Earlier this year, HKEx has published the consultation paper amending the reporting Guide with reference to Task force on Climate-related Financial Disclosures (‘TCFD’), in order to meet investors’ and stakeholders’ expectations and to facilitate the inclusion of additional core elements in the ESG report. The changes suggested in the consultation paper are listed as below.
Timeframe for publication of ESG reports – ESG report should be published at the same time as the annual report
The current time frame (up to seven months) for the publication of the ESG reports has been criticized for being too long, rendering information contained in the report out-of-date and less relevant for investors. It is considered the best practice to provide ESG data at the same time as the annual report and when financial accounts are published, or as soon as possible afterwards in order to present to investors a more comprehensive picture and up-to-date information on the company’s performance and long-term prospects.
Printed form of ESG report – listing rules clearly defines that the issuers are not required to send printed form of the ESG reports to shareholders unless responding to their specific requests
Some ESG reports are published as a part of companies’ annual reports, in which case issuers are not mandated to print the ESG reports in order to save paper. However, given the paramount importance of ESG information, issuers are required to notify shareholders that the ESG report has been published on the Exchange’s and the issuer’s websites.
Governance structure – disclose the board’s soversight on corporate ESG, identification and management of material ESG-related issues, and the effectiveness of measures taken to achieve ESG-related goals
As investors expect the board to have oversight of the ESG strategy and the way material ESG matters are dealt with and reported, the board’s governance of ESG issues should be revealed comprehensively. The aim of this proposal is to ensure that the board takes the lead on ESG issues. It is important for the board to assume responsibilities of ESG-related issues. The board should have discussions on identifying, evaluating and managing ESG-related issues (including risks that are material to the corporate businesses). The board’s involvement in ESG will also help to promote the board’s understanding of ESG issues and their accountability in this area. The disclosure in the issuer’s governance structure for ESG allows investors and stakeholders to assess the issuer’s commitment and contribution to ESG matters and the quality of its ESG governance.
Reporting principles – issuers should disclose the process for the selection of material ESG factors, including a description of how significant stakeholders are identified, the process and results of the issuer’s stakeholder engagement (if any), and the criteria for the selection of material ESG factors, and should disclose the information on standards, methodologies, assumptions and/or calculation tools used, and source of conversion factors used
Materiality assessment serves as a part of the risk assessment process through which companies can gain a fresh and fuller understanding of what ESG factors would have the greatest impact on the company’s business, prospects, asset value, reputation leading to greater investor confidence. To state that the board determines the materiality of ESG issues is in line with the amendments on governance structure as discussed above. The process of stakeholder engagement can serve as a tool to enable the company to understand the reasonable expectations and interests of stakeholders, as well as their demand of relevant information. This is an integral part of the materiality assessment process.
It is important to enable the stakeholders to be able to compare the ESG information among different issuers in order to assess the company’s performance. To facilitate comparability over time, it goes without saying that maintaining consistency in the methods adopted for calculations and the explanation of methodologies and assumptions used to prepare and organise relevant information are vital. Requiring a disclosure of the standards and methodologies would remind issuers of referring to consistent approaches when disclosing ESG data.
Reporting boundary – the ESG Guide requires that an ESG report should state which entities in the issuer’s group and/or which operations have been included in the report
The clearly defined reporting scope and reporting principle can avoid any misunderstanding on the ESG report and ESG performance as poor-performing entities or operations are excluded from the ESG report without explanation. The lack of disclosure on how the boundary setting is applied can lead to incorrect assessment of issuer’s ESG performance.
Climate change – disclose policies on measures to identify and mitigate the significant climate-related issues which have impacted, and those which may impact the issuer, and require a description of the significant climate-related issues which already have or may have the impact on the issuer and the actions taken to deal with them
Climate change poses serious risks to the global economy and has an impact across many, if not all sectors, in which our issuers operate. These risks could have significant impact on the issuers’ long-term sustainability. Broadly divided into transition and physical risks, TCFD categorized changes in policies, laws / regulations and market behavior that may increase operating, compliance and other costs into the transition risks, whilst the natural disasters such as draught, floods, severe typhoons, persistent and abnormal heat waves, etc. that may seriously affect the issuers’ businesses and operations are included into the physical risks. These are considerations that should be included in the issuers’ ESG reports.
Targets – require the disclosure of a description of targets setting regarding environmental performance and steps taken to achieve them
Having specific targets and requiring disclosure of the steps taken to achieve them would drive issuers to scrutinize and refine their strategies and systems which ultimately may lead to better risk management and improved performance.
GHG emissions – require disclosure of Scope 1 and Scope 2 GHG emissions
GHG emissions’ amendment aims to raise issuers’ environmental awareness, provide transparency and clarity to emissions data so as to meet the expectations of investors and other stakeholders.
Social KPIs – upgrade the disclosure obligation to“comply or explain”
Social KPIs are no less important than Environmental KPIs and for some issuers, they are more material. It is important to note that if any of the Social KPIs is considered immaterial to an issuer’s businesses, the issuer has the flexibility to explain rather than make irrelevant disclosures.
Employment types – require disclosure of number of full-time and part-time staff
Rate of fatalities – require disclosure of the number and rate of work-related fatalities occurred for the past three years including the reporting year
The disclosure of the track-record fatalities would help issuers review their safety practice and provide useful information to investors and stakeholders.
Supply chain management – require the description of practices used to identify environmental and social risks along the supply chain, and how they are implemented and monitored, and the description of practices used to promote environmentally preferable products and services when selecting suppliers, and how they are implemented and monitored
Customers, consumers and other stakeholders are becoming increasingly aware of and focused on whether a company is operating under a “sustainable business model”. One aspect of running a sustainable business is the supply chain management. Requiring disclosure of practices on the identification and monitoring of environmental and social risks along the supply chain would heighten the issuer’s awareness of ESG risks in its procurement practices. It would also allow investors to assess the risks associated with the issuer’s supply chain.
Anti-corruption – introduce a new KPI requiring disclosure of anti-corruption training provided to directors and staff
Anti-corruption is an important aspect of ESG reporting and training for directors and staff is essential to creating a healthy corporate culture and business ethics within the entity.
Besides, the Guide encourages issuers to seek independent assurance to strength the credibility of the ESG information disclosed. The issuer should describe the level, scope and process adopted for the assurance clearly in the ESG report.
With more and more responsible investments nowadays, ESG information is utilised in conjunction with financial analysis by the management, investors, rating agencies and other analysts, in order to allow those stakeholders to make more informed decisions. It is important that the ESG information disclosed in the report is reliable. External assurance on an ESG report can help improve the credibility of information and readers’ confidence in the ESG information, ensuring that the data can be trusted and used in the decision-making process.
To prepare for the amendments in HKEx’s ESG Guide, issuers should pay more attention to the board inclusiveness in ESG reporting, including establishing ESG governance structure, identifying ESG-related risks and setting relevant goals to alleviate climate change. Plus, the analysis of the impacts of climate change on operations also plays an important role, on which issuers need to make reviews to implement appropriate adjustments in its strategic development.
The reporting boundary and reporting principles will be compulsorily required to be explained in the report, including the entire process of deciding which entities or operations are chosen to be excluded from the ESG report and giving the explanation on how the issuer has applied the Reporting Principles in the preparation of the ESG report.
The impact of climate change needs to be assessed by the Board, who should establish relevant countermeasures to evaluate and manage the potential risks. Targets set to reduce the environmental impacts are significant in addressing the risks in ESG management. To quantify the progress of achieving goals, data collection will be more complex as a more comprehensive ESG reporting necessitates the data that is more accurate and the methodology for calculation process that is clarified in the report, such as the sources of applied figures.
Referring to the social KPIs, issuers should keep tracking the number and composition of employees and the rate of fatalities and accidents, i.e. the employment types should include full-time and part-time staffs and the number and rate of work-related fatalities should be disclosed as well.
Supply chain should include the description of practices to identify environmental and social risks, and the practices to promote environmentally preferable products and services. For anti-corruption subject, a new KPI is introduced, which requires the disclosure of anti-corruption training provided to directors and other staff.
Generally, as the importance of ESG information is growing and ESG investment market is developing at a staggering rate, the ESG report appears to loom large during decision-making process. Thus, a more comprehensive disclosure of ESG information and corporate sustainability performance is vital to issuers to gain conspicuous advantages among peers.
