Katherine Ng, Senior Vice-President, Hong Kong Exchanges and Clearing Ltd, highlights the new guidance materials on the Exchange’s website relating to environmental, social and governance (ESG) reporting.
Businesses are facing increasing demands to recognise their obligations to stakeholders and the broader society. Managing and disclosing ESG performance and practices makes perfect business sense from multiple perspectives. Studies, such as Grant Thornton’s 2014 report Corporate social responsibility: beyond financials, have shown that cost management, investor and customer demand, brand building and staff retention are some of the top business drivers for ESG reporting. It is also widely recognised that ESG disclosure strengthens a company’s risk management and control.
A high level of ESG performance and disclosure also makes sense for Hong Kong’s financial market. Investors increasingly treat ESG as a part of their investment strategies. The UN Principles for Responsible Investment (UNPRI – see www.unpri.org) has over 1,500 signatories, from over 50 countries, representing US$60 trillion of assets under management. The first three of the six principles are:
- we will incorporate ESG issues into investment analysis and decision-making processes
- we will be active owners and incorporate ESG issues into our ownership policies and practices, and
- we will seek appropriate disclosure on ESG issues by the entities in which we invest.
We would like to have as much of that US$60 trillion invested in our market as possible. UNPRI represents just one of many groups of investors seeking to invest in responsible companies.
Role of the Exchange
The role of the Hong Kong Exchanges and Clearing Ltd (the Exchange) is to ensure an orderly, fair and informed market. It is increasingly recognised that an ‘informed market’ calls for both non-financial and financial information. Investors are becoming more aware that corporate financial statements alone are not necessarily sufficient in determining the company’s access to capital, cost of capital, the likely environmental and social risks that it may face, and the way in which these risks are managed. Whilst in the past investors may have made decisions based largely on a company’s track record, they are increasingly looking to the future. ESG reporting reflects management strength and the long-term prospects of the company.
Revised ESG Reporting Guide
The Exchange introduced its revised ESG Reporting Guide and other amendments to the listing rules as a result of the consultation on the review of the guide conducted in 2015. The listing rule amendments and the upgrade of the disclosure obligations, except those relating to environmental key performance indicators (KPIs), to comply or explain under the revised guide, have been implemented for issuers’ financial years commencing on or after 1 January 2016. The upgrade in relation to the environmental KPIs will be implemented for issuers’ financial years commencing on or after 1 January 2017.
An issuer must publish an ESG report on an annual basis (covering the same period as its annual report) stating whether it has complied with the ‘comply or explain’ provisions of the ESG Reporting Guide for the relevant financial year. Where the issuer deviates from the ‘comply or explain’ provisions, it must give considered reasons in its ESG report. Issuers are encouraged, but not required, to report on the recommended disclosures of the ESG Reporting Guide.
How should companies get started?
Board commitment and role
For the company to fulfil its ESG responsibilities, the board should set a clear vision and key strategies for the company and monitor management to ensure proper ESG reporting measures or systems are in place. Although companies are expected to comply with all applicable laws, it is up to the board to decide the extent to which a company will undertake additional voluntary ESG measures.
The board’s role in the context of ESG reporting is evolving but is largely defined by its general responsibilities. The board’s specific roles may include the following.
- The board can provide inspiration and leadership for ESG projects.
- The board and senior management should set the strategic direction, including ensuring that the ESG strategy reflects the company’s values and core business.
- Directors should ensure that appropriate structures are in place for successful ESG reporting, for instance, establishing a committee that oversees ESG reporting within the company. The committee may monitor any conflicts that arise between the company’s short-term and long-term goals and ESG strategies. However, the board as a whole is responsible for evaluating and determining the company’s ESG-related risks and ensuring that appropriate and effective ESG risk management and internal control systems are in place.
- Directors can guide management in communication of the company’s ESG stance.
- The board is accountable to shareholders for information that is provided. The board or its delegated committee will oversee the integrity of information communicated to shareholders and stakeholders regarding ESG reporting.
Training, education and capacity-building programmes
Training and education on ESG reporting across the company may raise the awareness of management and employees regarding the company’s ESG reporting responsibilities and thereby improve the quality of the company’s ESG reporting. A capacity-building programme enables the employees of the company to understand the potential issues of ESG reporting, and enhances their ability to conduct appropriate ESG reporting, thereby avoiding conflicting messages within the company regarding ESG.
Communications and engagement with stakeholders
Effective communications and engagement with stakeholders regarding ESG encourages stakeholders’ support to the company’s ESG reporting.
The Exchange’s initiatives
To assist issuers with their ESG reporting, the Exchange has launched various initiatives since the publication of the revised guide. Firstly, it launched a revamped ESG webpage which includes three main documents:
- Key Steps for ESG Reporting
- a Toolkit, and
- Reporting Guidance on Environmental KPIs.
The first document forms the core of these new guidance materials – it sets out the seven key steps for ESG Reporting. The Toolkit provides a set of practical tools for identifying the appropriate information for disclosure. The Reporting Guidance on Environmental KPIs contains data collection methodologies and practical guidance on how to collect the information and calculate the data called for under each of the KPIs in the ‘Environmental’ Subject Area of the Guide. For each Environmental KPI, the document sets out ‘what to report’ and ‘how to report’.
Secondly, the Exchange conducted 12 ‘How to report on ESG’ seminars in March 2016, where over 2,400 listed company representatives and market practitioners registered to attend. During each training session, the Exchange’s trainers explained the new listing rules and the requirements of the Exchange’s revised ESG Reporting Guide. This was followed by an ESG expert’s advice on the preparation of an ESG report. Along with the training materials mentioned in the main article, ESG seminars in English, Cantonese and Putonghua have been uploaded onto the the Exchange’s website (see the end text for the webpage address).
Senior Vice-President, Hong Kong Exchanges and Clearing Ltd
The guidance materials mentioned in this article are available on the Exchange’s website (www.hkex.com.hk – Rules & Regulations/ Rules and Guidance on Listing Matters/ Special Topics/ ESG rules).
SIDEBAR: How to prepare an ESG report
The Exchange has made a step-by-step guide to preparing an ESG report available on its website. The guide – How to Prepare an ESG Report – sets out seven practical steps for ESG reporting.
Step 1: Set up an ESG working group.
Issuers should establish an ESG working group, comprising members of senior management and other members of staff who have sufficient ESG knowledge to conduct internal and external materiality assessments (see Step 5) and to write the ESG report, which reports to the board.
Step 2: Understand the requirements.
The ESG working group should first understand the reporting requirements of the Exchange’s ESG Reporting Guide, the issuer’s ESG risks determined by the board and the board’s ESG strategy.
Step 3: Set the reporting boundary.
Issuers need to determine the scope of the ESG report (that is what parts of the business the issuer intends to report on) based on the ESG risks determined by the board. If there is a change in the scope from previous years, the ESG report should explain the difference and reasons for the change.
Step 4: Engage stakeholders.
Stakeholder engagement is the process by which an issuer involves parties who may be affected by the decisions it makes, or can influence the implementation of its decisions.
Step 5: Make a materiality assessment.
In deciding whether to disclose the information under a ‘comply or explain’ provision, the ESG working group should take into account the information’s materiality (that is its importance and relevance to the issuer’s business and operations).
Step 6: Collect information for general disclosures and KPIs.
The ESG working group is now ready to start collecting information for the general disclosures and the KPIs that the issuer intends to report on. The ESG working group may need to work with other members of staff to compile data from diverse sources, or to help develop a process by which such data could be collected in future.
Step 7: Write the ESG report.
Finally, the ESG working group can start writing the ESG report. The ESG report should include contents such as the information called for under the provisions of the Exchange’s ESG Reporting Guide; and be written in a way that is balanced and easily understood.
Appendix I to the Exchange’s How to Prepare an ESG Report provides a toolkit on materiality assessment and other templates to help the issuers decide whether to comply with a provision in the ESG Reporting Guide. Appendix II, ‘Reporting Guidance on Environmental KPIs’, contains data collection methodologies, practical guidance on how to calculate the data, and advice on how to collect the information called for under each of the KPIs in the environmental subject area of the ESG Reporting Guide. It also provides the emissions factors for various types of fuel and electricity consumed.
In addition, the Exchange has also published FAQs on ESG reporting on its website. Other online resources such as international guidelines and references on ESG reporting and calculation methods for environmental KPIs can also be found on the Exchange’s website.
The guide ‘How to Prepare an ESG Report’ is available on the Exchange’s website (www.hkex.com.hk – Rules & Regulations/ Rules and Guidance on Listing Matters/ Special Topics/ ESG rules).