Green and Sustainable Finance in Hong Kong: Legal and Regulatory Framework

Hong Kong has positioned itself as a leading centre for green and sustainable finance in Asia, building on its role as the pre-eminent international financial centre for Greater China and the region. The Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC), and the Stock Exchange of Hong Kong (SEHK) have all introduced significant regulatory requirements relating to environmental, social, and governance (ESG) matters and sustainable finance, and the pace of regulatory development has accelerated substantially since 2020. For fund managers, listed companies, banks, and financial intermediaries operating in Hong Kong, understanding and complying with this evolving framework is both a regulatory necessity and a competitive imperative.

This guide provides an overview of the key regulatory requirements and market practices relating to green and sustainable finance in Hong Kong.

HKEX ESG Reporting Requirements

The SEHK's Environmental, Social and Governance Reporting Guide (the "ESG Guide"), which applies to all listed companies, was first introduced in 2012 and significantly enhanced in 2019 and 2023. The current ESG Guide requires listed issuers to report on a comprehensive range of ESG matters, including:

• Environmental: Greenhouse gas (GHG) emissions (Scope 1, 2, and 3), energy consumption, water usage, waste production, climate-related risks and opportunities, and biodiversity impact
• Social: Employment practices, occupational health and safety, development and training, labour standards, product responsibility, anti-corruption, and community engagement
• Governance: Board oversight of ESG matters, sustainability strategy, and governance structures for ESG risk management

Under the enhanced ESG Guide, Scope 1 and Scope 2 GHG emissions disclosure is mandatory for all listed issuers. Scope 3 (value chain) emissions disclosure is subject to a "comply or explain" approach. Climate-related disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD) framework are mandatory for Hang Seng Composite Index constituents from 2025, with phased implementation for other listed companies.

HKEX ESG reports must be published within five months of the financial year end for Main Board companies and within three months for GEM companies. Board oversight of the ESG report is mandatory — the ESG report must be reviewed and approved by the board, and the board must confirm its oversight of the company's ESG strategy and risk management.

TCFD Climate Disclosures

The TCFD framework — developed by the Financial Stability Board — provides a structured approach to reporting climate-related financial risks and opportunities across four pillars: Governance (how the company governs climate risk), Strategy (climate risks and opportunities and their impact on the business, strategy, and financial planning), Risk Management (how climate risks are identified, assessed, and managed), and Metrics and Targets (climate-related metrics used and the company's GHG emissions targets).

The HKMA has required all authorised institutions under its supervision to implement TCFD-aligned disclosures on a phased basis since 2021. The SFC has similarly required regulated entities to incorporate TCFD considerations into their risk management frameworks and disclosures. HKEX has aligned its mandatory climate disclosure requirements for listed issuers with the TCFD framework and, from 2025, with the IFRS Sustainability Disclosure Standards (ISSB Standards S1 and S2), which build on and supersede the TCFD recommendations.

SFC's Requirements for ESG Funds

The SFC has issued specific requirements applicable to investment funds that are marketed as "ESG funds" in Hong Kong. Under the SFC's ESG Fund requirements (applicable since January 2022), any fund that uses ESG-related terms in its name or marketing materials, or that discloses a primary ESG focus, must:

• Describe and implement an investment strategy that genuinely integrates ESG criteria as a primary feature (not merely as a secondary screen)
• Describe its ESG investment focus and methodology clearly in the offering documents, including how ESG criteria are incorporated into portfolio construction
• Disclose how it measures and monitors the ESG performance of its portfolio
• Report at least annually on the fund's progress towards its stated ESG objectives
• Disclose any potential conflicts of interest relating to the ESG strategy

The SFC's requirements are designed to prevent greenwashing — the practice of marketing a fund as "green" or "sustainable" without substantive integration of ESG criteria into the investment process. Funds that use ESG terminology without a genuine ESG focus will be required to amend their marketing materials or face regulatory action.

Green Bond Framework and Issuance

Hong Kong has developed a robust green bond market, anchored by the Hong Kong Government's own sovereign green bond issuances (including the world's first government tokenised green bond, issued in 2023). The framework for green bond issuance in Hong Kong is based on the International Capital Market Association (ICMA) Green Bond Principles, which require:

• Use of proceeds: Bond proceeds must be allocated exclusively to eligible green projects (as defined in the Green Bond Principles), such as renewable energy, energy efficiency, clean transportation, green buildings, and sustainable water management
• Process for project evaluation and selection: The issuer must communicate to investors the process for determining whether projects are eligible for green bond proceeds
• Management of proceeds: Proceeds must be tracked and ring-fenced for green projects, with any temporarily unallocated proceeds held in cash or high-quality liquid instruments
• Reporting: Annual allocation reporting and impact reporting (measuring the environmental impact of funded projects) are recommended under the Principles and required under several major listing frameworks

Hong Kong listed issuers wishing to issue green bonds should note that HKEX offers a dedicated Green, Social, Sustainability and Sustainability-linked Bond listing framework (the "GSSS Bond" framework), which requires independent third-party pre-issuance verification of the green credentials of the bond and ongoing reporting on use of proceeds.

Transition Finance

Beyond green bonds and ESG funds, the Hong Kong regulatory community has increasingly focused on "transition finance" — financing the transition of carbon-intensive industries towards lower-emissions operations. The Hong Kong Taxonomy for Sustainable Finance (HK Taxonomy), published in 2023, classifies economic activities as "green," "amber" (transitional), or "exclusion" categories, providing a standardised framework for assessing the sustainability of investments and financing activities. The HK Taxonomy is designed to be interoperable with the EU and ASEAN taxonomies, reflecting Hong Kong's role as a cross-border green finance hub.

Carbon Markets

Hong Kong has engaged actively with international carbon markets as part of its green finance strategy. Core Climate, a carbon market platform developed by HKEX in partnership with international partners, provides a marketplace for trading voluntary carbon credits — including credits linked to carbon offset projects in Greater China, Asia, and globally. Core Climate trades verified emission reduction units (VERs) and removal units (RUs) that meet internationally recognised standards (Gold Standard, Verra/VCS, etc.).

The legal status of carbon credits under Hong Kong law is not yet fully settled — they are neither securities nor conventional commodities under existing legislation. The SFC has engaged with market participants on the regulatory framework for carbon credit trading, and further regulatory development is anticipated.

HKMA Sustainability Obligations for Banks

Banks authorised by the HKMA are subject to a comprehensive set of sustainability-related obligations, including: incorporating climate and sustainability risks into their credit risk assessment processes; conducting climate-related stress testing; publishing TCFD-aligned disclosures; implementing green finance governance structures; and supporting the development of the HKMA's green and sustainable banking initiatives. The HKMA's "Climate Risk in the Banking Sector" supervisory guidance provides detailed expectations for how authorised institutions should manage physical and transition climate risks in their lending and investment portfolios.

How Alan Wong LLP Can Help

Alan Wong LLP advises on the legal and regulatory aspects of green and sustainable finance in Hong Kong, including: advising fund managers on SFC ESG Fund requirements and disclosure obligations; reviewing and drafting green bond documentation and ICMA Green Bond Principles compliance frameworks; advising listed companies on HKEX ESG reporting requirements and TCFD disclosure; advising on the legal status and transfer of carbon credits; advising asset managers on integrating ESG risk management into fund documentation and investment policies; and advising on green finance regulatory developments and their implications for financial institutions and investment managers. We work with issuers, asset managers, investment banks, and corporate clients on green and sustainable finance transactions across the Asia-Pacific region.