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New ESG requirements for Hong Kong listed issuers

  • Hong Kong
  • Corporate


Companies nowadays are placing a greater emphasis on environmental, social and governance (“ESG”) matters as they recognise what the impact of these may have on their businesses. Coupled with the increased demands from investors on disclosure of information relating to ESG risks and the changing global regulatory landscape, The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) has recently taken a comprehensive review of the ESG framework in Hong Kong. In December 2019, the conclusions to the Stock Exchange’s consultation on the “Review of the Environmental, Social and Governance Reporting Guide and Related Listing Rules” (the “Conclusions”) were published, introducing a number of changes to ESG reporting for issuers listed on the Stock Exchange which will apply to financial years commencing on or after 1 July 2020.

Publication of ESG Reports

As required under Chapter 13 of the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”), Hong Kong listed issuers must publish their ESG reports no later than five months after the end of each of their financial year1. ESG reports can be published in a separate report or as part of the issuer’s annual report, with the latter being preferred. If the ESG report does not form part of an issuer’s annual report, the issuer will not need to provide the printed form of the report to shareholders, unless it is specifically requested and provided that this is permitted under all applicable laws and the issuer’s constitutional documents2. Additionally, as part of the new Rule 13.91(4), ESG reports must be published on the issuer’s website as well as that of the Stock Exchange. When a ESG report is published on the issuer’s website, the shareholders must be notified.

Chapter 13 of the Listing Rules also provides that the Reporting Guide (the “Reporting Guide”) in Appendix 27 to the Listing Rules must be followed. In the new Reporting Guide, there is no longer a section on “Recommended Disclosures”. Disclosure obligations of issuers now fall under either:

  1. Mandatory Disclosure Requirements (“MDRs”); or
  2. “Comply or Explain” provisions.

Reporting Principles and Boundaries

In the Conclusions, the Stock Exchange stressed the importance of adhering to the Reporting Principles which are outlined in the Reporting Guide – “Materiality”, “Quantitative”, “Balance” and “Consistency” – when preparing ESG reports, as these will help investors better understand the issuer’s overall management of ESG issues.

In respect of the Reporting Principle “Materiality”, the latest updates have clarified that the materiality threshold of ESG issues is to be determined by the board of the issuer. The new “Quantitative” Reporting Principle states that while key performance indicators (“KPIs”) for historical data must be measurable, targets may be expressed by way of directional statements or actual numbers.

Regarding specific disclosures under the MDRs section of the Reporting Guide, issuers are required to describe or explain the application of only three Reporting Principles, namely “Materiality”, “Quantitative” and “Consistency”, in the preparation of their ESG reports3.

  1. Materiality” includes disclosure of the process to select material ESG factors including a description of any significant stakeholders identified and the relevant details.
  2. For “Quantitative”, the ESG Report must cover the standards and methodologies used for calculating the data as it is the Stock Exchange’s intention to enhance transparency such that stakeholders can compare ESG information among different listed companies.
  3. For “Consistency”, any changes to the methods or KPIs used must be included.

Furthermore, MDR 15 of the Reporting Guide now requires issuers to have a narrative explaining the reporting boundaries of the ESG report and describing the process used to identify the specific entities or operations that are included in the ESG report.

Governance Structure

The Stock Exchange mentioned in the Conclusions that ESG risks present financial, operational and compliance risks to companies and as a result, a number of items have been upgraded to MDRs for companies to consider ESG matters more seriously.

It has been observed that ESG reports were lacking details of the involvement of the issuer’s board in the ESG reporting process and the ESG governance structure. Therefore, one of the new MDRs in the Reporting Guide is the disclosure of a statement from the board with the following information:

  1. the board’s oversight of ESG issues;
  2. the board’s ESG management approach and strategy, including the process used to evaluate, prioritise and manage material ESG-related issues; and
  3. how the board reviews progress made against ESG-related goals and targets with an explanation of how they relate to the issuer’s businesses4.

Comply or Explain - Social Aspects

As aforementioned, all “Recommended Disclosures” under the prior regime have been upgraded to “Comply or Explain” provisions. While the areas stay largely the same, there are various revisions to the “Social” KPIs. When disclosing employment matters, the issuer must include details of both full-time and part-time staff. There must also be disclosure on the number and rate of work-related fatalities occurred in each of the past three years including the reporting year.

Additional KPIs on “supply chain management” also form part of the new standards. These include the issuer’s practices used to identify the environmental and social risks along the supply chain, and how they are implemented and monitored, as well as the practices used to promote environmentally preferable products and services when selecting suppliers, etc. There is also a “Comply or Explain” provision to disclose the anti-corruption training provided to directors and staff of the company.

Comply or Explain - Environmental Aspects

Similarly, the KPIs in the “Environmental” section have been slightly amended. The ESG Report must contain a description on targets set regarding emissions, energy use and water efficiency, waste reduction, and the steps taken to achieve them; and both Scope 1 and Scope 2 greenhouse gas emissions.

A new KPI on “Climate Change” was added which requires the inclusion of the significant climate-related issues which have impacted, and those which may impact, the issuer, and the actions taken to manage them.

What’s ahead?

The more stringent reporting obligations brought by the new rules should hopefully lead to an increased level of involvement of issuers in considering ESG issues particularly at the board level. Yet, given the significance of this topic, the Stock Exchange will be continuing to provide guidance and updates on the ESG-related materials, such as launching a new set of director e-training on ESG reporting and updating their step-by-step guide “How to Prepare an ESG Report?” which will all be accessible from their website.

1 Extended from three months under the previous rule.
2 Rule 13.91(5). This applies regardless of whether a shareholder has elected to receive the issuer’s corporate communication electronically or otherwise.
3 MDR 14 of the Reporting Guide.
4 MDR 13 of the Reporting Guide.