The Hong Kong Stock Exchange has issued its consultation conclusions on proposals to enhance the Environmental, Social and Governance Reporting Guide and related Listing Rules. Following positive market feedback, the Stock Exchange will proceed with the proposals in its consultation paper, with certain modifications. The changes introduce mandatory ESG disclosure requirements and will require earlier publication of ESG reports, with reports required to be published within five months after the end of the financial year (although companies are encouraged to publish their ESG report at the same time as their annual report).

The changes will apply to financial years commencing on or after 1 July 2020. This is six months later than the originally planned implementation date to give companies more time to put in place the necessary infrastructure to comply with the new reporting requirements. In this bulletin, we highlight the key changes to the ESG reporting regime.

New ESG reporting regime

Stock Exchange resources to assist with ESG compliance

Stock Exchange ESG disclosure review

Other ESG-related developments – Securities and Futures Commission ESG survey results

New ESG reporting regime

  • Mandatory and “comply or explain” approach – As mentioned above, certain ESG disclosures will become mandatory, with other disclosures elevated from “recommended” to being required on a “comply or explain” basis. There will no longer be any recommended disclosures as the current recommended KPI disclosures on social aspects to ESG reporting, such as employment and labour practices, will be elevated to “comply or explain” disclosures.

  • Giving explanations not viewed as secondary to compliance where ESG aspect is immaterial – Considered reasons are required for deviations. However, the Stock Exchange notes that there is no “one-size-fits-all” framework for ESG reporting and materiality is important in assessing what is material to a business. Where an aspect of the ESG Reporting Guide is not material or relevant, a company should explain that, rather than simply confirming compliance without giving any meaningful explanation. The Stock Exchange reminds companies that an explanation is not a less preferred or secondary option where a provision in the ESG Reporting Guide is immaterial to a company.

  • The mandatory disclosures – Mandatory disclosures will be required on the following:

    • a statement from the board covering the board’s oversight of ESG issues and its ESG management approach and strategy (including the process used to evaluate, prioritise and manage material ESG issues and the business risks), together with an explanation on how the board reviews progress against its ESG-related goals and targets and how they relate to its business;

    • a description or explanation on how the reporting principles (materiality, quantitative and consistency) are applied in preparing the ESG report; and

    • an explanation of the reporting boundaries and the process used to identify entities included in the report. Where there is a change in scope, this should be explained.

  • New climate change provision – A new category of disclosure on climate change has been added on a comply or explain basis, requiring disclosure of policies on identifying and mitigating significant climate-related issues impacting the company.

  • New environmental target disclosures – The environmental KPIs are being amended to include disclosure of environmental targets (eg emissions targets and water efficiency targets) and the steps taken to achieve them. These, again, are on a comply or explain basis.

  • Report format – Disclosure can either be made as part of the annual report, or in a separate ESG report. It must be published on the Stock Exchange’s and the company’s own website. If the ESG report is separate from the annual report, it need not be sent to shareholders in printed form (provided this is permitted by the company’s constitutional documents and all applicable laws) although a printed copy must be provided if requested. The company must notify shareholders of the website details and information on how to access the report.

  • Timing – ESG reports must be published within five months after the end of the financial year. However, companies are encouraged to publish their ESG report at the same time as their annual report.

Stock Exchange resources to assist with ESG compliance

The Stock Exchange is proposing to update its step-by-step guide to ESG reporting: “How to Prepare an ESG Report?” as well as its FAQs and has established a dedicated webpage with links to other resources to help companies comply with the regime.

Stock Exchange ESG disclosure review

At the same time as releasing the consultation conclusions, the Stock Exchange released its report on its review of listed company ESG reports for the financial year ending in 2018. The report shows that the majority of companies are publishing ESG reports to coincide with the timing of their annual report, and all companies reviewed as part of the sample met the required publication deadline.

Two thirds of companies disclosed that a materiality assessment had been undertaken, with varying levels of detail included. However, a majority failed to contain any description on the board’s involvement in ESG reporting. The Stock Exchange sees board involvement as important to assessing and addressing ESG-related risks and so this aspect of disclosure is an area where companies will need to enhance their disclosure to comply with the new mandatory disclosure requirements highlighted above.

Other ESG-related developments – Securities and Futures Commission ESG survey results

Separately, the Securities and Futures Commission has published the results of its industry-wide survey on ESG, climate change and asset management which looks at how and to what extent asset managers and institutional asset owners consider ESG risks, in particular those related to climate change. The survey is one of the initiatives in the Securities and Futures Commission’s Strategic Framework for Green Finance announced in September 2018.

The survey showed that 83% of those firms who responded considered at least one ESG factor when evaluating a company’s investment potential. 68% saw ESG factors as a source of financial risk but only 35% consistently integrated ESG factors into their investment and risk management processes.

As a result, the Securities and Futures Commission plans to set expectations on governance and oversight, investment management, risk management and disclosure for asset management firms with a focus on environmental risks, and climate change in particular. It also plans to provide practical guidance to help asset management firms to comply and proposes to establish an industry group to exchange views with experts in environmental and climate risks, as well as sustainable finance. These proposals are aimed at aligning Hong Kong’s regulatory regime with global standards and to assist firms in stepping up their ESG efforts.