Hong Kong Publishes Code of Conduct for ESG Ratings and Data Products Providers

On October 6, 2024, the Hong Kong Code of Conduct for ESG Ratings and Data Products Providers (VCoC) was published to establish and promote a consistent, interoperable, and proportionate voluntary code for providers offering ESG ratings and data products and services in Hong Kong (Providers). The Hong Kong ESG Ratings and Data Providers Voluntary Code of Conduct Working Group (VCWG), an industry-led working group sponsored by the Hong Kong Securities and Futures Commission (SFC), developed the VCoC.

The VCoC is a voluntary, self-regulatory framework covering a broad spectrum of Providers and is relevant to various business models and structures within the ESG landscape. Providers that are signatories to the VCoC can meet the expectations set out in the principles of the VCoC (see discussion of these principles below) in a manner aligned with such Providers’ own business model and structure.

Background

Hong Kong authorities have taken steps to develop key elements of a green finance ecosystem. In mid-2022, the SFC formed a focus group and conducted a fact-finding exercise that included a survey to understand the different business models of ESG service providers and the market practice of local licensed asset managers in engaging with ESG service providers. The SFC has also promoted the International Organization of Securities Commissions’ (IOSCO) recommendations, as set out in the Final Report on Environmental, Social, and Governance (ESG) Ratings and Data Products Providers, by sponsoring and supporting the VCWG in developing the VCoC. For more information on IOSCO’s recommendations, refer to this Latham blog post.

The VCWG published the initial draft of the VCoC on May 17, 2024, followed by a one-month consultation period. After considering market feedback, the VCWG officially launched the VCoC on October 6, 2024.

The VCoC closely aligns with the IOSCO recommendations and, in substance, replicates the voluntary code of conduct developed by an international industry-led working group initiated by the UK’s Financial Conduct Authority.

Principles Adopted and the Application Approach

The VCoC is structured around six key principles, each underpinned by a series of actions to guide Providers in their implementation:

1. Good Governance: Providers should ensure appropriate governance arrangements are in place to promote and uphold the principles and overall objectives of the VCoC.
2. Securing Quality (Systems and Controls): Providers should adopt and implement written policies and procedures to ensure that they issue high-quality ESG ratings and data products.
3. Conflicts of Interest: Providers should adopt and implement written policies and procedures designed to help ensure their decisions are independent, free from political or economic interference, and appropriately address actual or potential conflicts of interest. Such conflicts of interest may arise from, among other things, the Providers’ organisational structure, business or financial activities, or the financial interests of the Providers and their officers and employees. Providers should identify, avoid, or appropriately manage, mitigate, and disclose actual or potential conflicts of interest that may compromise the independence and integrity of the Providers’ operations.
4. Transparency: Providers should prioritise adequate levels of public disclosure and transparency in their ESG ratings and data products. This includes clearly outlining their methodologies and processes so that users understand what the product is and how it is produced. Providers should also disclose any potential conflicts of interest and maintain a balance with respect to proprietary or confidential information, data, and methodologies.
5. Confidentiality (Systems and Controls): Providers should adopt and implement written policies and procedures to address and protect all non-public information received from or communicated to them by any entity, or its agents, related to their ESG ratings and data products, in a manner appropriate in the circumstances.
6. Engagement (Systems and Controls): Providers should regularly consider whether their information-gathering processes with entities covered by their products leads to efficient information procurement for both the Providers and these entities. If Providers identify potential improvements to information-gathering processes, they should consider what measures they can take to implement them. If feasible and appropriate, Providers should respond to and address issues that users and covered entities flag, while maintaining the independence and integrity of their products.

The VCoC is designed to be interpreted and applied proportionately, having regard to the nature, scale, and complexity of the activities or business. It is not intended to overlay upon existing regulated activities for which formal rules and guidance already exist.

Providers may sign up for the VCoC voluntarily. Upon signing, a Provider agrees to complete, publicise (on its own website), and review at least annually (updating when appropriate) a self-attestation document in a prescribed form to explain its approach to implementing the VCoC. It should inform the International Capital Market Association (ICMA) and provide it with a hyperlink to the self-attestation document.

A Provider that is a signatory to the VCoC will be granted an implementation period (which is six months for Providers that are ESG ratings providers or 12 months for Providers that are ESG data products providers), to embed the principles within their organisation and produce the self-attestation document.

Hosting, Maintenance, and Future Development of the VCoC

ICMA will be responsible for hosting and maintaining the VCoC. Its responsibilities include publishing and maintaining an up-to-date signatory list of Providers on its website, responding to any formal inquiries from market participants about the VCoC, and conducting market surveys. As the ESG landscape continues to evolve, the VCoC will be subject to amendments to ensure it remains relevant and effective. ICMA will also reconvene market participants and stakeholders to amend the VCoC when necessary.

Conclusion

The VCoC’s publication marks a significant milestone in developing a transparent, reliable, and efficient market for ESG ratings and data products in Hong Kong. By adhering to its principles, Providers can enhance the trust and confidence of investors, contributing to the overall integrity and sustainability of the financial markets.

This post was prepared with the assistance of Toon Dictus.