Hong Kong SAR’s stock exchange is changing its
rules on environmental, social and governance (ESG) reporting
to improve corporate governance.
IFLR’s latest primer looks at how, following
similar rule changes in the US and EU, Hong Kong SAR is
changing its listing rules to increase transparency and the
accountability of listed companies.
What are the HKEX’s new ESG disclosure rules
Under HKEX’s new mandatory disclosure
requirements, which will be effective July 1 2020, companies
will need to provide: a board statement setting out its
consideration of ESG matters, disclosure of significant
climate-related issues which have impacted and may impact the
issuer, disclosure obligation to comply or explain key ESG
performance indicators, and published ESG reports within five
months of the financial year-end.
"The new rules are not just about reporting specific
indicators," says Mervyn Tang, senior director, global head of
ESG research at Fitch Ratings. "Companies have to demonstrate
how they assess and manage ESG issues, and the role and
expertise of the board in this process. In particular companies
have to disclose how climate-related issues could impact their
See also: ESG now a key factor in
The latest requirements expect a shift in corporate
attitudes towards ESG from a box-ticking exercise to embracing
it to drive long-term value, which can be challenging for many
companies, according to Hermes Investment
Management’s Janet Wong. For example, the
requirements emphasise the importance of forward-thinking in
ESG reporting through target-setting.
To set meaningful environmental and/or social targets,
companies need to first have a good understanding of their
internal operations. "That often requires dedicated resources
to define, collect and analyse quantitative data," says Wong.
"Buy-in throughout the organisation – not only from
senior management but also other departmental and business
heads – is also essential. Companies that have not
established a proper governance structure to manage ESG issues
may struggle to live up to the latest expectations."
See also: ESG: asset managers vary in
What has driven the HKEX to change its reporting
ESG considerations have recently become a key element of
fiduciary duties for many asset owners, and an important part
of investment product marketing for asset managers. Those who
cannot demonstrate ESG integration in the investment process
are increasingly being asked why not.
The availability of ESG data has become essential for asset
managers to demonstrate their sustainable credentials. The
HKEX’s requirement for ESG disclosure will help
asset managers to demonstrate ESG integration and increase
investor demand for HKEX-listed securities.
According to Roman Novozhilov, head of ESG at New
Development Bank, asset managers are actively addressing the
demand by developing and marketing specific products to access
ESG-conscious investors and demonstrate strong financial
returns following ESG integration.
"A positive impact of the new requirements is that this will
facilitate the inclusion of HKEX-listed issuers into the
universe of ESG-conscious investors and asset managers," says
ESG: the financial costs of climate
What aspects will listed companies find most challenging to
Market participants believe that the new requirements will
not present a significant challenge for large companies who
regularly issue, since many aspects are aligned with the
regulatory requirements they’re already subject
to. But for smaller issuers, this will likely require creating
a new data collection system across various business lines, as
well as additional resources to implement the disclosure.
"ESG industry leaders are already undertaking most, if not
all, of the revised ESG reporting requirements –
however, there will likely be a larger gap for smaller
companies or companies less engaged with ESG issues," says
Gabriel Wilson-Otto, head of stewardship, APAC at BNP
Wilson-Otto adds: "Areas that companies may find challenging
are the requirement for more strategic engagement with material
ESG issues, and increased disclosure requirements. This is
due to the potential for capability gaps, including ESG
expertise on the board or more broadly within an organisation,
and resource constraints."
For many company boards, ESG has not been on the radar until
recently. "Our previous research showed that a majority of
boards have not been paying enough attention to ESG," says
Brian Ho, climate change and sustainability partner at EY.
"Where now ESG risks should be, in some way, discussed in board
meetings, this implies that capacity-building on ESG topics is
required for the board."
Wong adds: "Devoting sufficient time and resources to ESG
issues can be challenging for board directors in Hong Kong,
especially when many have an already-busy schedule."
According to a
CLSA report in March 2019, 94 people occupy six or more
listed company board seats each in Hong Kong SAR.
Another potential issue is greenwashing. "To ensure the
validity of the data and avoid the temptation to greenwash,
companies will need to establish corporate data collection and
validation procedures," says Novozhilov. Without these
procedures in place, businesses will face reputational issues
if the validity of disclosure is questioned.
Ho adds: "A very limited number of issuers do set
quantifiable targets, such as energy and water consumption and
carbon emissions. For most, readiness to set and communicate
these targets is low."
The majority of issuers may not have conducted ESG risk
identification properly, including the involvement of relevant
stakeholders in the process. "Many issuers will have to conduct
a stakeholder engagement exercise for ESG risk identification
for the first time – and the market has limited
knowledge on how to do this," says Ho.
Additionally, issuers can be exposed to shareholder pressure
if their disclosed ESG data is found to be erroneous,
insufficient, or if its targets are not deemed ambitious
enough. "Such gaps can potentially attract scrutiny and
activist shareholder campaigns," says Novozhilov.
Another challenge will be to ensure consistency of reported
ESG disclosure data across different businesses operating in
See also: ESG survey: no need to accept lower
returns over long term
How do the new reporting rules compare with those in other
According to Wilson-Otto, in Asia, regulation has played a
large role in improving ESG disclosure – but for many
companies, this has not led to increased engagement with the
underlying issues. Essentially, ESG disclosure has been
treated as a compliance requirement by some companies, and not
as part of a strategic assessment of risks and
"Additional requirements to provide detailed information on
management and strategy of ESG is consistent with the direction
of change in many countries, as investors pay more attention to
ESG issues," says Tang. "Investors will judge companies on the
strength and coherence of their ESG strategy, along with the
execution of that strategy."
Singapore has a similar ESG disclosure framework. The local
exchange (SGX) requires issuers to make statements indicating
that company boards have overseen the management and monitoring
of the material ESG issues, and have considered sustainability
issues as part of their strategic formulations. "Unlike HKEX,
the SGX has not prescribed any particular sustainability
reporting framework, so issuers can select the framework which
is suited to its industry and business model, and explain its
choice," says Ho.
However, the latest HKEX rules have a relatively light touch
on social framework and indicators, which has been a key topic
in other markets, according to Wong. For example, the European
Commission’s non-binding guidelines reference
international frameworks like the OECD due diligence guidance
for responsible supply chains from conflict-affected and
high-risk areas and the UN guiding principles on business and
human rights. These are not discussed or covered in the latest
Plus, some social key performance indicators remain
input-based instead of outcomes-based. For example, companies
are required to disclose anti-corruption training provided to
directors and staff, which is an input proxy to measure a
company’s ESG performance.
Globally there have been increased expectations on
outcomes-based measurements. In the UK, the revised
2020 stewardship code has placed a strong focus on
activities and outcomes of stewardship. Wong believes this will
be the trend in future.
Market observers generally agree that there’s a
lot of room for ESG to grow in Asia, and companies should
expect to see increased compliance requirements. "The
mainstreaming of ESG in Asia-Pacific financial markets is still
in its infancy, and I expect an ongoing trend towards further
enhancements to ESG disclosure requirements and increasing
convergence of ESG standards and classifications," says
ESG investor interest swerves east