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Listed company's ESG reporting obligation will be upgraded after 1 July 2020
On 18 December 2019, The Stock Exchange of Hong Kong Limited (SEHK) published (a) the Consultation Conclusions on the Review of the Environmental, Social and Governance Reporting Guide ("ESG Guide") and related Listing Rules ("Consultation Conclusion"), and (b) the Analysis of Environmental, Social and Governance Practice Disclosure in 2018 ("ESG Disclosure Review"). SEHK adopts the amendments to the Rules Governing the Listing of Securities on the SEHK ("Listing Rules") and the ESG Guide proposed in its Consultation Paper with modifications to reflect market responses. SEHK will implement the amendments to the Listing Rules and the ESG Guide for financial years commencing on or after 1 July 2020.
SEHK reminds issuers that it is important for the board to take the lead and get involved in Environmental, Social and Governance (ESG) reporting from the outset. Issuers are recommended to (a) get familiarise with the new requirements set out in the Consultation Conclusions; (b) start the process to implement the necessary reporting infrastructure as early as possible before the commencement of the relevant financial year to allow fine-tuning of the infrastructure based on experience and feedback from stakeholders; (c) consider SEHK's recommendations set out in the ESG Disclosure Review when preparing their ESG Reports; and (d) review SEHK's ESG resources. SEHK will launch a new set of director e-training on ESG reporting, update the step-by-step guide to ESG reporting: "How to Prepare an ESG Report?", the frequently asked questions and links to other resources.
Internationally, various stock exchanges, regulators and supranational organisations (e.g. European Union) have made recommendations and guidelines to enhance listed issuer's reporting of environmental information. Locally, the Securities and Futures Commission (SFC) has recently published the findings of its surveys on integrating ESG factors and climate risks in asset management, which forms part of its initiative mentioned in its paper entitled "Strategic Framework for Green Finance" . Under the current trend, SEHK will continue to strengthen the emphasis on ESG for both listing applicants and listed companies.
Key Amendments to the Listing Rules and ESG Guide
Key amendments are summarized below. All references are to the Main Board Listing Rules unless otherwise stated and the amendments apply equally to the GEM Listing Rules.
Part I - Amendments to the Listing Rules
A. Shorten the publication timeframe of ESG Report
Rule 13.91 requires an issuer to Rule 13.91(5)(d) is amended to
disclose information set out in the encourage issuers to publish the ESG
ESG Guide in the annual report, in a report at the same time as the
separate report or on the issuer's publication of the annual report. In
website within three months after any event, the issuer should publish
publication of the issuer's annual the ESG report as close as possible
to and no later than five months after
the end of the financial year.
B. Paperless ESG Reports and notifications to shareholders
No clear guidance on whether issuers Rule 13.91(5) is amended to clarify are required to send printed form of that irrespective of whether a the ESG reports to shareholders. shareholder has elected to receive the
issuer's corporate communication electronically or otherwise, where the ESG report does not form a part of an issuer's annual report, the issuer is not required to provide a printed form of the ESG report to shareholders unless responding to their specific requests. Issuers are required to notify shareholders that the ESG report has been published on SEHK's and the issuer's websites.
Part II - Amendments to the ESG Guide
In the ESG Guide, the two levels of disclosure obligations are changed to :
(a) Mandatory disclosure requirements (Part B of the ESG Guide) - An issuer must include such information for the period covered by the ESG report.
(b) "Comply or explain" provisions (Part C of the ESG Guide) - If the issuer does not report on one or more of these "comply or explain" provisions, it must provide considered reasons in its ESG report.
All recommended disclosures (i.e. voluntary disclosures) are upgraded to "comply or explain" provisions. References to "recommended disclosures" are deleted in the amended ESG Guide.
A. Introduce mandatory disclosure requirements
New mandatory requirements
Governance structure - Paragraphs Board statement - New Paragraph 13 8-10 of the ESG Guide states that the of the ESG Guide is introduced to board has overall responsibility for
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the issuer's ESG strategy and require a statement from the board
reporting, including evaluating and containing the following elements :
determining the issuer's ESG related (a) a disclosure of the board's
risks. In addition to the requirements oversight of ESG issues;
of the ESG Guide, issuers are required under the Hong Kong Companies Ordinance to include, in their Directors' Reports, a discussion of their environmental policies and performance including environmental laws and regulations that have a significant impact on them.
the board's ESG management approach and strategy, including the process used to evaluate, prioritise and manage material ESG-related issues (including risks to the issuer's businesses); and
(c) how the board reviews progress
made against ESG-related goals
and targets with an explanation of
how they relate to the issuer's
Reporting principles - The ESG New Paragraph 14 of the ESG Guide
Guide sets out reporting principles is introduced to require a description
and of, or an explanation on, the
quantitative) that are said to underpin application of the following Reporting
the preparation of an ESG report, Principles in the preparation of the
informing the content of the report ESG report :
and how information is presented. Materiality - The ESG report should
disclose: (i) the process to identify and
the criteria for the selection of material
ESG factors; (ii) if a stakeholder
engagement is conducted, a
description of significant stakeholders
identified, and the process and results of the issuer's stakeholder
Quantitative - Information on the
assumptions and/or calculation tools
used, and source of the conversion
factors used, for the reporting of
(where applicable) should be
Consistency - The issuer should disclose in the ESG report any changes to the methods or key performance indicators (KPIs) used, or any other relevant factors affecting a meaningful comparison.
Reporting boundary - Paragraph 10 New Paragraph 15 of the ESG Guide
of the ESG Guide provides that an is introduced to require a narrative
ESG report should state which explanation of the reporting
entities in the issuer's group and/or boundaries of the ESG report and a
which operations have been included description of the process used to
in the report.
identify which entities or operations
are included in the ESG report. If there
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is a change in the scope, the issuer should explain the difference and reason for the change.
B. Introduce aspect on climate change and revise environmental KPIs
Climate change - No requirement to A new Aspect A4 is introduced, which
disclose how climate change impacts consists of :
(a) General disclosure - policies on
measures to identify and mitigate
the significant climate-related
issues which have impacted, and
those which may impact the
(b) a KPI - requiring a description of the significant climate-related issues which have impacted, and those which may impact the issuer, and the actions taken to manage them.
SEHK reiterates that the disclosure obligation under the new Aspect on climate change, like all other Aspects in the ESG Guide, is on a "comply or explain" basis. Accordingly, if an issuer considers that climate change is not material to its business and operations, an explanation of that fact in the ESG report will suffice .
Targets - ESG Guide requires issuers The environmental KPIs are revised
to disclose "results achieved" from to require disclosure of:
their initiatives to reduce (a) a description on targets set
emissions/waste, but not targets.
regarding emissions, energy use
Emissions - ESG Guide requires issuers to disclose greenhouse gas emissions in total and the intensity.
and water efficiency, waste reduction, etc. and steps taken to achieve them; and
Listing Rules do not require disclosure (b) Scope 1 and Scope 2
of emissions by scope types but FAQs greenhouse gas emissions.
encourage issuers to report on SEHK reminds issuers that all
emission by scope.
Environmental KPIs are subject to
"comply or explain" provisions.
Issuers are only required to disclose
and set targets for Environmental
KPIs that are considered material to
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C. Upgrade the disclosure obligation of the social KPIs
The Social KPIs of the ESG Guide Upgrade the disclosure obligation of all
are recommended disclosures (i.e. Social KPIs to "comply or explain".
If any of the Social KPIs is considered
immaterial to an issuer's businesses,
the issuer should explain rather than
making irrelevant disclosures.
Employment type - Issuers are Amend KPI B1.1 to clarify that
recommended to disclose total "employment types" should include
workforce by gender, employment "full- and part-time" staff. "Full- and
type, age group and geographical part-time staff" are non-exhaustive
examples of employment types.
Rate of fatalities - Issuers are Amend KPI B2.1 to require disclosure
recommended to disclose the of the number and rate of work-related
number and rate of work-related fatalities occurred in each of the past
fatalities for the reporting year.
three years including the reporting
Supply chain management - Introduce new KPIs B5.1 - B5.4 to
Issuers are recommended to require disclosure of a description of
describe practices relating to practices used to :
engaging suppliers, number of (a) Identify the environmental and
suppliers where the practices are
social risks along the supply chain,
being implemented and how they
and how they are managed and
are implemented and monitored.
preferable products and services
when selecting suppliers, and how
these practices are implemented
Issuers should consider how far down the supply chain the disclosure should encompass in light of materiality and appropriateness in their own circumstances. In some cases, disclosure of issuers' direct suppliers may be sufficient.
Anti-corruption - Issuers are Introduce a new KPI B7.3 to require a
recommended to disclose the description of anti-corruption training
provided to directors and staff.
(a) Number of concluded legal cases The ESG Guide only sets out the
regarding corrupt practices brought minimum parameters for ESG
against the issuer or its employees reporting. SEHK encourages issuers to
during the reporting period and the disclose additional information they
outcomes of the cases.
consider appropriate and material
(b) Description of preventive under this KPI, such as the number of
measures and whistle-blowing directors or staff trained, the content
procedures, how they are and the outcomes of the anti-corruption
implemented and monitored.
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D. Encourage independent assurance on ESG Report
New voluntary requirements
Paragraph 7 of the ESG Guide Introduce a new Paragraph 9 in
provides that the issuer may consider Section A of the ESG Guide to state
obtaining assurance on its ESG that issuers may seek independent
assurance to strengthen the credibility
of the ESG information disclosed.
Where independent assurance is
obtained, the issuer should describe
the level, scope and processes
adopted for assurance given clearly in
the ESG report.
SEHK reiterates that issuers are encouraged, but not required, to seek independent assurance.
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Recommendations in the ESG Disclosure Review
SEHK suggests the following key areas on how issuers can continue to enhance their ESG reporting in the future :
(a) Board-level engagement - Describe (i) the board's oversight of ESG issues; (ii) the board's role in identifying, evaluating and managing material ESG issues; and (iii) how the board reviews progress on ESG issues.
(b) Materiality assessments - Conduct the materiality assessment and demonstrate the existence and thoroughness of the exercise in the ESG report.
(c) Considering every provision - Cover each and every provision in the ESG Guide. If a provision is considered as immaterial, make a statement to that effect with sufficient explanation of its determination of immateriality.
(d) "Comply or explain" - both are acceptable options - If a "comply or explain" provision is not material to an issuer, "explanation" is not a less preferred or secondary option. It is better to say so, and for the issuer to demonstrate that it has fully thought through what applies to them in a material way, and what does not.
This client alert has been prepared for clients and professional associates of Baker & McKenzie. Whilst every effort has been made to ensure accuracy, this client alert is not an exhaustive analysis of the area of law discussed. Baker & McKenzie cannot accept responsibility for any loss incurred by any person acting or refraining from action as a result of the material in this client alert. If you require any advice concerning individual problems or other expert assistance, we recommend that you consult a competent professional adviser.
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