Updated: Feb 11, 2020
Hong Kong leads the way with new mandatory disclosure requirements for ESG reporting.
What will this mean for ESG reporting in Mainland China in 2020?
On 18th December 2019, the Hong Kong Stock Exchange ("HKEx") released the consultation conclusions regarding requirements for Environmental, Social and Governance ("ESG") reporting for listed companies. HKEx received 153 responses from a broad range of respondents, including financial professionals, public companies, professional organisations, NGOs and investment management companies.
According to David Graham, Head of Listing at HKEx:
“We had a very broad and strongly supportive response to this consultation, and we are pleased to be announcing significant improvements to the ESG governance and disclosure framework for Hong Kong-` listed companies. The changes reflect the Exchange’s commitment to enhancing Hong Kong’s ESG regulatory framework and to meeting investor and stakeholder expectations in accordance with international best practices. We would like to thank all those who made submissions to the consultation,”
Indeed, the overall support rate is between 83% to 99%, where paperless reporting receiving 99% support, provision of anti-corruption training receiving 94% support, and GHG emission disclosure reporting receiving 90% support. However, not everyone is satisfied about the amendments of the ESG disclosure guide, multi-billionaire Li Ka-Shing's company CK Hutchison Holdings Limited, mentioned that independent shareholders believe mandatory ESG disclosure is a waste of company's resources. They believe not all Hong Kong issuers will benefit from green capital from institutional investors, according to Sina Finance.
What are the main changes in the HKEX consultation guide?
Key changes to the ESG Guide and related Listing Rules include: (information provided by HKEx)
Introducing mandatory disclosure requirements:
A board statement setting out the board’s consideration of ESG matters;
Application of Reporting Principles “materiality”, “quantitative” and “consistency”;
Explanation of reporting boundaries of ESG reports;
Requirement to disclose significant climate-related risks that have impacted or may impact the issuer;
Amendments to the “Environmental” key performance indicators (KPIs) to include disclosure of relevant targets;
Upgrading the disclosure obligation of all “Social” KPIs to a “comply” or “explain” basis;
and Shortening the deadline for publication of ESG reports to within five months after the financial year-end.
How do we rate the quality of ESG reporting for Hong Kong listed companies?
The number of listed companies in HKEx reached 2,395 in September 2019, with 77% disclosing their 2018 ESG reports on the HKEx website, and almost half of them published a separate report from the annual financial report.
From the sample of companies taken from 2018, 75% of these companies released ESG reports. For companies on the Hang Seng 50 index, 48 companies issued an ESG report in 2018, of which 12 were published in the annual financial report, and 36 issued a separate ESG report.
The Exchange also reviewed ESG reports for the financial year ended 31 March, 30 June or 31 December 2018 from 400 randomly selected issuers (Sample Issuers). The review provides insight and guidance to issuers on areas for improvement on which to focus their approach and assess ESG-related risks, and when preparing ESG reports.
Key findings and recommendations of the ESG Disclosure Review include: (information provided by HKEx)
All Sample Issuers published an ESG report within the time frame set out in the Listing Rules. The majority published their ESG reports on the same day as their annual report (63 per cent). Two-thirds of Sample Issuers disclosed that a materiality assessment had been undertaken, although some assessments were more detailed than others. The Exchange emphasizes the importance of materiality as this is a fundamental element in assessing ESG-related risks faced by the company. ESG reports from many sample Issuers contained little or no description of board involvement.
The ESG disclosure requirements recommend that the board of directors have oversight of and assume responsibility in assessing and addressing company related ESG risks. When an issuer is required to “comply or explain”, only 3 per cent of such provisions were “explained”. The high percentage of reports adopting the “comply” option may suggest that issuers have not sufficiently determined what is material to them, or the “explain” option is believed to be a less-preferable option. Issuers are reminded that if a “comply or explain” provision is immaterial to them, then an explanation to that effect may well be appropriate. “Explanation” is not a less preferred or secondary option.
What can we anticipate from Mainland China’s ESG reporting requirements in 2020?
In 2001, China securities regulatory commission (CSRC) issued its first " Code of Corporate Governance for Listed Companies in China", with the latest update issued in April, 2019. According to CSRS’ requirement to public companies, the annual financial report will need to include “Environment”,”Social” and “Governance” disclosure.
Under the guidance of CSRC, Shanghai stock exchange (SSE) issued the first "Guideline on Environmental information Disclosure by Listed Companies" in May 2008. Similarly, in 2006 and 2010, Shenzhen stock exchange (SZSE) published "Social Responsibility Instructions for Listed Companies, Standard Operation Guidelines for Listed Companies". In 2018, SSE developed guidance on mandatory environmental, social and governance (ESG) disclosure framework, and is currently undergoing testing. In October 2018, SZSE organised the 3rd consultation meeting regarding the ESG disclosure reporting guide.
After HKEX’s completion of ESG disclosure review, several rating agencies commented that SSE and SZSE are likely to accelerate the publishing of their version of the ESG reporting guidance for China A shares in the year 2020. As China A shares now appear in MSCI, S&P global and emerging market indices, company's ESG performance reporting will attract more attention in the coming year.
(Written by Yiwen He, edited by Lena Chen)
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