THE Hong Kong Exchange (HKEX) has issued stricter and more demanding requirements for environmental, social, and governance (ESG) reporting for listed companies which is intended to raise the standard of ESG reporting by Hong Kong companies to the global level.
The new requirements announced on December 18 are part of the HKEX’s consultation conclusions on review of the ESG reporting guide and related listing rules. The new requirements will apply to financial years commencing on or after July 1 2020.
The new rules place more specific demands as well as more technical requirements on listed companies in terms reporting deadline, more responsibilities for the board, data management, as well as increased disclosure of specific ESG policies and strategies.
The amendments to the existing guide represent a shift away from mere ESG reporting to actual management of ESG activities by listed companies, with an emphasis on the board’s role in the governance structure for ESG matters, according to Pat Woo, head of sustainable finance at KPMG China.
The new HKEX guidelines explicitly place the burden of ESG reporting on a company’s board of directors by making it mandatory for the board to disclose its oversight of ESG issues, its ESG management approach and strategy, and how it reviews progress on ESG related issues.
This means that the board must have a formal ESG governance structure, sufficient knowledge and expertise in ESG, internal risk management processes that connect to ESG risk management, an overall ESG strategy with clear goals and targets.
But perhaps the most important change in the ESG reporting rules is that companies are now required to disclose how climate change will impact their businesses. Listed companies must now have policies on the identification and mitigation of significant climate-related issues that have impacted or may impact their business. A company must also have a KPI (key performance indicator) description of the significant climate related issues that have impacted or may impact their business and actions taken to manage them.
In this aspect, the HKEX makes reference to the recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD) to address this disclosure requirement.
Another important change in the ESG reporting rules is that it will now be mandatory for a company to disclose the process it uses to identify the specific entities or operations (business units) that are included in the ESG report.
This means that the company will have to explain the basis for the coverage of entities/operations in the report, for example, with reference to the financial materiality or significance of ESG impact. The company also has to ensure that it provides data on the entities/operations to explain the basis of coverage for each entity/operation.
The new ESG reporting rules also require disclosure of a description of targets set regarding emissions, energy use and water efficiency, waste reduction, etc., and steps taken to achieve them. This means there must be an increased focus on the material topics and determine the specific KPIs and targets. It also requires that a company must have a robust ESG data management system and controls to track ESG performance and ensure reliable data.
One of the key changes is that the HKEX has shortened the deadline for publication of ESG reports, with a revised timeframe of within five months after the financial year-end after this consultation. The original proposal was to shorten the deadline for ESG report publication to align with the publication timeframe of annual reports (i.e. within four months (Main Board issuers) or three months (GEM issuers)) after the financial year-end.