Sale and Distribution of Green and Sustainable Investment Products (PDF File, 335.1 KB)

In view of the growing interest in ESG-related products and services, the Hong Kong Monetary Authority (HKMA) has recently reviewed the practices of registered institutions (RIs), including retail banks, corporate banks, and private banks, as regards the sale of ESG products (investment funds, green bonds, and certain structured products). The aim was to ensure sufficient safeguards and measures by institutions to monitor the fulfillment of investment objectives and thus to prevent greenwashing in the Hong Kong financial market.
The HKMA has now issued a [circular](https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2023/20231129e1.pdf) in this matter to present its key expectations and best practices as regards the distribution of ESG products, including ESG funds. The key expectations are briefly described below, for the best practices please refer to the circular itself:
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(1) Product due diligence: RIs should take reasonable steps to classify an investment product as green and sustainable. This involves the review of relevant information, such as issuer documentation, reports (e.g., green and sustainable bond framework, post-issuance reports, periodic impact reports), and external assessments (second-party opinions, independent certifications). Following the original classification as an ESG product, the product in question must be reviewed at frequent, regular intervals to ensure it maintains its green and sustainable status. Naturally, such reviews must be documented appropriately. If a product no longer meets the ESG criteria, RIs should inform customers who have invested in it and discontinue marketing the product as green and sustainable.
(2) Customer due diligence: RIs should actively engage with customers to understand their investment goals. This includes exploring whether customers have an interest in ESG or sustainable investments altogether, if they have any specific concerns regarding controversial business activities they wish to avoid, and if they have any specific investment areas of interest, such as water, biodiversity, low carbon emissions, etc.. Furthermore, RIs are expected to factor in various aspects of a customer’s profile, including its risk tolerance, financial situation, knowledge, and experience in the investment domain, when selling products to clients.
(3) (ESG) disclosures to customers: RIs must ensure that any information provided to customers about green and sustainable investment products is truthful and not misleading. When marketing or categorizing an investment product as green or sustainable, RIs should offer details about the product’s green/sustainability characteristics and associated risks. If RIs use metrics to score the sustainability of products, they should provide information about the methodology, assessment criteria, and data sources used to derive these scores.
(4) Governance in relation to the sale of ESG products: RIs maintain high standards in managing and overseeing the risks related to the sale and distribution of green and sustainable investment products, specifically addressing the risks associated with greenwashing. The HKMA expects RIs to have robust policies and procedures in place, along with effective monitoring by control functions, to identify and handle these risks properly.
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Also, the HKMA has enclosed a set of frequently asked questions (FAQs) to address some ongoing concern as regards investor due diligence and know-your product obligations in this context:
1. Under what circumstances are RIs expected to comply with the expected standards set out in the Circular?
2. Can RIs apply the exemptions for Institutional Professional Investors and Corporate Professional Investors?
3. Can RIs apply the streamlined approach when dealing with Sophisticated Professional Investors?
4. Is there any streamlined approach for bonds issued by government or sovereign?
5. Can RIs identify and classify green and sustainable investment products by relying on the relevant information provided by reputable third party service providers, the expertise of their parent company or other entities within the group?
6. Is an RI expected to request product certification or verification?
7. Is it mandatory for RIs to make enquiry about a customer’s sustainability preference?
8. If a customer has indicated sustainability preference, is an RI only allowed to recommend investment products which align with the customer’s sustainability preference, as the RI might not have such investment products available?
9. If RIs make enquiry about a customer’s sustainability preference, but the customer does not provide an answer or does not indicate any sustainability preference, can RIs still recommend products with sustainability-related features?