In this article, we are talking about whether IPO applicants should prepare their ESG disclosures for getting listed on Hong Kong Stock Exchange. Stock Exchanges in other countries or regions might request the information differently, but this document will be a good guide for listing on other Stock Exchanges too.
Although Hong Kong Stock Exchange didn't include ESG reporting on the list of filing documents provided by IPO applicants, it doesn't mean ESG disclosure doesn’t need be prepared. The Stock Exchange will question the applicants with ESG related questions.
Disclosure in Listing documents
IPO applicants need to consider preparing ESG disclosure as well, that's because investors want to see ESG information in their IPO listing documents although ESG reporting is not yet mandatory at the stage.
Hong Kong Stock Exchange also questions applicants on their ESG practice at vetting stage.
For example, if an applicant is in the garment industry and operates in countries where environmental or labor laws are known to be lacks or unenforced., the exchange may question the applicant whether their measures are in place to ensure they comply with international best practice.
A listing document should contain information that is necessary to enable an investor to make an informed assessment of the operations and financial condition of the company of particular importance would be the risks based by a company and how it manages such risks.
Companies face at least three broad categories of risks. Financial operational and compliance. ESG risks may bring all three categories of risks to accompany.
Failure to identify and manage ESG risks may cause financial loss to the company and operational disruptions. Failure to comply with ESG laws and regulations poses a compliance risk as well as financial and operational risks.
To give an example. If a company's operations involve emitting an excessive amount of greenhouse gas and/or pollutants it may have to pay higher tax. And it may even be prohibited from operating under local laws and regulations and any breaches of the laws and regulations would pose a compliance risk.
The role of Boards
The board should consider all the risks including but not limited to ESG risks faced by the company. The material risks identified should then be disclosed in the risk factor section of the listing document.
The board is also reminded to identify ESG laws and regulations that have a significant impact on the company and summarize these laws and regulations in the regulatory overview section of the listing document.
In the case of any material non-compliance of these laws and regulations during the track record period, details of the breach sanctions imposed on the applicant etc. should also be disclosed in the business section of the listing documents.
Identification of risks is only the first step, more importantly, companies should move on to the management of such risks. The board is responsible to oversee and ensure the effectiveness of a company's risk management and internal control system. This envisages development of policies and procedures around material risks identified. This includes procedures to identify, evaluate and manage such risks.
Following up on management implementation of such policies and procedures do the policies and procedures function as they are intended how can you further enhance efficiency and effectiveness of the process taking steps to foster risk awareness within the company is more training required to ensure better understanding amongst the staff.
Lastly ensure that the process used to identify evaluate and manage material risks are properly disclosed in the listing document. Guidance letter. GL86-16 has also been updated to emphasize that applicants should consider environmental including climate related social and governance risks in preparing disclosure relating to its risk management and internal control systems.
1/3 of the board comprise of independent non-executive directors. What is the role of independent non-executive directors in terms of risk management? Under the listing rules, a majority of members of the audit committee shall be independent non-executive directors. The audit committee is often tasked with the task to review the company's risk management and internal control systems.
Therefore instead of major role to play in this area, they are expected to ask the right questions, and also scrutinize the company's policies and processes with their fresh pair of eyes. They should also review disclosure in the listing document to ensure that it reflects the systems in place.
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