Hong Kong Exchanges and Clearing Ltd proposes new regulatory requirements designed to boost the effectiveness of companies’ governance structures for the management of environmental, social and governance (ESG) issues.

Tougher regulation of ESG management and the disclosure of ESG performance and risks has been a notable trend in recent years, both globally and in Hong Kong. Hong Kong Exchanges and Clearing Ltd (HKEX) introduced its Environmental, Social and Governance Reporting Guide (ESG Guide) in 2013, and has subsequently expanded its scope and compliance obligations – for example upgrading the guide’s General Disclosures and Environmental key performance indicators (KPIs) to ‘comply or explain’ in 2016.

In its first phase, the regulatory focus in Hong Kong was on assisting companies to establish the internal controls necessary to ensure that ESG issues are effectively monitored, managed and disclosed. More recently, the emphasis has shifted to assisting companies to move up to the next level where the management of ESG is not primarily a compliance or PR exercise but a fundamental part of corporate strategy.

The most recent HKEX review of listed companies’ compliance with the ESG Guide (Analysis of Environment, Social and Governance Practice Disclosure in 2016/2017, published in May 2018) found that, superficially, Hong Kong companies have an excellent compliance record when it comes to ESG disclosure. All sampled issuers duly published their ESG reports within three months of their annual report, as required by the ESG Guide. Digging deeper, however, the HKEX review found areas of weakness in listed companies’ approach to ESG management and disclosure. In particular, the review lamented the lack of discussion and details regarding issuers’ ESG governance structures and the board’s involvement in the ESG reporting process and the process of materiality assessments.

Last month (May 2019), HKEX published its Consultation Paper on Review of the ESG Reporting Guide and Related Listing Rules (ESG Consultation) proposing revisions to the ESG Guide designed, among other things, to address these areas of weakness.

Oversight of ESG is the board’s responsibility

The ESG Consultation emphasises the crucial importance for issuers to have in place a governance structure for ESG. ‘It is important for ESG matters to be led by the board so as to ensure, amongst others, that ESG issues are factored into high-level discussions, and appropriate systems and processes are implemented with adequate resources. To facilitate the inclusion of these essential elements in the ESG reports, we propose to introduce mandatory reporting requirements requiring the disclosure of the board’s involvement in ESG governance,’ the consultation states.

Under the new proposals, issuers would be required to include a statement from the board in their ESG reports setting out the board’s consideration of ESG issues. This would need to include the disclosure of:

  1. the board’s oversight of ESG issues
  2. the process used to identify, evaluate and manage material ESG-related issues (including risks to the issuer’s businesses), and
  3. how the board reviews progress made against ESG-related goals and targets.


The ESG Consultation also seeks to highlight the fact that materiality in respect of ESG is key to meaningful and concise reporting. ‘The key to a meaningful and concise ESG report is materiality,’ the ESG Consultation states. ‘Materiality is the threshold at which ESG issues determined by the board are sufficiently important to investors and other stakeholders that they should be reported. It is important that the issuer explains its materiality assessment process in the ESG report.’

The ESG Consultation proposes to introduce a mandatory requirement for companies’ ESG reports to contain an explanation of the application of the reporting principles and reporting boundary relevant to the company. Under the HKEX ESG Guide, materiality is a reporting principle which underpins the preparation of ESG reports. Under the proposals, issuers would be required to disclose the process for the selection of material ESG factors, including a description of the process and results of the issuer’s stakeholder engagement, if any, as well as the process used to identify the specific entities or operations that are included in the ESG report.

Target setting

The annual research reports by Alaya Consulting (see endnote for details) highlight the benefits of target setting for effective ESG governance. Tony Wong, Founder, and Regina Tai, Consultant, Alaya Consulting, stated in the October 2018 edition of CSj that ‘establishing targets in the long-run helps to set out strategies and a roadmap towards sustainable growth’.

The 2018 Alaya research found that less than 20% of the companies surveyed set environmental and social targets. The Alaya report suggests that ‘companies are yet to realise the advantage of setting SMART (specific, measurable, attainable, relevant and time bound) and effective targets as a driving force in ESG, and integrating these into the company’s business strategy’.

HKEX is similarly keen to promote the benefits of companies setting relevant targets. The ESG Consultation proposes to amend the ESG Guide environmental KPIs to require disclosure of relevant targets regarding issues such as emissions, energy use, water efficiency and waste reduction, as well as the steps taken to achieve them.

‘We believe that having specific targets and requiring disclosure of the steps taken to achieve them would drive issuers to scrutinise and refine their strategies and systems, which ultimately may lead to better risk management and improved performance’ the ESG Consultation states. It adds that disclosure requirements regarding targets would also help to align Hong Kong with international standards such as the Global Reporting Initiative (GRI) standards and the recommendations published by the Task Force on Climate-related Financial Disclosures (TCFD) in June 2017.

Other HKEX proposals

The ESG Consultation makes a number of other proposals designed to improve the management of ESG issues by listed issuers in Hong Kong and to better align Hong Kong with international standards.

Climate change

For example, the risks associated with climate change have been an increasing global concern and focus, with investors demanding more information on how climate change has impacted or may impact a company. Moreover, the TCFD recommendations mentioned above call for disclosure on the actual and potential impacts of climate-related risks and opportunities on the company.

‘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,’ the ESG Consultation states.

HKEX points out that these considerations should be included in issuers’ ESG reports. The ESG Consultation therefore proposes to introduce a new Aspect (subject to ‘comply or explain’) requiring disclosure of the significant climate-related issues which have impacted, and those which may impact, the issuer and the actions taken to manage them.

Upgrading Social KPIs to comply or explain

The ESG Consultation also proposes to upgrade the disclosure obligation of the Social KPIs of the ESG Guide, which are currently recommended (voluntary) disclosures, to comply or explain.

The level of disclosure for Social KPIs has been relatively low. HKEX is concerned that this may give the wrong impression that they are less important than Environmental KPIs, resulting in less attention being paid by the issuers.

‘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 are considered immaterial to an issuer’s businesses, the issuer has the flexibility to explain rather than make irrelevant disclosures,’ the ESG Consultation states.

Shortening the deadline for publication of ESG reports

The ESG Consultation also proposes to shortening the deadline for publication of ESG reports. Currently issuers are required to publish their reports within three months from the publication of their annual report. Since annual reports have to be published within four months of the relevant year-end, this means that the ESG report may be published seven months after the year end.

‘It is considered best practice to provide ESG data at the same time as the annual report and when 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,’ the ESG Consultation states.

HKEX proposes to shorten the time required to publish an ESG report to align with the publication timeframe of the annual report. Issuers would be required to publish their reports within four months for Main Board issuers and within three months for GEM issuers from the financial year-end.

The ESG Consultation discussed in this article is available online: www.hkex.com.hk. The Alaya Consulting research reports on the ESG disclosure practices of Hong Kong listed companies are available online: www.alayaconsulting.com.hk.
Analyses of the Alaya reports, which appeared in November 2017 and October 2018 editions of CSj, are available online at: http://csj.hkcgi.org.hk.

SIDEBAR: Guidance materials

In addition to the ESG Consultation reviewed in this article, Hong Kong Exchanges and Clearing Ltd (HKEX) has launched an e-training course, ‘ESG Governance and Reporting’, published new frequently asked questions on its website and revised ‘Guidance Letter HKEX-GL86-16’ to require additional disclosure relating to issuers’ policies on board diversity.

The new e-training course

The new ‘ESG Governance and Reporting’ e-training course explains the board’s leadership role in ESG matters and covers the following six topics:

  1. what is ESG, and why is it important?
  2. board’s role in ESG governance
  3. why report on ESG?
  4. essential elements in an ESG report
  5. details on ESG reporting, and
  6. ESG disclosure by IPO applicants

The e-training takes approximately 45 minutes to complete.

Frequently asked questions

The new FAQs (No 24K and 24L in Series 17 and FAQ No 2A in Series 18) have been added to the HKEX website to clarify how different aspects of ESG relate to the Corporate Governance Code.

Gender diversity

In respect of disclosure in listing documents by new applicants, HKEX has revised ‘Guidance Letter HKEX-GL86-16’ to require additional disclosure relating to issuers’ policies on board diversity (including gender) and how gender diversity of the board can be achieved in the case of a single gender board. The revised Guidance Letter also sets out expected disclosures on ESG matters, including material information on applicants’ environmental policies, and details of the process used to identify, evaluate and manage significant ESG risks.

The guidance materials are available online: www.hkex.com.hk