Hong Kong: Analysis Of ESG Practice Disclosure By Hong Kong Stock Exchange

On November 25, 2022, the Stock Exchange of Hong Kong Limited (SEHK) published a report on its analysis of ESG practice disclosure in Hong Kong (the Report). The Report sets out the SEHK's findings of their review of compliance by Hong Kong issuers of the new ESG requirements implemented in July 2020, which focused on board governance, climate change, and other ESG issues (2020 Enhancements). We reported here on the related amendments to the SEHK's Corporate Governance Code and the Listing Rules addressing the link between ESG and good corporate governance, ESG reporting and gender diversity.

In this Blog Post, we highlight the key findings of the Report with respect to the four areas of ESG practices under the 2020 Enhancements. The Report was prepared by SEHK based on the ESG reports published by a sample of 400 issuers.

Board governance of ESG issues

• A vast majority of the issuers have disclosed their boards' oversight and management approach on ESG issues.
• Issuers are suggested to disclose information that enables readers to understand the processes, controls and procedures used to monitor and manage ESG matters.
• The board of directors of a company is required to monitor the progress of ESG-related goals and targets set.

Climate Change

• A majority of issuers acknowledged the importance of climate-related risks, and made disclosure of the new climate-related requirements, which include consideration of climate-related risks and mitigation measures, setting of certain environmental targets and reporting on scope 1 and scope 2 GHG emissions.
• The SEHK intends to enhance its climate-related disclosure requirements in line with the framework of Taskforce on Climate-related Financial Disclosures (TCFD) and the new climate standards to be published by the International Sustainability Standards Board (ISSB).
• Issuers should consider reporting on scope 3 GHG emissions, which are the indirect emissions outside of scope 2 emissions that occur in the value chain of the company, by developing a systematic approach to calculate and report their data.
• To analyse the resilience of its strategy to climate change, issuers are recommended to develop at least two climate-related scenarios, which are hypothetical pathways, with scope and boundaries adapted to their material business operations.

Social Issues

• The Hong Kong government has announced the carbon neutrality target by 2050 and Hong Kong's Climate Action Plan 2050.
• Issuers should consider include in their ESG reports (i) information on practices to identify social risk in addition to environmental risk along the supply chain, which plays a crucial role in operating a sustainable business, and practices to promote green procurement; and (ii) information on anti-corruption trainings e.g. the scope and method of trainings, the audience, and the frequency of trainings.

Reporting Practices

• When preparing ESG reports, issuers should apply the following relevant reporting principles i.e. (i) materiality; (ii) quantitative; (iii) balance; and (iv) consistency.
• Where quantitative disclosures are made, issuers should also include information on the methodologies, standards and assumptions adopted in arriving at the figures.
• Issuers are reminded that effective from the financial year commencing on or after 1 January 2022, ESG reports should be published at the same time as their annual reports.
• Independent assurance can help enhancing the credibility of ESG information and the quality of ESG reporting. Issuers may refer to ISAE 3000, which is standard for assurance over non-financial information, or other reputable guidance.

Further, as part of the SEHK's commitment to promote high standards of responsible corporate governance and ESG practices, the SEHK disclosed in the Report that it is reviewing its ESG framework with a focus to enhance climate disclosure requirements amongst issuers. Issuers are therefore suggested to familiarise themselves with the new ISSB climate standards in preparation of the enhanced climate reporting requirements. Please see our blog posts here and here for a discussion on the development and consultation of the ISSB.