HONG Kong Stock Exchange(HKEX) has added more demanding requirements for environmental, social, and governance (ESG)reporting for all the listed companies with the intention of raising the sustainability bar to the global level. HKEX has now joined other exchanges, such as New York Stock Exchange (NYSE) and London Stock Exchange (LSE), to ingrain sustainability into their operations. Here is a deeper look at the HKEX ESG reporting rules to determine what they mean for listed firms in the jurisdiction.
Before digging deeper into HKEX ESG reporting, let us go back to the beginning. What is ESG reporting? What is an ESG report? How does ESG reporting process work?
ESG reporting is the disclosure of a company's environmental, social, and governance impacts with the goal of supporting a sustainable global economy. It can be traced back to the two core conferences, the 1992 UN Conference on Environment and Development (UNCED)and the 2002 World Summit on Sustainable Development (WSSD).
During these meetings, it was agreed that companies have a bigger role to play for sustainability to be achieved. ESG reporting in a company goes beyond the simple creation of the final report. It extends to helping companies craft goals for sustainability, corporate strategies for achieving them, and realizing the success they want.
HKEX guidelines for sustainability are built on the primary principles of ESG reporting, which listed firms have to follow. Here are some of the defining principles for ESG reporting:
· Balance and neutrality.
· Accuracy and completeness.
· Building on existing reporting efforts, such as corporate social responsibility.
The new mandatory HKEX ESG reporting requirements that took effect on July 1, 2020, require every company to provide a board statement highlighting environmental, social, and governance considerations. Other requirements outlined in the HKEX ESG reporting rules include:
· Every company must disclose significant climate-related issues that have impacted or are likely to impact the company.
· Disclosure obligations for compliance or explaining the main ESG performance indicators for the listed company.
· ESG reports for every company must be published within five months of every Hong Kong financial year.
In line with ESG guiding principles, the HKEX ESG reporting rules are not just about the report generated at the end of the financial year. In addition, every company is required to demonstrate the process involved, including the goals used to guide the focus on sustainability. It also has to demonstrate how the company assesses and manages different ESG issues. The ultimate goal is to demonstrate how climate-related issues are likely to impact business operations and craft good strategies to mitigate the effects.
These HKEX ESG reporting rules are expected to herald a new shift in corporate focus towards sustainability and building long-term value. For example, the guide requires companies to think ahead and determine the impacts they are likely to get from climate-related issues. Ultimately, all the listed firms will be bubbling with new ideas, technologies that focus on avoiding the expected negative impacts and enhancing the positive ones.
The first step to setting clear ESG targets is running a comprehensive analysis of a company's operations. This will require expertise and dedication of enough resources. In addition, companies require developing good structures for managing ESG issues. Although this might be a challenge to some companies because of the cost involved, the long-term governance, social and environmental benefits are many and worth the effort.
Over the last 20 years, there has been a growing need to promote sustainability. ESG considerations have particularly become some of the important fiduciary duties, especially for asset owners. It is also a crucial product for asset managers and investment product marketing professionals. Therefore, those who are unable to demonstrate ESG integration are always faced with the big question, “Why?”
For asset managers, ESG data is crucial in demonstrating their sustainability credentials. Therefore, HKEXESG reporting guide is crafted to assist asset managers to demonstrate correct integration. ESG integration is likely to increase demand for companies listed on HKEX.
The Hong Kong administration has always worked with other organizations, such as UNEP, World Bank, and others, to advocate for progressive solutions towards addressing climate change and global warming. This is why they have seized the opportunity to help make the world a better place by requiring every listed firm to take action.
If all the companies listed on HKEX are focused on sustainability, what happens if all others on the globe adopted structures to address sustainability challenges? The world would be a better place, a better home for all. That is what Hong Kong wants to see for its resident and companies.
The new rules place the burden of ESG reporting on the board of directors for the listed companies. Asa global business hub, most of the large companies are not likely to face significant challenges trying to implement the new guidelines. However, smaller firms might face major hurdles to operate in line with the new guidelines.
Many companies, especially those with presence in countries where ESG reporting started earlier, are likely to have already commenced the process. Therefore, they already have the right framework and understanding of how the process of sustainability reporting works. For the smaller firms, here are the challenges that they are likely to face:
· The Need for More Capacity Building
Since most small companies have not been following ESG guidelines, adopting them and in strict conformity to HKEX rules is likely to require additional capacity building. Because the focus of the reporting process if the board of directors, most of them are likely to find it challenging to devote enough time for capacity building.
· The Risk of Greenwashing
The most important thing when it comes to HKEX ESG reporting is the validity of data. Although most companies appreciate the importance of sustainability, the danger of using incorrect data to generate “attractive” reports is likely to arise with some firms. Unless the data collection and validation procedures are installed, reputational issues are likely to emerge along the way.
HKEX ESG reporting is a continuous process, which starts with a company's review to identify key opportunities and goals. Then, the company sets goals for enhancing environmental, social, and governance performance. This requires the dedication of enough resources for the process. Small companies, especially those with strained budgets, are likely to face challenges trying to raise additional funds. Non-compliance is likely to result in delisting from HKEX.
The good thing about ESG reporting is that it has been extensively applied elsewhere. This means that it is possible to check what challenges were faced when the reporting standards were introduced there and avoid recurrence.
As we have highlighted already, Hong Kong is not the first to implement ESG reporting guidelines. So, how does its ESG reporting standards compare to others?
Closest to Hong Kong is Singapore, whose exchange, SGX, already initiated reporting guidelines for listed firms. According to SGX, companies are required to have an elaborate method of monitoring and managing ESG issues. Like with HKEX ESG reporting, the role of reporting according to SGX is largely vested on the board of directors. Furthermore, the listed companies must make sustainability part of their strategic planning and operations.
The main difference between HKEX ESG reporting and SGX is that the latter does not specify the framework that companies can use. This means that companies are free to use the models they want, from the GRI framework to the SASB framework. In Hong Kong, the preferred model is the social framework and social indicators.
After Hong Kong released the rules for ESG reporting, the focus has now shifted to individual companies. So, here are some of the most important things to consider for correct ESG reporting:
· Involving the board of management from the start of the ESG reporting process.
· Comprehensive understanding of the company’s operating procedures. This should help to identify sustainability opportunities and risks from ESG reporting.
· Setting of the right goals and objectives for ESG reporting. This should include identifying key performance indicators to regularly check and confirm that the process is progressing well.
· Install an appropriate system for data gathering and analysis. This will be crucial to ensure that the information gathered is valid.
· Create ESG reports which are correct. The aim is not only to highlight the positive aspects of a company but to correctly capture the business’s position at present and imagine it in the future. So, if there are negative considerations, make sure also to highlight them in the report.
The idea of sustainable changes is seen as an enabler for drawing more companies into responsible firms’ brackets. This is why HKEX had to adopt ESG reporting guidelines that listed firms have to follow. Therefore, whether you are a board member, manage or target to invest in a Hong Kong company, it is prudent to take note of the ESG reporting rules and comply. Remember that you can always simplify ESG reporting by using appropriate environment management software, such as Diginex, which helps automate the process.
HKEX has added more demanding requirements for environmental, social, and governance (ESG) reporting for all the listed companies
With a good environmental management system, it becomes easy to understand the concept of sustainability and coordinate various activities efficiently