Amid the rising awareness of ESG issues, Asian governments are prioritizing ESG related regulations and developing rules to push forward more accountable and sustainable development of companies. The Hong Kong Stock Exchange (HKEX) is proposing changes to its Corporate Governance Code and Listing Rules to enhance standards in corporate governance, including board independence, board gender diversity, board refreshment and succession planning, according to International Financial Law Review (IFLR) on June 3, 2021.
Up to now, 60 stock exchanges globally have published ESG reporting guidance to regulate their listed companies, according to the United Nation Sustainable Stock Exchanges Initiative (UN SSE). Hong Kong, as a pioneer of China, is taking its path to becoming a global hub of green finance, and imposes increasingly stringent ESG disclosure requirements for listed companies during these years.
Overview of ESG policies and regulations in Hong Kong
In August 2012, HKEX issued the ESG Reporting Guide for the first time, which introduced ESG issues as voluntary disclosure items for listed companies. The Guide was divided into four areas: Workplace Quality, Environmental Protection, Operating Practices, and Community Involvement. On December 18, 2019, HKEX released the revised version of the ESG Reporting Guide. The new guidelines integrated the market opinions of Hong Kong and considered the participation of various parties, as well as relevant standards of Hong Kong and other countries. In March 2020, HKEX revised How to Prepare an ESG Report again to guide issuers to disclose ESG information.
The latest reporting requirements mainly focus on three components, according to KPMG.
Strengthening board’s responsibility. Companies should enhance their board’s responsibility for overseeing ESG issues and introduce the mandatory disclosure requirements on board’s statement.
Improving ESG management. Companies should introduce a new aspect pertaining to climate change, disclose information based on materiality, and keep information quantitative and consistent. Also, companies should set targets for environmental KPIs.
Enhancing reporting quality. Companies are required to release ESG reports within five months after the year-end date, and it is mandatory to describe the process used to determine the reporting boundary.
Meanwhile, HKEX also enhanced requirements of all social KPIs to “comply or explain” and encouraged independent assurance in order to strengthen the credibility of disclosed ESG information.
ESG strategy is the first step to fulfill disclosure obligation
In terms of developing a roadmap for regulatory mandates ahead and ensure a successful ESG strategy, companies should focus on five key areas:
1. Baseline setting: the board and executives need to agree on the value of ESG and make it a mindset of the company.
2. Materiality assessment: the board and senior management should determine which ESG risks and opportunities are most material so as to optimize the use of resources.
3. ESG integration: the company should adopt a systematic approach to incorporate ESG into strategic planning.
4. Stakeholder engagement: the company should disclose the company’s ESG vision, strategy and performance through different communications channels.
5. Sufficient oversight: the company should set up an ESG/CSR committee or workgroup to oversee the process of ESG incorporating.
Go beyond ESG regulatory compliance
In 2018, Hong Kong launched an HKD100bn green bond plan, aiming to build the city into an international green finance hub. However, according to a ranking compiled by the UN SSE in the same year, HKEX ranked 32nd among 35 global stock exchanges in terms of ESG disclosure of issuers. The ranking indicates there is still some space for HKEX to hold a more comprehensive ESG disclosure requirement. In addition, for companies that intend to go public internationally, it is necessary to consider beyond the regulatory compliance, and regard ESG as a long strategy to enhance investors’ confidence.
Going beyond regulatory compliance, companies are encouraged to align or reference various international reporting standards and frameworks in the development of their ESG or sustainability report. That means if a company adopts the global acknowledged standards referenced by stock exchanges, the company could save lots of efforts when doing ESG reporting. According to the UN SSE, ESG reporting instruments referenced in stock exchange guidance documents are mainly from the six organizations: GRI, SASB, IIRC, CDP, TCFD, and CDSB. Among them GRI, SASB and TCFD are globally accepted ones which cover all ESG topics. Here enclosed the comparison for reference:
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