Katherine Ng, Managing Director, Head of Policy and Secretariat Services, Listing Department, Hong Kong Exchanges and Clearing Ltd (HKEX), discusses the role that good governance plays in ensuring that companies survive and thrive for the long term.

Can we start by talking about the rationale behind the latest changes to the Environmental, Social and Governance (ESG) Reporting Guide?

‘The ESG Reporting Guide (the Guide) has come a long way. In 2013, we started with a voluntary guide and that was upgraded to comply or explain in 2015. HKEX monitors listed issuers’ ESG reporting and assesses how helpful the information provided is to investors. Our goal is to ensure that the ESG exercise is beneficial to the market rather than dictating the reporting requirements for the sake of it.

Since the Guide was upgraded to comply or explain, all Hong Kong listed issuers have published ESG reports on an annual basis, but the key question is whether they are publishing information that is useful to investors. Issuers tend to be very good at compliance and producing data, but investors are looking for discussion about how they are managing their ESG risks, in particular the directors’ views and how they are governing ESG issues.

As a result, the focus of the latest ESG consultation is very much on the governance of ESG. Have directors identified the important issues? Have they done a materiality assessment? Have they identified the potential impacts on the company? We’re looking at ESG from a risk management perspective because getting this right will help ensure the long-term sustainability of the companies.’

Could we discuss the new requirements for reporting on climate risks?

‘Climate change is now a much more imminent and real issue compared with a decade ago. Initially, issuers were more focused on reporting their own emissions and waste, but there has been a growing awareness that climate change could have a significant impact on the bottom line of a company. Natural disasters such as Typhoon Mangkhut in Hong Kong in 2018 and the recent catastrophic fire season in Australia have prompted companies to rethink what climate change could mean to them.

We closely monitor the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) and have added a new climate change requirement to the Guide. Every issuer must now assess whether they have significant climate-related issues which have impacted, or which may impact, them. We’re not saying that every company must find climate change risk material to them, but they must consider it because it is a rising and inevitable risk to many companies.’

Do you think there is sufficient awareness in the market about how serious the environmental risks are – whether global warming, loss of biodiversity or degradation of the global ecosystem?

‘Hong Kong issuers are quite agile. They survived the Asian Financial Crisis and Severe Acute Respiratory Syndrome (SARS). The ones with good governance structures have not only weathered the storms but capitalised on the opportunities and thrived. Crises are a true test of the quality of your governance, of how well you’re guarding against future ups and downs and how seriously you are taking your sustainability.

I don’t think we should be painting a doomsday picture, but directors need to be acutely aware that this is an issue with growing importance. Directors have been asked more questions on ESG, but I know this is still relatively new to many of them. Five years ago, issuers were learning about cybersecurity risks, how to manage them and how to equip themselves with the necessary expertise on their boards. Five years down the road, most directors are aware of these risks and are able to solicit help where needed to ensure that these risks are properly managed.

We are seeing a similar pattern with ESG. Directors initially may have been sceptical and considered ESG as something technical and scientific, or had the impression you need a PhD to contribute to it. We’re not expecting our directors to turn into environmental scientists overnight, nor should it be necessary for them to do so, but we expect them to uphold their fiduciary duty to ensure that a company’s risks, including ESG risks, are properly managed. HKEX is very aware that this is still a relatively new area and many issuers are just beginning to take ESG seriously, so we’ve put a lot of effort into training directors as well as the preparers of ESG reports.

We have produced videos which give directors a high-level overview of what ESG is about, the role and responsibility of directors on ESG risk management, as well as a guidance paper on leadership and accountability of ESG issues. We have included guidance on the ESG issues which board discussion should include and the support which should be provided by management in order for the directors to have a fruitful discussion. For report preparers, we’ve put together a step-by-step guide to reporting on ESG. Over the years, issuers have asked us questions and we have addressed them in our FAQs for the benefit of the whole market.’

Do you think that is one of the advantages that you have at HKEX, in terms of your closeness to the market and your ability to complement enforcement with market education?

‘Definitely. We want companies to do well, we want to uphold our market quality, so we are trying to support them as much as we can. We have tried to make our training materials as useful and as accessible as possible.’

Is that the side of HKEX’s work that you are most interested in?

‘Yes, our policy team reviews our regulatory framework, and proposes changes to our Listing Committee and for market consultation that may improve our market quality and keep up with international developments. We need to constantly ask ourselves how we can do better. Last year, for example, we brainstormed on how we could improve issues such as diversity and corporate governance. There is never a dull moment in policy work.’

You mention diversity – what is your view on how best to promote better board diversity in Hong Kong?

‘I think the starting point should be to consider diversity in the widest sense. Attention is often drawn to gender diversity because it is a measurable aspect of diversity, but we should not forget the other aspects of diversity. The key point is that, if your directors share similar experiences and have similar backgrounds, the board is likely to be blinded in a groupthink trap. Your chances of successfully spotting the key risks and finding solutions is much greater if you have a group of people armed with different life experiences and perspectives.

We’ve done a lot of work around diversity. From 1 January last year, Hong Kong became the first jurisdiction to mandate that every company must have a diversity policy. Gender is an important aspect in diversity and since mid-last year we have also required every IPO company that wishes to list in Hong Kong but is handicapped by a single-gender board, to come up with a plan – measurable objectives and a pipeline – to move towards a more diverse path. We are pleased to see that a lot of them have committed to nominating a woman to their board in one or two years’ time.’

Do you believe Hong Kong should be imposing quotas to achieve better gender diversity on boards?

‘I think there needs to be a discussion amongst everybody involved on whether quotas are the way to go. This is a conversation that needs to take place at the society level, not just at the HKEX level.’


We have talked about the environmental aspects of ESG, could we also discuss the social aspects?

‘When we upgraded the Guide to comply or explain, we kept the social key performance indicators (KPIs) as recommended best practices because a sizable group of listed companies were reporting on ESG issues for the first time. Social issues can be just as important, if not more important for some companies, so this time around we’ve upgraded all the social KPIs from voluntary to a comply or explain disclosure requirement.

If social issues are important and material risk to your company, it is only right that you should disclose to your stakeholders how you manage them. I would add that our list of social KPIs is not an exhaustive list; companies need to think about the specific social risks they face and the risks that could be unique to them. It is perfectly acceptable for companies to explain rather than comply where risks are not material to their business. We are seeing very little of that, as companies seem to find it easier to disclose issues which are not material to them rather than explain non-compliance. Companies should know that there is no shame in choosing the explain route where issues are not material to them.’

Is that a worrying sign – does this mean that companies find it easier to tick the boxes rather than think through what is material to them?

‘If companies are writing their ESG report just for the sake of complying with the listing rules it will be of no use to themselves or their investors. Companies need to take important and material risks seriously for their survival. This is the focus of one of our online training videos. We’re asking directors to look at their risks critically and decide what’s material and what’s not.’

You’ve given us the broad sweep of how Hong Kong’s ESG regulatory regime has developed over the last seven years – how do you think things will develop over the decade ahead?

‘This is the beginning of the journey. Companies are now capturing the data so at least they know what they’re dealing with – they have the facts. The next step will be to have the governance structure in place. There’s more awareness every year, whether about climate risks or other environmental and social issues. Hopefully with our new Guide and training, directors will be focused on the governance of ESG issues going forward.

The investors’ side of the ecosystem is equally important because everybody needs to mature together in this area. If investors engage the issuers on ESG topics, then the issuers will have a better sense of how ESG issues may affect their reputation as well as their valuation. This will in turn help improve their next ESG report. In this context, Hong Kong’s stewardship code is important; there needs to be a two-way dialogue after all.’

What role do you think Chartered Secretaries and Chartered Governance Professionals should be playing in this area?

‘We’ve always seen Chartered Secretaries as the captains of governance issues in a company. Chartered Secretaries play an important role helping the chair set the agenda for the board and ensure that ESG is part of the board’s risk management agenda. Chartered Secretaries should recommend appropriate training to the chair and directors to help them to get up to speed with ESG. Chartered Secretaries also provide the constant force on ESG. ESG is not a one-off exercise. Chartered Secretaries can be the bridge between the directors and management to ensure the appropriate assessments are being made at the right juncture.’

Could you tell us about your own personal and professional background?

‘I grew up in Hong Kong, but I went to boarding school in the UK for my secondary education. I stayed in the UK for university where I studied law. After law school, I stayed in the UK for a few more years and worked as a corporate lawyer at Linklaters before returning to Hong Kong, and then worked for an investment bank.

At that point I decided I wanted a change. I have always been interested in public policy so I decided to step out of my comfort zone and went to work for the Financial Services and the Treasury Bureau (FSTB) of the HKSAR Government. For four years, I was Political Assistant to the Secretary for Financial Services and the Treasury, KC Chan. That was an eye-opening experience and I learned a lot. Working as a transaction lawyer, you are focused on drafting and negotiating contracts and getting deals done – I enjoyed the wider scope involved in setting policy. I joined the FSTB in August 2008 – one month before the collapse of Lehman Brothers. So I spent the first couple of years addressing the fallout from the global financial crisis which followed. My work became very real and hopefully had an impact on society.

After working for the government, I knew I wanted to do something that married my legal experience and my interest in public policy, and I landed at HKEX. This, in many ways, has been my dream job. It calls on my legal skills – drafting and writing rules is easier if you have a legal background – but it also allows me to tackle issues such as ESG and diversity via the policy formation side of the role.

I love finding solutions. I was a mathematician before I studied law and that is about finding solutions to problems. I enjoy brainstorming and collaborating with people to work out how to strike a balance and find a solution that is acceptable to our society as a whole.’

Katherine Ng was interviewed by Kieran Colvert, CSj Editor.