Global Trustee and Fiduciary Services Bite Sized Issue 12 2024

10 QUICK LINKS COSTS & CHARGES CSDR CRYPTOASSETS EMIR FINTECH FSB FUND LIQUIDITY MIFID II/MIFIR NBFI OPERATIONAL RESILIENCE SUSTAINABLEFINANCE/ESG T+1 ASIA NORTH AMERICA UNITED KINGDOM Global Trustee and Fiduciary Services Bite-Sized | Issue 12 | 2024 SUSTAINABLE FINANCE/ESG Guidance to Asset Managers Regarding Due Diligence Expectations for Third-party ESG Ratings and Data Products Providers On 25 November 2024, the Hong Kong Securities and Futures Commission (SFC) published a circular, noting that it had observed from its previous fact-finding exercise, in October 2023, that asset managers generally engage ESG ratings and data products providers (ESG service providers) and use the products of these providers to facilitate their investment decision-making and risk management processes. The SFC exercise also highlighted common concerns raised by asset managers regarding ESG service providers’ data quality, transparency and conflicts of interest management. The SFC says that , pursuant to General Principles 2 and 3 of its Code of Conduct , asset managers are generally expected to exercise due skill, care and diligence when engaging third-party service providers and ensure that such resources are adequate and effective for the proper performance of their business activities. To meet such regulatory expectations, the SFC says that asset managers should conduct reasonable due diligence and ongoing assessments on third-party ESG service providers. To address asset managers’ concerns, the SFC says the due diligence and ongoing assessments should allow them to reasonably understand the ESG products provided by the third-party ESG service providers. The SFC goes on to say that asset managers may take into account the principles and recommended actions of the Hong Kong Code of Conduct for ESG Ratings and Data Products Providers during their due diligence and ongoing assessment process. The SFC says its expectations are applicable to asset managers who carry out Type 9 regulated activities, including those that are wholly incidental to their other regulated activities, and who have discretion over the investment management process of the fund or discretionary account under their management, regardless of whether the fund being managed is authorised by the SFC. The SFC says asset managers should adopt a proportionate approach to fulfil the regulatory expectations, i.e., the level of due diligence and ongoing assessments of the third-party ESG service providers and their products to be conducted should be proportionate to the impact that the products ultimately have on their investment and risk management processes. Link to Circular here ESAs Conclude Transition Risk Losses Alone Unlikely to Threaten EU Financial Stability On 19 November 2024, the European Supervisory Authorities (EBA, EIOPA, and ESMA – the ESAs) together with the European Central Bank (ECB), released the results of the one-off “Fit-For-55” climate scenario analysis. Under the scenarios examined, the ESAs conclude that transition risks alone are unlikely to threaten financial stability. However, when transition risks are combined withmacroeconomic shocks, the ESAs state that they could increase losses for financial institutions andmay lead to disruptions. The ESAs say that this calls for a coordinated policy approach to financing the green transition and the need for financial institutions to integrate climate risks into their risk management in a comprehensive and timely manner.