Over recent years, in keeping with the global focus on environmental, social, and governance (ESG) factors in investing, the Hong Kong Stock Exchange (HKEx) has enhanced its ESG disclosure requirements on issuers to better serve investors' demands for more ESG information about their investments. Set out below are the major features of the ESG reporting and disclosure regime in Hong Kong for both listed issuers and applicants for initial public offerings (IPOs), as well as some latest developments relating to this regime.

ESG DISCLOSURE REQUIREMENTS IN LISTING RULES

The Main Board Listing Rules (Listing Rules) require listed issuers to publish an ESG report every year, which can be part of the annual report or a separate one.1 The business review in the issuer's directors' report must also contain a discussion of the issuer's environmental policies and performance.2 There is a section in the Listing Rules dedicated to an  Environmental, Social and Governance Reporting Guide (the ESG Guide).3

In December 2019, the HKEx issued the  consultation conclusions (the 2019 Conclusions) on its proposals to amend the ESG Guide and other related provisions of the Listing Rules, with an aim to improve listed issuers' governance and disclosure of ESG activities. The 2019 Conclusions revised the timeframe for the annual publication of the ESG report, which has been shortened from three months after the publication of the annual report to no later than five months after the financial year-end.4 Where the ESG report is not included in the annual report, the issuer is not required to provide the ESG report in printed form. The listed issuer may also seek third-party assurance to strengthen the credibility of its ESG reports.5

Issuers should conform to the four Reporting Principles below:

  1. Materiality: The ESG report should discuss issues sufficiently important to investors and other stakeholders.
  2. Quantitative: The ESG results and targets discussed, e.g., key performance indicators (KPI), should be measurable.
  3. Consistency: Consistent methodologies should be used to allow for meaningful comparisons of ESG data over time.
  4. Balance: The ESG report should provide an unbiased picture of the issuer's performance.

The HKEx requires the listed issuer to disclose how it has applied the Reporting Principles of "materiality," "quantitative," and "consistency," while the principle of "balance" should be self-evident in the ESG report itself.6

Issuers are also required to explain the "reporting boundaries" of their ESG reports and to list out the entities in the issuer's group included in the ESG report, as well as explain the process used to identify such entities.7 

MANDATORY DISCLOSURES

Mandatory ESG disclosure requirements were introduced following the 2019 Conclusions to highlight the board's role in ESG governance. Included in those requirements is a statement from the board containing:  

  1. A disclosure of the board's oversight of ESG issues;
  2. The board's approach to ESG management and strategy, including the process used to evaluate, prioritize, and manage material ESG-related issues; and
  3. How the board reviews progress against ESG-related goals and targets, with an explanation of how the goals and targets relate to the issuer's businesses.

COMPLY OR EXPLAIN DISCLOSURES

The HKEx does not envisage a "one size fits all" approach to compliance with ESG disclosure requirements. While some ESG disclosure requirements are mandatory, some are on a "comply-or-explain" basis; i.e., the company either complies with the requirements and states the same or gives reasons for why it is not in compliance. The comply-or-explain provisions consist of disclosures encompassing two main subject areas—environmental and social—each covering several aspects that a listed issuer should disclose information on and provide KPIs for.

For "environmental" disclosures, listed issuers are asked to discuss issues relating to emissions, resources, the environment and natural resources, and climate change. Climate change was a new aspect that was adopted following the 2019 Conclusions. The issuer is asked to disclose its policies on how it identifies and mitigates significant climate-related issues that have impacted and may impact the issuer; describe these issues and the actions taken to manage them; and give reduction targets for emissions, hazardous and non-hazardous wastes, energy use, and water usage, as well as the steps taken to achieve these targets.

As for "social" disclosures, the HKEx encourages companies to discuss issues relating to employment, health and safety, employee development and training, labor standards, supply chain management, product responsibility (which refers to compliance with health and safety, advertising, labelling and privacy matters relating to products and services provided and any methods of redress), anti-corruption, and community investment.

HOW TO PREPARE AN ESG REPORT: A STEP-BY-STEP GUIDE TO ESG REPORTING

In March 2020, the HKEx released a  step-by-step guide on how to prepare an ESG report (Step-by-Step Guide), which essentially serves as a manual for listed issuers on how to implement the Reporting Principles and how to report the KPIs discussed above.

The Step-by-Step Guide identifies the following six steps:

1. The role of the board and the ESG working group: The board has a responsibility to oversee ESG issues and to assess the potential ESG risks to the company's overall strategy and ability to generate returns. The company may set up an ESG working group, comprising senior management and staff, to report to the board.

2. Understanding the requirements of the ESG Guide: The ESG working group should understand the reporting requirements, the issuer's ESG-related risks as determined by the board, and the board's ESG strategy.

3. Reporting boundary: An issuer should have its own criteria for determining the corporate scope of the ESG report; e.g., whether to include subsidiaries or certain divisions.

4. Materiality assessment: Listed issuers are encouraged to conduct both internal and external assessments to identify material issues. An internal materiality assessment should be conducted by senior managers and/or key employees to consider the company's overall mission, competitive strategy, corporate values, policies, strategies, main topics, and future industry challenges. As part of the external assessment, the company may engage investors, shareholders, customers, and suppliers to assess the company's ESG performance. This also helps the company understand stakeholders' expectations, interests, and information needs. Appendix 1 to the Step-to-Step Guide contains a stakeholder influence-dependency matrix that can help the company identify key stakeholders.

Even though the ESG Reporting Guide discusses a wide range of aspects relating to both the environmental and social subject areas, not all aspects are relevant to the industry that a company belongs to. The Step-by-Step Guide contains a "Materiality Table" that identifies which aspects are more relevant and material for different sectors.

5. Target setting: The HKEx encourages companies to set targets that are specific, measurable, attainable, relevant, and time-bound for all KPIs that are material to them.

6. Writing the ESG report: The ESG report should contain the following information:

  • A description of the issuer's ESG governance;
  • An explanation of the reporting boundary and a description of the process used to determine the boundary;
  • A description on how certain Reporting Principles are applied;
  • A report on each of the comply-or-explain provisions;
  • An independent assurance (optional); and
  • Key messages that the issuer aims to convey to investors and other stakeholders.

The Step-by-Step Guide provides detailed guidance on the environmental and social KPIs relating to the information called for in the ESG Guide, as well as how to collect, calculate, and report such information. By way of example, for environmental KPIs relating to emissions, a company is asked to identify the operational activities that give rise to emissions of air pollutants and sources of gas emissions (e.g., gaseous fuel consumption or vehicle emissions), and is provided with instructions on how to calculate the emissions.

GUIDANCE ON CLIMATE DISCLOSURES

Following the adoption of the Paris Accords in 2015, the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, launched a Task Force on Climate-Related Financial Disclosures (TCFD) to combat global warming. One goal of the TCFD is to create a uniform standard for corporate climate-risk disclosures to help companies take action to address climate change.

In November 2021, the HKEx published the  Guidance on Climate Disclosures (Climate Disclosures Guide), detailing how to comply with TCFD's recommendations regarding climate-related disclosures in a company's ESG report. The reporting requirements discussed in the Step-by-Step Guide above also incorporate certain key recommendations of the TCFD.

The Climate Disclosures Guide assists companies in assessing climate-related risks and provides practical tips and step-by-step guidance on preparing TCFD-aligned reporting, including how to:-

  1. Determine a suitable governance structure for the company;
  2. Formulate best-case and worst-case climates scenarios;
  3. Identify climate-related risks;
  4. Map those risks in the value chain;
  5. Choose the right metrics, indicators, and targets;
  6. Formulate a climate action plan to achieve the company's targets;
  7. Conduct a financial impact assessment of climate-related risks and opportunities; and
  8. Incorporate the climate-related impacts into a coherent business strategy.

GUIDANCE LETTER FOR IPO APPLICANTS

Previously, IPO applicants only briefly discussed ESG risks in the Risk Factors section. According to the HKEx Guidance Letter 86-16 (GL 86-16) that was updated in July 2020, new IPO applicants should in essence discuss three kinds of ESG disclosures in the "Business" section of their listing documents:

  1. Board-level ESG oversight: The board of directors of the IPO applicant is collectively responsible for establishing measures to fulfill HKEx's ESG requirements in advance to ensure the company is compliant upon listing. Applicants are therefore recommended to appoint directors, including independent non-executive directors, as early as possible, so that the directors are involved in formulating the necessary ESG measures and policies.
  2. Materiality assessment and risk management: IPO applicants are encouraged to conduct materiality assessments and disclose the identification process or selection criteria of material ESG risks.
  3. ESG compliance: IPO applicants should discuss material information about their environmental policies, including climate-related policies. Details of compliance with relevant environmental laws and regulations that have or may have a significant impact on the applicant should also be included, including compliance costs during the track-record period and the expected compliance costs going forward. For social matters, IPO applicants should discuss material information about policies on compensation and dismissal, equal opportunities, diversity, anti-discrimination, benefits and welfare, occupational safety measures, and health and work safety compliance record.

TAKEAWAYS

Despite the guidance in GL86-16, an analysis of the HKEx that focused on IPO applicants' corporate governance and ESG practice disclosure found that only one-third of the applicants disclosed the board's oversight of ESG issues, and only a small number disclosed their materiality assessment in relation to ESG factors. Most applicants identified none or few material ESG risks in their prospectuses at all, and disclosures were mainly about the impact of regulatory compliance. It appears that, in general, IPO applicants are either not clear about the ESG requirements or have not done enough to ensure the HKEx's ESG requirements are met when they become listed later.

The HKEx's recent updates to the ESG disclosure regime emphasize the board's leadership role and accountability in a listed issuer's ESG strategy. The changes are expected to help improve issuers' governance and disclosure of ESG activities, and therefore all directors should familiarize themselves with their responsibilities under the HKEx's ESG reporting requirements. With more and more money flooding into ESG investing,8 the demands of ESG disclosure are intensifying as global warming and human-rights issues are seen to pose new risks for companies.9 More-transparent reporting on ESG is not just a matter of meeting a regulatory requirement but also benefits listed issuers by addressing some of the high-priority issues many of their investors are concerned about.

Footnotes

1  Rule 13.91(4).

2 App. 16 of the Listing Rules; para. 2 of Sch. 5 to the Companies Ordinance (Cap 622).

3 App. 27 of the Listing Rules.

4 Rule 13.91(5)(d).

5 Para. 9 of App. 20.

6 Consultation Conclusions of the Review of the Environmental, Social and Governance Reporting Guide and Related Listing Rules, para. 91.

7 Para. 15 of Part B of App. 27 of the Listing Rules.

8 https://www.wsj.com/articles/socially-responsible-investing-11624288038.

9 https://www.ft.com/content/894aeb77-8bc4-4c05-a491-7cfb56e7935e;  https://www.wsj.com/articles/esg-investing-in-five-years-11637161312.

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