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Overview
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 in the ESG Guide;
(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 the 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 has launched 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.
Background
ESG risks present financial, operational and compliance risks to companies, instead of just CSR and reputation issues.
Stock exchanges and regulators of developed countries in the US and Europe have made recommendations and guidelines to enhance listed issuer's reporting of environmental information. Investors continue to pressure public companies to provide more detailed disclosure about their ESG initiatives and results of those initiatives to enable investors to track and eventually compare performance. They criticise that ESG disclosures lack detail, comparability and consistency.
There are a number of observations that indicate the interest of investors in ESG is expanding:
(a) Investors see a link between ESG activities and financial performance;
(b) Investors consider ESG information when making voting decision in annual meetings; and
(c) Investors are creating new ESG funds and portfolios.
The Hong Kong Securities and Futures Commission 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 Changes to the Listing Rules and ESG Guide
Key changes are summarized below. All amendments apply equally to the Main Board and GEM Listing Rules.
Summary of Mandatory Disclosure Requirements Starting 1 July 2020
Further Recommendations by SEHK
Encourage independent assurance on ESG report
Issuers are encouraged to 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.
Materiality assessment
Conduct the materiality assessment and demonstrate the existence and thoroughness of the exercise in the ESG report.
Consider significance of every provision
Cover every provision in the ESG Guide. If a provision is considered not significant, make a statement to that effect with sufficient explanation of its determination of immateriality.
Comply or explain
Both options are acceptable by SEHK. If the provision is not material to the issuer, the issuer is better to explain and as such to demonstrate that they have thoroughly thought through what applies to them in a material way, and what does not.
Disclaimer:
The publication contains information in summary form and is therefore intended for general guidance only. This publication is not intended as legal, accounting or other professional advice and should not be relied upon as such. If legal, accounting or other professional advice or expert assistance is required, the services of a competent professional should be sought. Neither Reanda Lau & Au Yeung Limited nor any related entity shall have any liability to any person or entity that relies on the information contained in this publication.
