The Hong Kong Stock Exchange (HKEX) announced its enhanced environmental, social and governance (ESG) reporting requirements in December 2019. With effect from financial years commencing on or after 1 July 2020, Hong Kong-listed companies will need to disclose additional information in their ESG reports, with a shortened reporting deadline of five months from the end of their financial years.
Company boards are now expected to play a more substantial role in governing ESG issues, and companies are being asked to be more transparent regarding how their material ESG issues are identified, evaluated and managed, as well as how the boards oversee and review these issues. This implies companies should establish formal ESG governance structures and mechanisms, incorporate ESG elements into their existing risk management and operational frameworks, and develop appropriate controls and monitoring systems to enable their boards to discharge their duties properly.
Although this can require substantial efforts, it is a good chance for boards to revisit what ESG means to their businesses, as well as understand not just the key risks, but also the opportunities to drive value, from this compliance exercise. It also promotes accountability and ensures an appropriate tone at the top on ESG, which will ultimately help improve related performance.
HKEX also requires companies to disclose how they adopt the reporting principles set out in the HKEX ESG reporting guide (i.e. materiality, quantitative and consistency), and explain the reporting boundaries (i.e. entities or operations covered in their ESG reports). Given companies have different ESG reporting practices, which affect the comparability of ESG information, such disclosures will help stakeholders determine whether a specific ESG report is comprehensive enough to cover the material issues and businesses of the company, and whether the data presented is calculated and reported in accordance with generally accepted standards, therebyfacilitating more effective assessment of ESG across different companies.
Under this new ESG regime, there are also additional required disclosures on specific environmental and social issues.
The first covers reduction targets for emissions, waste, energy and water. Currently, listed companies are only required to describe their environmental initiatives and results in these four areas. Establishing and disclosing specific targets can motivate companies to refine their environmental management strategies and practices, and make further progress over time.
However, companies might need to consider whether the targets they plan to commit to are feasible, and realign these with their business plans and stakeholders’ expectations to avoid being too aggressive or too conservative. With this in mind, HKEX allows some flexibility for companies to express their targets as directional statements or quantitative descriptions.
Secondly, companies will need to formulate policies to identify and mitigate climate risks, as well as disclose major climate-related issues in their businesses and their plans to manage them. Unlike general environmental protection efforts, which focus on minimizing the negative impact on the environment from companies’ activities, this new concept of climate change reporting emphasizes mitigating the risks caused by extreme weather events, which can disrupt companies’ operations and damage their assets.
According to the most recent Global Risks Perception Survey by the World Economic Forum, five of the top 10 long-term risks, in terms of likelihood and impact, are climate related. It is time for companies to recognize the effect of climate change in a business context, and prepare themselves for the unfavourable climate conditions that are expected to appear more frequently, and with greater magnitude.
Besides these new environmental reporting requirements, HKEX has also upgraded the disclosure obligations of all social related key performance indicators (KPIs) from “recommended practice” to “comply or explain.” This means companies can no longer exclude data on employee turnover rate, lost days due to work injuries, work fatalities and product recalls from their ESG report. These are considered important indicators not only from a corporate responsibility perspective, but also as they pertain to operational and financial performance. Practices to identify ESG risks and promote environmentally friendly products and services have also been added as social KPIs, which can help drive companies to exercise greater influence over suppliers regarding responsible business practices.
Under HKEX’s strengthened requirements, listed companies should adopt a more strategic approach towards ESG reporting, rather than just treat it as an annual box ticking exercise, in order to create value for their businesses, as well as address stakeholders’ growing concerns about companies’ ESG performance. ESG should also be integrated further into corporate policies and business processes, to formalize efforts and get everyone working at a company involved in transforming it into a more sustainable business, backed by appropriate training and resources. Enhanced ESG reporting will soon give stakeholders a more comprehensive and detailed understanding of companies’ ESG performance to facilitate their decision making.
