The new guidelines aim to minimize greenwashing and enhance the integrity of ESG data.
The International Capital Market Association (ICMA) is the international trade association of the wholesale financial, corporate, and regulatory communities representing the capital markets, and it has just published the Hong Kong Voluntary Code of Conduct (VCoC) for Environment, Social and Governance (ESG) data and ratings providers. In its new set of guidelines, the new series shall enhance transparency, governance, and responsibility in growing ESG market activity, at the same time addressing the growing concern about greenwashing in Hong Kong’s sustainable finance ecosystem.
A code was brought forward as a response to an inquiry by the SFC of Hong Kong, which wished to have a formal framework established for ESG data providers. With growing commercial attention of investors toward sustainability, greenwashing has become a huge issue, where firms exaggerate or misrepresent their environmental credentials. The new guidelines, making ESG ratings and data more reliable and transparent, seek to ensure renewed trust and accurate credible information guiding sustainable investment decisions.
Background and Purpose of the Code
The VCoC release marks a crucial time for the global ESG market at large, especially since it has experienced exponential growth in recent years where investors and companies alike give due preference to sustainability. However, these developments have been accompanied by problems including inconsistent ESG data, conflicts of interest from data providers, and perceptions of sustainability misrepresentation on the side of companies. All these are matters that have gained heightened attention in Hong Kong as the city seeks to better position itself as an attractive green and sustainable finance hub.
The SFC has recognized a need to add some strength to the governance in this sector. It approached ICMA to work out a voluntary code to help set standards for ESG data and rating providers operating in Hong Kong. On the mainland, the new guidelines agree with IOSCO’s recommendations-thus far, it has been pushing internationally for a better regulation of ESG data providers. The VCoC addresses some of the challenges identified as conflicting interest, transparency, and data accuracy to set a standard within the ESG space.
Evolution of the Voluntary Code of Conduct
On the development of the VCoC, there has been substantial consultation with market participants. The suggestion was open to public consultation by ICMA in 2013 in the form of feedback from stakeholders within finance, investment, and the regulatory sectors. This will enable the guidelines to take into account the needs and concerns of both the public and private sectors.
The ultimate version of VCoC clearly states criteria to which ESG data providers have to operate: independence of the companies rated, transparency in methodology disclosure and ensuring that what is served as information is accurate and reliable. Thirdly, it emphasizes the management of conflict of interest since these agencies have the propensity to offer consulting services acrossRated companies by their ratings thereby bestowing some bias on their viewings.
Enhancing Integrity in the ESG Market
The VCoC also combats burgeoning greenwashing. As consumers for products that claim to be green and sustainable increase, greenwashing has become a source of growing concern for regulators, investors, and indeed for society at large. To help mitigate this risk, ICMA strives for convergence in expectations relating to ESG data providers, thereby making the ESG market in Hong Kong all the more robust and reliable.
This code will underlie high standards in the ESG market, the Chief Executive of ICMA Bryan Pascoe said. “We are honored to coordinate the voluntary code of conduct for Hong Kong and grateful for the support of the Hong Kong Securities and Futures Commission and the involvement of key stakeholders from the private and public sectors.”. According to Pascoe, it will also promote best practice in the market and add to Hong Kong’s wider initiatives on sustainable finance.
Regulatory Support and Industry Adoption
The SFC has led the development and marketing of the VCoC, as it believes that a vehicle like the VCoC is a vital tool in enhancing the quality of ESG data available in the market place and ridding the serious threats of greenwashing. Chief Executive Officer of the SFC, Julia Leung, commended the work undertaken by ICMA for designing the code, and urged how the initiative was providing key support for maintaining the credibility of Hong Kong’s sustainable finance ecosystem.
“The voluntary code will set a benchmark on the provision of high-quality, reliable, and transparent ESG information to combat greenwashing in Hong Kong’s growing green and sustainable finance ecosystem,” said Leung.
The ICMA challenges the ESG ratings and data providers to take the VCoC voluntarily and show them the quality of being transparent and honest. No matter how unobligatory the code may seem to be, many market participants would follow it in their activities because they will try to blend with the rest of the world’s best practices besides establishing trust among investors, regulators, and other stakeholders.
Deeper Meaning for the ESG Industry
The VCoC is an enormous leap forward in regulation of ESG data and rating providers. With the increasing global demand for ESG investments, so will the need for accurate, reliable, and transparent information. ICMA, together with SFC, places Hong Kong at the forefront of the world’s governance over sustainable finance by holding Hong Kong’s ESG data providers accountable in terms of setting a benchmark.
Because the code is voluntary, there will be flexibility to accommodate company changes over time while promoting broader industry adoption.
Increased adoption is also anticipated to lead to higher quality and consistency of ESG data in the market that will benefit investors and the financial system at large.
Conclusion
It is another significant step forward in the pursuit of increased transparency and governance in the ESG market. The Hong Kong Voluntary Code of Conduct for ESG data and ratings providers was developed by ICMA in consultation with the SFC to combat greenwashing in ESG ratings and make sure that the data is accurate and reliable, free of conflicts of interest, and as widely accessible as possible. Expected to advance the reputation of Hong Kong as a hub for green and sustainable finance, these guidelines are expected to promote high standards of market integrity and encourage best practice among the industry.
Source: ICMA