Business implications from latest HKEX consultation on ESG reporting guide

  • Published: 26 June 2019
  • Author: Jonathan Tong

Business implications from latest HKEX consultation on ESG reporting guide

BlackRock CEO, Mr. Larry Fink wrote an open letter to CEOs in early 2019 warning that “environmental, social, and governance issues will be increasingly material to corporate valuations.” This letter has been referred to as an “inflection point in the long-simmering argument over the state of global capitalism”[1]. Those paying attention will note that The Stock Exchange of Hong Kong (HKEX) has been communicating this message repeatedly since 2013. While there have been some improvements in ESG disclosure by listed firms, further progress is necessary. HKEX has issued a consultation paper on review of ESG Reporting Guide and related listing rules in a drive towards alignment with international best practices and companies must prepare to act.

Operational and compliance implications of proposed amendments

Reading between the lines of the proposed regulatory compliance clauses and understanding the international context ultimately helps issuers to track HKEX’s ESG reporting trajectory. This in turn allows more time to properly plan resource allocation and strategize approach. Highlighted below are several key proposed amendments from the consultation paper that may affect a company’s resources allocated toward and strategy on ESG reporting:

Proposed amendment Implications and suggested mitigation
Shortened timeframe for publication (within four months for Main Board issuers or three months for GEM issuers after year-end date)

 

Potential increased reporting burden during the first quarter of the year due to condensed time frame when compared with the production of standalone ESG reports that used to take full advantage of the three months after annual report publication allowance.

For companies currently producing ESG reports three months after annual report: Attempt synchronisation with the proposed shortened timeframe in the 2019 reporting cycle to test reporting approach and resource requirements.

New environmental aspect (subject to “comply or explain”) requiring disclosure of climate change-related issues

 

Companies may need to employ professionals with relevant experiences in climate change in assessing physical and transition risks, and be able to set feasible targets with respect to the company’s operations.

Moreover, investors are becoming more aware and interested in climate-related financial information. Companies may need to start understanding frameworks such as the TCFD, and begin dialogues at the board level as climate-related disclosures are becoming more material to investors.

Disclosure of environmental KPI description on target set and steps to achieve

 

Companies will have to start investing in systems and equipment that enable effective monitoring and measuring progress toward strategically set environmental goals and targets.

 

Mandatory disclosure disclosures, including:

  • Statement from the board setting out the board’s consideration of ESG issues
  • The process used to identify, evaluate and manage material ESG-related issues and risks
  • How the board reviews progress made against ESG-related goals and targets
  • Explanation of application of the Reporting Principles (i.e. materiality, quantitative, balance, and consistency) and the reporting boundary
The board is obligated to be involved in delivering a company’s ESG disclosures. It is highly recommended and common practice, to establish an ESG Committee or Working Group (as advised in HKEX’s How to Prepare an ESG Report?) and to formulate a strategy and system to set reduction targets and monitor performance.

 

Strengthening of social disclosures: KPI’s upgraded from recommended to “comply or explain”

 

More time and resources would be needed to compile data and meet compliance. For example, companies will need to describe practices used to identify environmental and social risks along the supply chain, and how they are implemented and monitored. Companies may need to designate resources to understand the potential risks along the supply chain, and methods of mitigation.

While most social KPI’s may be rather straight forward, the requirement on supply chain risks is one that not many companies may have a firm grasp on. Companies will need to reference to various risk data sources to first map out and understand where its environmental and social risks lie in their respective supply chains, followed by a review and improvement of its procurement policies and practices.

 

The days of the “check box” approach are over

HKEX has made explicitly clear that the current round of proposed amendments are informed by international standards including Global Reporting Initiatives (“GRI”) Standards and the FSB-developed Taskforce on Climate-related Financial Disclosures (“TCFD”). It is only a matter of time before the HKEX ESG Reporting Guidelines references in full compliance with GRI Standards.

It is very evident and encouraging that the proposed amendments could help close the gap between investor-desired and issuer-disclosed ESG information. It can also be expected that HKEX’s progression in ESG reporting requirements will target to align disclosures with sustainability instruments, such as Dow Jones Sustainability Index (DJSI), MSCI, and CDP which provide investors with more information on how a company manages its ESG risks.

Company executives need to come to an understanding and realization that a company’s strategy is intrinsically linked to many ESG factors, and the process of reporting on these is an opportunity. ESG reporting communicates to investors and other stakeholders a company’s contribution to society and the environment, how it manages challenges and progress it is making towards company goals and national and global agendas. To paraphrase Mr. Fink, companies that ignore these will stumble and fail.

 


For more information on ESG / Sustainability reporting in accordance with HKEX, GRI Standards; TCFD disclosures; DJSI, CDP, FTSE, GRESB, or any sustainability / ESG-related indices; and supply chain risk mapping and assessment, contact [email protected]

 


Source: 

  1. Sorkin, A. (2019, January 17). World’s Biggest Investor Tells C.E.O.s Purpose Is the ‘Animating Force’ for Profits. New York Times.