Hong Kong’s Securities and Futures Commission (SFC) has outlined regulatory expectations for how asset managers conduct due diligence on ESG ratings and data products providers. The SFC said its previous fact-finding exercise highlighted common concerns among asset managers regarding service providers’ data quality, transparency and conflicts of interest management. The commission expects asset managers to exercise due skill, care and diligence when engaging third-party service providers and ensure that resources are adequate and effective for the proper performance of their business activities. “To meet such regulatory expectations, asset managers should conduct reasonable due diligence and ongoing assessments on third-party ESG service providers,” the SFC said. The commission’s circular said that the due diligence and ongoing assessments should allow asset managers to “reasonably understand the ESG products provided by the third-party ESG service providers”. This includes product functionality – such as the source and timeliness of underlying information, any use of estimates, methodologies applied, and the criteria and approach for assessing the covered entity – as well as product limitations and purposes. To meet regulatory expectations, the SFC says asset managers can take into account the principles and recommended actions of the recently-finalised Hong Kong Code of Conduct for ESG Ratings and Data Products Providers, or “other similar or higher standards” during their due diligence and ongoing assessment process.
