The Hong Kong Exchange (HKEX) has issued a consultation paper, titled "Review of the Environmental, Social and Governance Reporting Guide and Listing Rules" (ESG Consultation), to review and enhance reporting on environmental, social and governance (ESG) issues by listed companies on The Hong Kong Stock Exchange (HKEX).

Responses to the ESG Consultation are invited to be submitted by July 19, 2019. It is proposed that the revised ESG reporting requirements, once adopted, shall be effective the following January 1, 2020 (with ESG reports under the new standard expected from 2021).

Present State

The current requirements of HKEX on listed companies' disclosure on ESG had in 2016 been upgraded beyond just "recommended" (voluntary), to the expectation that listed issuers should "comply or explain" ESG policies and compliance with relevant laws and regulations. In 2017 HKEX added further requirements for issuers to disclose their key performance indicators (KPIs) on Environmental and Social aspects, but listed issuers are only required to "comply or explain" with respect to the Environmental KPIs, while reporting on Social KPIs remained voluntary.

A review conducted by HKEX in May last year revealed that while all listed issuers have published ESG reports, quality of reporting was very varied. Disclosures are predominantly a "box-ticking" exercise, and often with incomplete disclosures. Only 38 per cent of 400 listed firms randomly sampled complied on all 11 ESG aspects in their first report after the 2017 requirements took effect, with many failing to explain reasons for non-disclosure of an aspect, or only provided partial disclosure, or provided only blanket statements without explanation (e.g. "we have complied with all Laws and Regulations").

The HKSE observed that there is a general absence in issuers' ESG reports on ESG governance structures (the board's involvement in the ESG reporting process was not clearly explained), and how ESG is integrated in the issuers' strategy and management, and many omitted to provide information on how they carry out ESG materiality assessments.

Overview of proposed changes

Some key recommendations under the ESG Consultation are:

  • introducing certain mandatory disclosure requirements, including that of a board statement to ensure ESG integration at the governance and strategy level, as well as the proper conducting of ESG materiality assessment and tracking progress on ESG goals and targets;
  • adding "Climate Change" as a new aspect for disclosure within the "comply or explain" provisions;
  • upgrading of all Social KPIs disclosures from "recommended and voluntary" to "comply or explain"(including policies and KPIs on managing environmental and social risks of supply chain);
  • encouraging independent assurance to strengthen the credibility of ESG information disclosures.

These recommendations reflect HKEX's move towards making ESG disclosure more mandatory, and also requiring the disclosure of processes and methodologies, rather than just policies. If the recommendations under the ESG Consultation are adopted, there will be no more "voluntary" disclosure under the Hong Kong ESG Reporting regime, which means issuers must disclose their ESG policies and performance under all categories required by the HKEX Listing Rules, or they must provide considered reasons for not being able to do so. Non-compliance would constitute a breach of the listing rules. More details on the key proposals are set out below.


The ESG Consultation is undertaken following a series of local and international market developments, most notably the following:

  • the Hong Kong's Financial Service Development Council (FSDC) issued the "Environmental, Social and Governance Strategy for Hong Kong" ("the FSDC Report") in November 2018;
  • the Hong Kong's Securities and Futures Commission (SFC) issued "Strategic Framework for Green Finance" in September 2018;
  • the Financial Stability Board Task Force on Climate-related Financial Disclosures (TCFD) set up following a request from the G20 to avoid potential negative impacts of climate-related risks on the stability of financial markets issued a set of disclosure recommendations in June 2017.

While focusing on risk and opportunities from climate change, the TCFD recommendations principles are also applicable to ESG reporting in general, and it focuses on four thematic areas: governance, strategy, risk management, metrics and targets. Since their launch the TCFD recommendations have received a lot of support from governments around the world. China has also announced that it would make environmental disclosures mandatory by 2020. The latest "Listed Companies' Corporate Governance Code" issued by the China Securities Regulatory Commission in September 2018 for companies listed in Mainland China stock exchanges has also made it a general obligation on disclosure of environmental and social information.

ESG Investing, Risks and Opportunities

With a global market worth USD30.7 trillion at the beginning of 2018, having grown 34% in value in two years, ESG investing is a fast-growing trend internationally. However, as of 2016 Hong Kong's share of the global ESG investment market is reported to be only 0.06%. The FSDC Report in November warned that the slow uptake of ESG in the city "could also undermine Hong Kong's competitiveness in the long run as a leading international financial centre."

More attention is necessary on ESG risks and opportunities. However, according to a latest report by UNPRI and the CFA Institute, "ESG Integration in Asia Pacific: markets, practices and data" (May 30, 2019), the main barriers to ESG integration remain a limited understanding of ESG issues and a lack of quality and comparable ESG data.

The investments community and fund management industry have been requested to provide input on the ESG Consultation, with the intention that ESG reporting of Hong Kong listed issuers would be providing better ESG data to meet the growing need to take into account ESG issues.

Key Proposed Requirements

  • Issuers are not required to provide printed form of the ESG report to shareholders (unless specifically requested or otherwise required under applicable laws and regulations or its own constitutional documents), but they shall be required to notify shareholders when the ESG report has been published and accessible on the Exchange's and the issuer's websites. (An ESG report may be included in an issuer's annual report or set out in a separate report.)
  • If the ESG report is not included in the annual report, the issuer is expected to issue the ESG report as soon as possible, but no later than four months (for Main Board issuers, and three months for GEM issuers) after the end of the financial year to which the ESG report relates.
  • While it is the responsibility of an issuer's board of directors to have oversight on ESG issues of the organization, including identifying material ESG-related risks to the issuer's businesses, the proposed new ESG reporting requirements would introduce mandatory disclosure requirements ("MDRs") to improve issuers' ESG performance and reporting, and the issuers' materiality assessment process.
  • In particular, it would be mandatory that the ESG report shall incorporate a statement from the issuer's board of directors setting out the board's consideration of ESG issues, which must include disclosure of (i) the board's oversight of ESG issues; (ii) the process used to identify, evaluate and manage material ESG-related issues (including risk to the issuer's businesses); and (iii) how the board reviews progress made against ESG-related goals and targets.
  • The ESG report must also contain an explanation of the application of the Reporting Principles, in particular on the "Materiality" and "Quantitative" reporting principles (the two others are "Balance" and "Consistency").
  • With respect to the "Materiality" reporting principle, which is the threshold at which ESG issues determined by the board are sufficiently important to investors and other stakeholders that they should be reported, ESG reports shall be required to disclosure (i) a description of significant stakeholders identified (ii) the process and results of the issuer's stakeholder engagement (if any); and (iii) the criteria for the selection of material ESG factors.
  • On the "Quantitative" reporting principle, issuers shall be required to set targets (which may be actual numerical figures or directional, forward-looking statements) to reduce a particular impacts, with reference to measurable data for KPIs. Information on the standards, methodologies, assumptions and/or calculation tools used shall be disclosed.
  • An issuer's ESG report would need to contain an explanation of its reporting boundary, describing the process used to identify the specific entities or operations that are included in the ESG report.
  • The ESG Consultation proposes to introduce a new Aspect on Climate Change requiring disclosure of the significant climate-related issues which have impacted, and which may impact, the issuer, and the actions taken to manage them.
  • Other new requirements shall apply to environment KPIs of the listed issuers: (i) requiring disclosure of a description on targets set, and steps taken to achieve them; and (ii) for the KPI on greenhouse gas emissions, requiring disclosure of Scope 1 and 2 emissions.
  • For the disclosure requirement for all Social KPIs, it shall be upgraded from "recommended" (voluntary) to "comply or explain", and revision has been made to Social KPIs in relation to "Employment Types", "Rate of Fatalities", "Supply Chain Management" and "Anti-corruption".
  • On "Supply Chain Management", the ESG Consultation proposes to include specific KPI requirements on the practices used by the issuer to identify environmental and social risks along the supply chain (and how they are implemented and monitored), as well as on practices used to promote environmentally preferable products and services when selecting suppliers (and how they are implemented and monitored).
  • The HKEX also proposes to make it clear that independent assurance of ESG polices and reporting is encouraged, and that the level, scope and processes adopted for assurance should be outlined in the ESG report.

We would welcome feedback from our clients and business partners for whom this topic is particularly relevant or close to heart, and who would like to join us in providing responses to the ESG Consultation. Besides listed companies, shareholders and stakeholders should also carefully consider the proposed ESG reporting requirements.

Given Hong Kong's position as an international financial capital and the world's leading fundraising centre for initial public offerings, including as a destination of choice for overseas listing of Mainland and Asian companies, the new requirements on HKEX listed issuers would be significant in raising the bar and setting standard for addressing climate and global ESG issues.