Due diligence processes for green and sustainable products

2 - have put in place additional policies with respect to internal approval and reporting procedures for green and sustainable products. For instance:- o Some AIs have established dedicated committees to assess and approve green and sustainable products or the use of green and sustainable-related product and transaction labelling. These dedicated committees usually comprise senior representatives from the management and various business functions with the requisite expertise, and they are independent from the deal teams to avoid any unintended conflict of interests. To facilitate their oversight, management information reports covering the performance of green and sustainable products are submitted to these dedicated committees regularly. Cases of a complex and sensitive nature, and those with disputes over green and sustainable categorisation are escalated to these committees for consideration, advice or final decision. Some AIs have also assigned the risk oversight responsibility with respect to greenwashing risks to these dedicated committees. o Some AIs have embedded climate-related risks, including greenwashing risks in their product due diligence processes by documenting the ways that these risks should be identified and managed. They have clearly delineated the roles and responsibilities of the three lines of defence throughout the entire due diligence process. While climate-related risks are generally considered as part of the inherent risk framework (e.g. as part of reputation and strategic risks), some AIs have set up standalone guidelines on managing climate-related risks and developed separate guidance on climate-related greenwashing risks to facilitate staff members to identify and mitigate such risks. These guidelines are approved by authorized parties (e.g. dedicated committees) and are reviewed and updated periodically, taking into account the latest development in this space. • AIs have developed internal product-specific guidelines on the design, origination and classification framework for green and sustainable products. These internal guidelines are developed with reference to existing international or industry practices and principles, and some AIs also have their internal guidelines reviewed by independent third parties. Some widely adopted market principles and standards include:- o For green loans and green trade facilities: Green Loan Principles (GLP) 2 of the Loan Market Associations (LMA), Asia Pacific Loan Market Association (APLMA), and Loan Syndications and Trading Association (LSTA); o For sustainability-linked financing: Sustainability-linked Loan Principles (SLLP) 3 of LMA, APLMA and LSTA; and Sustainability-linked Bond Principles (SLBP) of International Capital Market Association (ICMA)4 ; 2 Green Loan Principles: https://www.lsta.org/content/green-loan-principles/ 3 Sustainability-linked Loan Principles: https://www.lsta.org/content/sustainability-linked-loan-principles￾sllp/ 4 Sustainability-linked Bond Principles: https://www.icmagroup.org/sustainable-finance/the-principles￾guidelines-and-handbooks/sustainability-linked-bond-principles-slbp/

3 - o For green deposits and green bonds: Green Bond Principles (GBP)5 of ICMA. On green product classifications, some AIs have developed their own internal green classification frameworks as an interim internal reference while a local classification framework is being developed 6 , taking into account a range of international guidance, including the European Union Taxonomy, Climate Bonds Taxonomy of the Climate Bond Initiative (CBI), and Green Bond Endorsed Catalogue of China. Second-party opinions are sought by some AIs on their classification frameworks to show their alignment with market principles and standards. In the case of green mortgages, AIs generally identify the eligible buildings for their programmes based on the building rating of BEAM Plus of the Hong Kong Green Building Council7 . • Some AIs have also developed clear procedures for incorporating green and sustainability analysis into their due diligence process for offering green and sustainable investment products manufactured by third parties. For instance, in the case of green and sustainable bonds, some AIs task dedicated teams to review the mandates of these bonds before execution and require third-party bond issuers to provide independent green certification on their bond frameworks prior to offering the products to customers. For other green and sustainable investment products, some AIs use due diligence questionnaires that cover a range of green or sustainability attributes (e.g. the ways that sustainability factors are integrated into and managed throughout the investment process, and alignment with its broader sustainability goals) to assess whether certain products should be labelled as green and sustainable before offering to clients. • Some AIs have also assessed their green and sustainable product programmes against their own climate strategies and risk appetite standards. Some AIs have further sought verification or second-party opinions from external reviewers to demonstrate the level of greenness of their product programmes.

4 - processes. For such client-level “greenness assessments”, AIs collect and review additional supporting materials from clients, including greenness certifications issued by independent third-party agencies8 and second-party opinions on potential projects, and information about the overall green and wider sustainability strategies of clients. Questionnaires are used by some AIs to collect relevant quantitative and qualitative information for green and climate-related risk assessments. Site visits and negative news checking are also conducted by some AIs to understand the overall greenness and climate risk profile of clients and the potential reputation risks that they face. • While the transaction approval process for conventional products is usually adopted for green and sustainable products as well, some AIs seek additional advice and support from dedicated teams or approvers with green and sustainable expertise during the process. Other additional measures adopted by AIs for the approval of green and sustainable transactions include:- o For green loans and green trade facilities: Borrowers are required to provide additional evidence to indicate the greenness of their projects or the proposed use of proceeds, including third-party greenness certifications, and external verification showing alignment with GLP. While borrowers’ self-attestations are sometimes acceptable according to market practices, predefined eligibility criteria on borrowers and loans are put in place (e.g. renewal of loans for existing projects) to specify the occasions where a self-attestation can be made in lieu of a third-party certification. o For sustainability-linked financing: AIs assess the key performance indicators (KPIs) and the corresponding sustainability performance targets (SPTs) set by borrowers through in-depth discussions with them, benchmarking against key market players’ performance, assessing the relevance and materiality of KPIs by making reference to Materiality Map of Sustainability Account Standards Boards (SASB)9 , and reviewing the borrowers’ past performance. Second-party opinions on the appropriateness of KPIs and SPTs are also required by some AIs as a condition precedent. Some AIs assign a separate unit to conduct the assessment and benchmarking and provide appropriate advisory services to support clients to develop acceptable KPIs and SPTs as needed. o For green personal loans: Green personal loans are mainly offered by AIs for the purchase of electric vehicles (EVs) in Hong Kong. To ensure the use of the EV loan facilities is consistent with the said purpose, AIs require borrowers to provide purchase evidence including sales invoice and purchase order of an EV that is on the list of eligible EVs of the Environmental Protection Department for transaction approval or before loan drawdown. 8 Some AIs have put up a list of pre-approved service providers by making reference to the Recognised External Reviewer List of the Hong Kong SAR Government’s Green and Sustainable Finance Grant Scheme to facilitate assessment by their staff. 9 SASB’s Material Map is a tool that helps identify likely material sustainability issues on an industry-by￾industry basis (https://www.sasb.org/standards/materiality-map/).

5 - • Some AIs also perform additional due diligence on clients of climate risk sensitive and high carbon-emitting sectors according to their own sectoral policies. Clients are asked to provide extra proof and information (e.g. via completing sector-specific climate risk questionnaires and submitting transition plans) to show that their business strategies and activities are in line with the AIs’ strategies, policies and risk appetites. The clients’ carbon emissions reduction targets are compared against the industry transition pathway.