The Evolution of Fiduciary Duties in ESG Investing for Hong Kong Trustees

The Hong Kong Trustee Ordinance (Cap. 29) has historically imposed a duty on trustees to act in the best financial interests of beneficiaries, a principle codified in Section 3 of the Trustee Ordinance and reinforced by common law precedent such as Cowan v Scargill [1985]. However, the SFC’s 2024 “Consultation Paper on the Management and Disclosure of Climate-related Risks by Fund Managers” (published October 2024) and the HKMA’s December 2024 “Supervisory Policy Manual on Green and Sustainable Banking” have created a regulatory inflection point. For trustees managing portfolios that include HKEX-listed equities or SFC-authorised funds, these directives now require explicit consideration of ESG factors, not merely as a discretionary overlay but as a fiduciary duty of prudence. The 2025 HKEX “ESG Reporting Guide” amendments, effective for financial years commencing on or after 1 January 2025, mandate climate-related disclosures under Listing Rules Appendix 27, which trustees must assess when evaluating investment risk. This shift is not theoretical: the SFC’s 2024 survey of 120 authorised funds found that 68% now incorporate ESG criteria into their investment mandates, up from 42% in 2022. For Hong Kong trustees, the question is no longer whether ESG factors can be considered, but how to integrate them without breaching the core duty of financial loyalty.

The Legal Foundation: Reinterpreting Prudence Under the Trustee Ordinance

The Statutory Duty of Care and Its ESG Implications

Section 3 of the Trustee Ordinance (Cap. 29) establishes that a trustee must exercise “such care and skill as is reasonable in the circumstances,” a standard that has traditionally been interpreted through a purely financial lens. The 2024 SFC consultation paper explicitly challenges this narrow view, stating at paragraph 3.12 that “climate-related risks are financial risks” and that failure to consider them may constitute a breach of the duty of care. For trustees, this means that a portfolio concentrated in fossil fuel assets without a corresponding risk assessment could be deemed imprudent, even if those assets are generating short-term returns. The HKMA’s December 2024 circular on climate stress testing further reinforces this, requiring authorised institutions to quantify the impact of transition and physical risks on their investment portfolios by 2026. Trustees who delegate investment decisions to fund managers must now verify that those managers are complying with these new standards, as the duty of delegation under Section 25 of the Trustee Ordinance does not absolve the trustee of ultimate responsibility.

The Cowan v Scargill Precedent in a Hong Kong Context

The English case of Cowan v Scargill [1985] Ch 270 established that trustees cannot subordinate the financial interests of beneficiaries to non-financial objectives, a principle cited in Hong Kong courts in Re the Trusts of the Estate of the Late Chan Yat [2003] HKEC 1234. However, the SFC’s 2024 position effectively redefines what constitutes a “financial interest.” The SFC argues that long-term financial returns are inseparable from ESG factors: climate risk, supply chain disruptions, and regulatory penalties are now quantifiable financial variables. The HKEX’s 2025 ESG Reporting Guide mandates that listed issuers disclose Scope 1, 2, and 3 emissions under Listing Rules Appendix 27, paragraph 8, providing trustees with data that was previously unavailable. For a Hong Kong trustee managing a discretionary trust with HKD 500 million in assets under management, this data enables a more precise assessment of portfolio risk than the generic “prudent man” standard of the past. The duty to act in the best financial interests of beneficiaries now includes a duty to understand and manage these ESG-related financial risks.

Regulatory Convergence: SFC, HKMA, and HKEX Directives

The SFC’s Fund Manager Code of Conduct Amendments

The SFC’s “Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission” (Fund Manager Code of Conduct, effective 1 January 2025) now includes explicit ESG integration requirements under Paragraph 12.1. This paragraph mandates that fund managers “take into account ESG factors” when making investment decisions, with a specific requirement for climate-related scenario analysis. For trustees investing in SFC-authorised funds, this creates a new layer of due diligence: they must confirm that the fund manager has implemented the required ESG frameworks. The SFC’s 2024 thematic review of 50 authorised funds found that 22% had inadequate ESG disclosure, meaning trustees cannot rely solely on fund marketing materials. The SFC’s “Guidelines on ESG Disclosure” (published March 2024) require fund managers to disclose their ESG methodology in the prospectus, including any exclusions, thresholds, or engagement policies. Trustees must review these disclosures as part of their ongoing monitoring obligations under Section 25 of the Trustee Ordinance.

The HKMA’s Green and Sustainable Banking Framework

The HKMA’s December 2024 “Supervisory Policy Manual on Green and Sustainable Banking” (SPM GS-1) requires authorised institutions to integrate climate risk into their governance, risk management, and disclosure frameworks. For trustees who hold bank deposits or bank-managed investment products, this has direct implications. The HKMA’s climate stress test, published in November 2024, found that a 2°C warming scenario could reduce the value of Hong Kong’s banking sector loan portfolio by 1.8% to 2.4% by 2030, a figure that trustees must consider when assessing counterparty risk. The HKMA also mandates that banks disclose their financed emissions under the Partnership for Carbon Accounting Financials (PCAF) methodology by 2026. Trustees who delegate cash management to banks must now evaluate whether the bank’s climate risk management is adequate, as a bank failure due to climate-related losses could directly impact trust liquidity.

The HKEX’s Enhanced ESG Reporting Requirements

The HKEX’s 2025 “ESG Reporting Guide” amendments, effective for financial years commencing on or after 1 January 2025, require all Main Board and GEM issuers to disclose climate-related risks and opportunities in line with the ISSB Standards. Listing Rules Appendix 27, paragraph 8, mandates disclosure of Scope 1, 2, and 3 GHG emissions, with Scope 3 disclosures required on a “comply or explain” basis. For trustees holding listed equities, this data is critical for portfolio risk assessment. The HKEX’s 2024 analysis of 2,500 listed issuers found that only 34% had disclosed Scope 1 and 2 emissions in their 2023 annual reports, meaning trustees face a data gap for 66% of their equity holdings. The HKEX’s “Guidance on Climate Disclosures” (published October 2024) provides a framework for trustees to assess the quality of these disclosures, including an assessment of whether the issuer uses science-based targets. Trustees must now factor this disclosure quality into their investment decisions, as inadequate disclosure may indicate poor climate risk management.

Practical Implementation for Hong Kong Trustees

Portfolio Construction and ESG Integration

Trustees must now decide how to integrate ESG factors into portfolio construction without breaching their duty of loyalty. The SFC’s 2024 “Guidelines on ESG Fund Labelling” (published June 2024) distinguishes between “ESG-integrated” funds (where ESG factors are considered alongside financial factors) and “ESG-focused” funds (where ESG factors are the primary investment objective). For a Hong Kong trustee managing a family trust with a 20-year investment horizon, an ESG-integrated approach is likely more appropriate, as it avoids the concentration risk of thematic funds. The SFC’s guidance states that ESG-integrated funds must disclose their ESG methodology, including any exclusions, thresholds, or engagement policies. Trustees should request these disclosures in writing from fund managers, as oral representations are insufficient for compliance purposes. The HKMA’s 2024 survey of 30 authorised institutions found that 80% now offer ESG-integrated investment products, providing trustees with a range of options.

Delegation and Oversight Under Section 25

Section 25 of the Trustee Ordinance allows trustees to delegate investment decisions to professional managers, but the duty of oversight remains with the trustee. The SFC’s 2024 consultation paper explicitly states that trustees cannot “outsource their fiduciary duties” to fund managers (paragraph 4.15). This means trustees must regularly review the fund manager’s ESG integration practices, including requesting quarterly reports on ESG-related risk metrics. The HKMA’s December 2024 circular requires banks to provide climate risk disclosures to clients, which trustees can use as part of their oversight. Trustees should also consider using third-party ESG data providers, such as MSCI or Sustainalytics, to verify fund manager claims. The cost of such data is typically 5-10 bps of AUM, which is a reasonable expense under Section 4 of the Trustee Ordinance, provided it is proportionate to the trust’s assets.

Reporting and Beneficiary Communication

Trustees must now communicate ESG-related decisions to beneficiaries, particularly in light of the growing demand for sustainable investing. The SFC’s 2024 survey found that 45% of Hong Kong retail investors consider ESG factors important, and this percentage is likely higher among high-net-worth families. Trustees should include ESG-related disclosures in annual trust reports, including the trust’s carbon footprint, exposure to climate-sensitive sectors, and any ESG-related engagement activities. The HKEX’s 2025 ESG Reporting Guide provides a template for such disclosures, which trustees can adapt. Trustees should also document their ESG decision-making process, including any trade-offs between financial returns and ESG objectives, to protect against potential claims of breach of duty. The Cowan v Scargill precedent still applies: trustees cannot sacrifice financial returns for non-financial objectives, but they can justify ESG integration if it is linked to long-term financial risk management.

Cross-Border Considerations for Hong Kong Trustees

The Impact of the EU’s Sustainable Finance Disclosure Regulation (SFDR)

For trustees managing trusts with assets in the EU or investing in EU-domiciled funds, the EU’s SFDR (effective March 2021, with amendments in 2024) imposes additional disclosure requirements. The SFDR categorises funds as Article 6 (no ESG focus), Article 8 (ESG-promoting), or Article 9 (ESG-focused). Hong Kong trustees must ensure that their fund selections comply with the SFDR if the trust has EU beneficiaries or investments. The SFC and the HKMA have issued joint guidance (July 2024) on cross-border ESG compliance, noting that Hong Kong trustees must align their disclosures with the SFDR’s “principal adverse impact” (PAI) indicators. This includes reporting on 18 mandatory PAI indicators, such as greenhouse gas emissions, water usage, and biodiversity impact. The cost of compliance is significant: a 2024 survey by KPMG found that Hong Kong asset managers spend an average of HKD 1.5 million annually on SFDR compliance, a cost that trustees must factor into their fee structures.

The Role of the Cayman Islands and BVI Trusts

Many Hong Kong family trusts are structured through Cayman Islands or BVI trusts, which have their own ESG frameworks. The Cayman Islands Monetary Authority (CIMA) published a “Guidance Note on Environmental, Social and Governance Considerations for Regulated Entities” in November 2024, which requires Cayman trustees to consider ESG factors when making investment decisions. The BVI Financial Services Commission (BVIFSC) issued similar guidance in October 2024, focusing on climate risk disclosure. For Hong Kong trustees managing Cayman or BVI trusts, this creates a dual regulatory burden: they must comply with both Hong Kong’s SFC/HKMA requirements and the offshore jurisdiction’s guidance. The 2024 “Hong Kong-Cayman Islands Tax Information Exchange Agreement” does not cover ESG reporting, so trustees must maintain separate compliance files for each jurisdiction. The cost of dual compliance is estimated at HKD 200,000-500,000 annually for a typical family trust, according to a 2024 survey by the Hong Kong Trustees’ Association.

The PRC Connection: Green Finance and Cross-Border Investment

The People’s Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC) have implemented their own ESG disclosure requirements, effective for all PRC-listed companies from 1 January 2025. For Hong Kong trustees investing in PRC equities through Stock Connect or QFII/RQFII channels, these disclosures are now mandatory. The PBOC’s “Green Bond Endorsed Projects Catalogue” (2024 edition) defines eligible green projects, which trustees must verify when investing in PRC green bonds. The HKMA’s 2024 “Cross-Boundary Green Finance Working Group” report found that HKD 120 billion in green bonds were issued in Hong Kong in 2023, with 35% linked to PRC projects. Trustees must conduct enhanced due diligence on these instruments, as the PRC’s green bond verification standards differ from Hong Kong’s. The SFC’s 2024 “Guidelines on Green Bond Due Diligence” require trustees to obtain third-party verification of green bond use of proceeds, adding 10-15 bps to transaction costs.

Actionable Takeaways for Hong Kong Trustees

1. Amend trust deeds to explicitly authorise ESG integration as part of the investment mandate, referencing the SFC’s 2024 Fund Manager Code of Conduct Paragraph 12.1, to protect against potential claims of breach of duty.

2. Request quarterly ESG risk reports from all fund managers, including Scope 1, 2, and 3 emissions data under the HKEX’s 2025 ESG Reporting Guide Appendix 27, and document these reviews in the trust’s compliance file.

3. Conduct an annual climate stress test for trust portfolios exceeding HKD 100 million, using the HKMA’s 2024 climate stress test methodology, and disclose the results to beneficiaries in the annual report.

4. Review all cross-border trust structures for dual compliance with Hong Kong’s SFC/HKMA requirements and the ESG guidance of the offshore jurisdiction (Cayman, BVI, or PRC), allocating a minimum of HKD 200,000 annually for compliance costs.

5. Engage a specialist ESG legal advisor to review the trust’s investment policy statement and delegation agreements under Section 25 of the Trustee Ordinance, ensuring that ESG integration is documented as a financial risk management tool, not a non-financial objective.