincided with the release of a green fund database late last year.