On 18 December 2019, The Stock Exchange of Hong Kong Limited (HKEX) published new requirements in its Consultation Conclusions on Review of the Environmental, Social and Governance (ESG) Reporting Guide and Related Listing Rules. The new requirements will apply to financial years commencing on or after 1 July 2020.
One of key changes is that the HKEX has shortened the deadline for publication of ESG reports, with a revised timeframe of within five months after the financial year-end after this consultation. The original proposal was to shorten the deadline for ESG report publication to align with the publication timeframe of annual reports (i.e. within four months (Main Board issuers) or three months (GEM issuers) after the financial year-end.)
The amendments to the existing guide represent a shift away from “reporting” to “management”, with an emphasis on the board’s role in the governance structure for ESG matters. The following section summarises the key amendments and our guidance for understanding how to comply with them.
Key amendments
1. Enhanced Board’s responsibility for overseeing ESG issues
| Current requirements | New requirements |
|---|---|
| The Board is responsible for: • ESG strategy and reporting • Evaluating and determining the ESG-related risks • Ensuring appropriate and effective ESG risk management and internal control systems are in place Management should provide confirmation to the board on the effectiveness of these systems. |
Mandatory Disclosure Requirement on board’s statement covering: • Board’s oversight of ESG issues • Board’s ESG management approach and strategy, including the process used to evaluate, prioritise and manage material ESG-related issues and risks • How the board reviews progress towards ESG-related goals and targets and relevance to the business |
What does it mean?
- A formal ESG governance structure is required to ensure appropriate and effective involvement of the board and accountability by relevant departments
- The board needs to have sufficient knowledge and expertise in ESG
- The internal risk management process needs to connect ESG to risk management
- There should be an overall ESG strategy with clear goals and targets
2. Explanation of how the Reporting Principles apply
| Current requirements | New requirements |
|---|---|
Reporting Principles of Materiality, Quantitative, Balance and Consistency underpin the preparation of an ESG report, informing the content of the report and how information is presented. |
Mandatory to disclose application of the Reporting Principles: • Materiality: (i) Process to identify and criteria for the selection of material ESG factors; (ii) a description of significant stakeholders identified; and the stakeholder engagement process and results (if any) • Quantitative: standards and methodologies used for data disclosure • Consistency: any changes to methods or key performance indicators (KPIs) |
What does it mean?
- Materiality assessment required to be performed with stakeholder engagement process
- The ESG governance structure and processes should enable the board to determine the materiality of ESG issues
- Need to ensure consistent internal guideline for data collection within the group of entities
3. Explanation of the reporting boundary
| Current requirements | New requirements |
|---|---|
Not required to disclose the process in which entities or operations are chosen to be excluded from the ESG report. |
Mandatory to disclose the process used to identify the specific entities or operations that are included in the ESG report, and explain any change in scope. |
What does it mean?
- Need to determine and explain the basis for the coverage of entities/operations in the report, e.g. with reference to the financial materiality or significance of ESG impact
- Ensure the ESG data system covers the data of the entities/operations within the reporting boundary, as applicable
4. Targets for environmental KPIs
| Current requirements | New requirements |
|---|---|
Require disclosure of “results achieved” from initiatives to reduce emissions/waste, but not targets. |
Require disclosure of a description of targets set regarding emissions, energy use and water efficiency, waste reduction, etc. and steps taken to achieve them. |
What does it mean?
- Focus on the material topics and determine the specific KPIs and targets
- Require robust ESG data management system and controls to track ESG performance and ensure reliable data
5. Disclosure of climate-related issues
| Current requirements | New requirements |
|---|---|
Not required to disclose how climate change impacts the issuer. |
Introduce a new Aspect related to climate change (“comply or explain”) comprising: • Policies on identification and mitigation of significant climate-related issues that have impacted and may impact the issuer; and • A KPI description of the significant climate-related issues that have impacted and may impact the issuer, and the actions taken to manage them |
What does it mean?
- Climate change poses significant risks and impact for businesses across all sectors, and there is increased demand for related disclosure globally
- Reference the recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD) to address this disclosure requirement
6. Upgrade of disclosure obligation of social KPIs
| Current requirements | New requirements |
|---|---|
Social KPIs are recommended disclosures. |
Upgrade the disclosure obligation of all social KPIs to “comply or explain”. Introduction of new social KPIs relating to supply chain management and anti-corruption training to directors and staff. |
What does it mean?
- Heightened expectation of issuers’ social performance, in particular with identifying and managing ESG risks along the supply chain and promoting environmentally preferable products and services when selecting suppliers
7. Shortened timeframe for ESG reporting
| Current requirements | New requirements |
|---|---|
Disclose information set out in the ESG Guide in the annual report, in a separate report, or on the issuer’s website within three months of the publication of the issuer’s annual report. |
Shorten the deadline for publication of ESG reports with a revised timeframe of within 5 months from the year-end date |
What does it mean?
- Need to improve internal reporting practices and streamline processes
- Need to plan for sufficient resources for ESG reporting
8. Encouragement to seek independent assurance
| Current requirements | New requirements |
|---|---|
Issuer may consider obtaining assurance on its ESG report. |
Encourage issuers to seek independent assurance to strengthen the credibility of disclosed ESG information. Requirement to clearly describe the level, scope and processes adopted for assurance in the ESG report where independent assurance is obtained. |
What does it mean?
- All information reported pursuant to the listing rules must be accurate, and seeking independent assurance will help improve confidence in the information disclosed
- Reliable data are needed for ESG report readers, including investors and rating agencies to evaluate the company