The interest of next generation investors in sustainable and impact investing, as well as the increase in regulatory ESG requirements and the upcoming wave of intergenerational wealth transfer, are key – and with the significant growth in these offices, which increased by 44 per cent between 2017 and 2019[i], and 500 per cent in Singapore alone, it could be argued that Asian family offices are a critical component of any move towards sustainable investing.
The focus of these family offices on sustainable investing is highlighted in the UBS 2020 Global Family Office Report[ii], which found that 39 per cent of family offices intend their portfolios to be sustainable within five years, and two-thirds regarded sustainable investing as important for their legacies. Exactly what that might look like will vary, and it's important to note that of the respondents who intend to have sustainable portfolios, they still rely largely on exclusionary strategies rather than more proactive measures.
Across the board, ESG is gaining momentum with both sustainable[iii] and impact investing[iv] growing steadily, and it looks as though COVID-19 has done little to diminish this momentum. 83 per cent of Stonehage Fleming's Four Pillars survey respondents said they had not altered their ESG approach despite the devastating impact of the pandemic.[v]
Family Office And Funds
A family office is a privately owned or controlled entity which manages assets for, or on behalf of, a family. While a family office may take the form of a single family office (SFO) or a multi-family office, this article will only cover SFOs.
A typical Singaporean structure is illustrated below.
In both Singapore and Hong Kong, there is no specific licensing regime for SFOs. Both jurisdictions' regulations are activity-based, meaning that if the services constitute regulated activity under statues, they have to obtain the appropriate licenses unless the activities fall under an exemption.
In Singapore, an SFO generally relies on existing class exemptions from licensing for the provision of fund management services. This is called the related corporation exemption and it exempts related entities from having to hold a capital market services (CMS) licence. This clarity on the regulatory treatment of SFOs was issued in 2017.
SFOs can also take advantage of tax incentives which include the section 13CA (offshore fund tax) exemption, the section 13R (onshore fund tax) exemption, and the section 13X (enhanced-tier fund tax) exemption. These have varying requirements, but the section 13X incentive is the most onerous yet flexible of them all. The tax rules exclude specified income from designated investments earned by a fund. This could include income from stocks, shares, securities or derivatives, but not Singapore immoveable property.
In a bid to gain a competitive edge over Hong Kong, the Monetary Authority of Singapore (MAS) is exploring the possibility of relaxing the requirement for “permissible fund managers” to allow SFOs to manage Variable Capital Companies (VCC). This is a new corporate structure which provides operational flexibility – and subsequent cost savings – to investors. It enables the use of an umbrella structure where a single fund holds various cells that separate the assets and liabilities into specific cells of the VCC. SFOs managing their own VCCs may also qualify for the VCC Grant Scheme that provides access to tax treaty benefits and grant incentives. Under the scheme, MAS will co-fund up to 70 per cent of qualifying expenses for the establishment of a VCC, capped at SGD$150,000 per application, with each fund manager allowed up to three VCCs.
Since January 2020, the Securities and Futures Commission (SFC) has taken a series of steps to clarify the licensing requirements for family offices, demonstrating its intentions to boost Hong Kong's attractiveness as a family office hub.
On the structure side, the recent introductions of the open-ended fund company (OFC) (July 2018) and the limited partnership fund (LPF) (August 2020) will likely provide more onshore options for investors, including family offices. A bill is intended to be passed later this year which will allow foreign investment funds to re-domicile to Hong Kong as OFCs and LPFs[vi]. The bill will complement a newly announced government subsidy to cover 70 per cent of the expenses, paid to local professional service providers, for OFCs that are set up over the next three years, subject to a cap of HK$1 million per OFC. An amendment bill is also under way to provide tax concessions for carried interest issued by private equity funds operating in Hong Kong.
Under the existing licensing obligations, in order to determine whether a family office needs a license, a legal analysis is required to look at whether the activities constitute any regulated activity or whether they fall within any of the available carve-outs. An example is the intra-group carve-out, when an SFO is providing asset management services solely to related entities defined as wholly owned entities, its holding company, or that holding company’s other wholly owned subsidiaries. The current licensing implications do not hinge on whether clients are families or not.
The SFC issued its first circular on licensing requirements for family offices in January 2020. This was followed by an update in September 2020 which provided more information regarding when an SFO may not need a license.
However, there are still major gaps. The government policy advisory body Financial Services Development Council (FSDC) issued a report in July 2020[vii], and called for further measures including a definition of an SFO for potential licensing exemptions and the introduction of more competitive tax rules for family offices. There is already no capital gains tax in Hong Kong.
The majority of charities and non-profit organisations in Singapore are established in the form of a company limited by guarantee (CLG) i.e. the liability of its members is limited to the amount they undertake to guarantee. While a CLG can accept donations and grants, it is unable to receive funding in the form of equity as it does not have share capital.
A CLG may register and, in turn, be regulated as an approved charity, so it can have full income tax exemption on income and receipts. Qualifying donations into charities, registered as institutions of a public character, may also be eligible for a 250 per cent tax deduction until 2023. This is particularly attractive for SFOs looking to establish a philanthropic arm under their operations. However, an issue arises regarding the use of charities as a vehicle for venture philanthropy (Philanthropy Vehicle). In its guidelines, the Officer of the Commissioner for Charities (COC) has discouraged charities from engaging in activities that expose their assets to significant risk. It advises that the investment of charity funds should be conducted under a separate business subsidiary.
The guidance seeks to help these philanthropy vehicles because they have a restriction on their profit distribution to stakeholders. As non-profit organisations, they can only carry out wholly charitable purposes and, as such, are limited by business regulations. These restrictions encourage SFOs to consider the idea of "impact investing" as an alternative in order to align their personal values with their investment portfolios without facing regulatory limitations.
There is neither a statutory charity law nor charity commission in Hong Kong. The common structures for charities are CLG, trusts and society, and, like Singapore, the majority are CLGs. A charity can apply for tax exemption status from the Inland Revenue Department (IRD) under section 88 of Inland Revenue Ordinance (IRO) and, if successful, be exempt from profits tax, subject to ongoing conditions. Likewise, donors can enjoy tax deduction on “approved charitable donations” for up to 35 per cent of their assessable income or profits.
In order for an organisation to be a charity at law and tax-exempt, it must be set up for one of the four recognised charitable purposes: the relief of poverty; the advancement of education or religion; or other purposes of a charitable nature beneficial to the Hong Kong community. It must be established for public benefit and subject to the jurisdiction of the Hong Kong courts.
In response to the continued rise of social entrepreneurship and impact investing, the IRD updated its tax guide for charitable institutions and trusts of a public character in 2019, which included helpful clarification on the proviso to s.88, IRO which provides the conditions for when profits from "trade or business" for a charity may be exempt from profits tax.
While the IRD emphasised every case would be determined on its own facts, the updated guide did provide lists of examples of when a "trade or business" activity may fulfil the proviso to s.88 conditions. It also has specific sections on financial investment, programme-related investment, and property letting, and provided some guidance on when income generated from these scenarios may meet the proviso to s.88 conditions.
While there are still questions regarding how the IRD will apply the proviso to s.88 to different social entrepreneurship scenarios, it is encouraging that it has started to generate guidance on this topic – good news for families interested in more innovative philanthropy or investing for good.
Environment Social Governance (ESG)
Singaporean investors' appetite for ESG investment opportunities are increasing. Cross-border ESG fund sales reached US$1.2 billion between January and November 2020, and according to the GIIN survey, east and southeast Asia are emerging as the second-fastest-growing regions for impact fund allocations after Europe.[x] For example, Temasek, a Singapore state-backed investment company, made a record SGD$500 million allocation to a specialist impact investment manager[xi]. This growing interest is also highlighted by Singapore's central bank’s announcement, in November 2020, that the MAS will channel up to US$2 billion to asset managers who are committed to promoting green finance activities in Singapore, as part of Singapore's Green Finance Action Plan (GFAP).
The GFAP introduces general guidelines, set out by MAS, for environmental risk management. These guidelines highlight MAS’ expectations and provide financial institutions (i.e. banks, asset managers and insurers) with criteria to assess, monitor, mitigate and disclose environmental risk.
The financial institutions have a transition period of 18 months, which ends in June 2022, to implement these guidelines. They are then required to make their first disclosures in the next annual report / sustainability report and on their websites immediately afterwards.[xii]
While these are Singapore's first steps towards building a global centre for green finance, there is more to be done. The lack of standardised ESG regulations and reporting may leave investors at risk of being exposed to greenwashing, with companies not having to substantiate their sustainability claims.
The Hong Kong government and regulators have been active in recent years with regard to ESG. Examples include the introduction of the Government Green Bond Programme in 2018 to encourage the issuance of green bonds in Hong Kong, and the gradual tightening of the ESG reporting guide for companies listed on the Hong Kong Stock Exchange (HKEx), making disclosures either semi-mandatory or mandatory in 2020.
For the SFC specifically, since it announced a strategic framework to contribute to the development of green finance in Hong Kong in September 2018, there have been several follow-ups. In May 2019, it issued a "Circular to management companies of SFC-authorised unit trusts and mutual funds – Green or ESG funds" which provided clarification on what would qualify as a green or ESG fund and the level of disclosure required.
In October 2020, the SFC launched a consultation on amending the Fund Manager Code of Conduct (FMCC), to introduce requirements for fund managers to disclose how they take climate-related risks into consideration in their investment and risk management processes. When the consultation conclusions are released, the mandatory disclosure requirements will be applied in a two-tier approach: fund managers with AUM of HK$4 billion or above will be required to adopt a more robust approach and make more detailed disclosures; there will also be two different sets of transition periods for the large fund managers and others.
There have been various other milestones in 2020, including: the launch of the Cross-Agency Steering Group led by the Hong Kong Monetary Authority (HKMA) and the SFC to better coordinate the government's climate and sustainable finance actions; the setting up of the Greater Bay Area (GBA) Green Finance Alliance, a cross-sector platform to promote policy research and develop green investments in GBA; the HKMA White Paper on green and sustainable banking; the launch of the sustainable and green exchange (STAGE) on the HKEx website listing sustainable and green finance products; and the announcement of a 2050 carbon neutrality goal.
More ESG-related regulatory action is to be expected which will not only exert pressure on all investors to align their businesses but also to make sustainable businesses and investing more mainstream.
Navigating the various government policies and selecting those best for each office may be daunting – and not helped by the often-cited shortage of products and skilled advisors for investors – but this should not be considered prohibitive.
There's never been a better time to move towards an ESG approach; the COVID-19 pandemic has highlighted the importance of considering the environmental and social impacts of business activities. We know from a UN report[xiii] in July 2020 that the pandemic has reversed decades of progress. Family offices can be a catalyst for growth here and bridge the gap between philanthropy and asset management. Now is the time for us to secure a sustainable future for generations to come.
[i] Global Family Office Report 2019, Campden Research and UBS
[ii] Global Family Office Report 2020, UBS
[iii] Over US$30 trillion of assets globally were managed in sustainable investments in 2019, up 34 per cent from 2016, according to the 2019 Global Sustainable Investment Alliance (GSIA) Report.
[iv] Impact investing grew by 42.4 per cent, from US$502 billion in April of 2019 to US$715 billion in April 2020, as published in the 2020 Annual Impact Investor Survey, Global Impact Investing Network (GIIN).
[vii] "Family Wisdom: A Family Office Hub in Hong Kong", FSDC (July 2020)
[viii] "Hong Kong – Developing into the Global ESG Investment Hub of Asia", FSDC (July 2020)
[xii] Paragraph 6.4, https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulations-Guidance-and-Licensing/Commercial-Banks/Regulations-Guidance-and-Licensing/Guidelines/Guidelines-on-Environmental-Risk---Banks/Response-to-Feedback-Received-for-Proposed-Guidelines-on-Environmental-Risk-Management-for-Banks.pdf
Kevin is head of the firm’s wealth and corporate practice in Greater China. Qualified in Hong Kong and Canada, Kevin advises clients in respect of both jurisdictions. Kevin acts as counsel for major corporations headquartered in Hong Kong, China, the USA, Canada, Japan and other jurisdictions. He advises on the registration, corporate tax, intellectual property, employment and immigration aspects of doing business in Hong Kong, as well as on cross-border transitions. Kevin also represents numerous high net worth clients from around the world on diverse matters, including succession planning, family trust, tax advisory and compliance, wills and estate, asset preservation, family business succession and governance, private equity investments and philanthropy. Aside from representing trust settlors and beneficiaries, Kevin also advises trust companies on Hong Kong registration, licensing and regulatory compliance issues. Kevin co-authored the Hong Kong Q&A chapter for the 2019 edition of the Practical Law Private Client Global Guide.
Tze-wei advises clients across the impact spectrum: from charities and philanthropists, to purpose-driven companies and ESG & impact investors. She regularly advises charities and social enterprises in relation to structuring, tax exemption status, and governance, and also advises both family and corporate foundations on structuring complex giving arrangements. She is a board member of esela – the legal network for social impact, an international network of lawyers focused on the impact practice – and was a member of the founding team of Sustainable Finance Initiative, which aims at building a community of private investors in Asia active in impact investing.
Yi specialises in trusts and private wealth matters. Her experience includes assisting high-net worth individuals and families in setting up complex trusts, family offices and developing efficient structures for succession planning. Yi also has experience in setting up family-owned charities, immigration and relocation advisory, corporate and regulatory compliance, as well as advising on international tax regulations.