Karen Pong, Project Coordinator, CSR Asia Hong Kong, gives a quick guide to the stock exchange’s upgraded environmental, social and governance (ESG) reporting requirements.
Listed companies in Hong Kong should by now be aware of the decision of Hong Kong Exchanges and Clearing (the Exchange) on 21 December 2015 to strengthen its ESG reporting requirements from voluntary to ‘comply or explain’. This article is a quick guide to what this means for listed companies.
How and why did the Exchange come up with this decision?
The latest amendments to the Exchange’s ESG Reporting Guide (the ESG Guide) were proposed in July 2015. This was followed by a two-month public consultation which received 203 responses which were described as ‘overwhelmingly supportive’ of the proposal to upgrade the ESG disclosure requirements. Why are respondents supportive of the move from the voluntary approach to a more demanding comply or explain provision? David Graham, The Exchange’s Chief Regulatory Officer and Head of Listing, said that ‘Issuers starting to report on their ESG performance may reap the benefits of better risk management, improved access to capital, greater capacity to meet supply chain demands and lower operational costs, to name but a few of the advantages that ESG reporting could bring to issuers’ businesses.’
Who will be affected and how?
Starting from 1 January 2016, the amended ESG Guide was applied to 1,842 (as of November 2015) listed companies on both the main and growth enterprise market (GEM) boards of the stock exchange. This means that companies will have to state in their annual or ESG reports if they have complied with the provisions set out in the ESG Guide for the relevant financial year. If they have not, they must explain why not and give considered reasons. As for the disclosure of environmental KPIs, a one-year buffer was granted so companies will need disclose environmental KPIs no later than the 2017 financial year. If a company decides to issue a standalone ESG report, it should be published no later than three months after the publication of its annual report.
The two groups of listed companies that will be most affected are:
- companies that have published ESG reports previously, but have not collected data and/or disclosed their environmental KPIs, and
- companies that have never published any ESG reports aligned with the Exchange’s voluntary ESG Guide or other international reporting guidelines.
Companies following international standards, like the sustainability reporting guidelines published by the Global Reporting Initiative (GRI), for their previous reports may be more at ease, but should double check if the environmental KPIs are all covered and whether their publication timeline can meet the new requirements.
What does the latest ESG Guide require a listed company to disclose?
An overview of the reporting requirements is captured in the table overleaf. Note that the wording might have been condensed from the original text in the ESG Guide. Always refer to the full version of the ESG Guide when preparing your report.
Do I have to report on every single aspect listed there? Some aspects just do not make any sense to our business.
Given that the new requirements are comply or explain provisions rather than mandatory requirements, the Exchange permits certain flexibility for companies to adapt to the rules based on their specific circumstances. The definition of comply or explain in Appendix 14 of the listing rules makes it clear that ‘where an issuer considers a more suitable alternative to a code provision exists, it should adopt it and give reasons’.
Does the board have to be involved in ESG reporting?
Yes. The ESG Guide specifies that ‘The board has overall responsibility of the issuer’s ESG strategy and reporting’ and is responsible for evaluating and determining the issuer’s ESG-related risks and ensuring there are appropriate management systems in place.
Apart from meeting the disclosure requirements, what else is essential for good ESG reporting?
Materiality. Report on ESG aspects and issues that are considered important for reflecting your organisation’s economic, environmental and social impacts or substantively influence the assessments and decisions of stakeholders.
Quantitative. Provide measurable KPIs and targets wherever possible and supplement them with explanatory narrative.
Balance. Ensure that the disclosure is an unbiased and inclusive account of your ESG performances. Report both good and bad news.
Consistency. Use consistent methodologies to report on and track the trends of your ESG data for meaningful comparisons.
If I have never prepared an ESG report before, what should my first step be?
Allocate responsibility. Identify the people in the company that will take responsibility for ESG issues.
Training. Build capacity and knowledge of the people involved in driving the ESG reporting process.
Gap analysis. Map where the company currently is compared to the disclosure requirements and identify what information is missing.
Materiality. Assess which aspects and KPIs are relevant to your specific business and report on those items.
Stakeholder engagement. Engage your stakeholders in identifying material issues for reporting.
Data collection. Create a system mapping out individual data points for collection.
What if I still have questions?
How do I communicate the value of ESG reporting to management? How exactly am I supposed to engage with stakeholders? What content would make an interesting ESG report? Those involved in ESG reporting can attend training seminars and workshops to answer these and other questions that they might have. CSR Asia was the consultancy commissioned by the Exchange to deliver training seminars and develop training materials for listed companies when the ESG Guide was first launched in 2012. More information on CSR Asia training is available on the CSR Asia website (www.csr-asia.com).
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