The Hong Kong Exchanges and Clearing organisation (HKEX) runs Hong Kong’s equity, commodity, fixed income and currency markets. In July last year it introduced its new ESG Reporting Guide. This note looks at these changes and highlights those that may of the greatest salience.
Compliance with the previous HKEX 2013 guidance was entirely voluntary. The new guide is more prescriptive. By 2025, all issuers, both current and prospective, must report in line with the Task Force on Climate-related Financial Disclosure (TCFD) recommendation. This requirement applies to both Main Board and Growth Enterprise Market (GEM) Board listing: the latter aimed at small and medium sized issuers.
The Guidance itself consists of two appendices, Appendix 27 of Main Board Listing Rules and Appendix 20 of GEM Listing Rules. Both divide reporting obligations into mandatory disclosure requirements and those operating on a ‘comply or explain’ basis. The former includes corporate governance and the responsibility of the board for overseeing and managing ESG reporting. It also sets out the reporting principles covering ensuring the setting of numerical and forward looking targets buttressed by relevant and meaningful key performance indicators which must be consistently applied and any changes explained. The ESG Report must be coterminous with the annual financial statements and supplied promptly after the end of the financial year.
There are two sections under the 'comply or explain’ provisions, with their own detailed appendices, covering environmental and social matters. The former includes information regarding emissions, use of resources, environment and natural resources and climate change, while the social section is focused on reporting issues relating to employment and labour practices, operating practices and the community.
The Guide goes beyond simply ESG reporting by requiring the boards of listed firms to take responsibility for ESG management. This may be a challenge for some firms where board, senior executives and shareholders have yet to understand the cultural and ethical importance of ESG.
Key to the new reporting requirements is the expectation that firms will develop and report new KPIs on supply chain management. This important development includes the disclosure of practices used to identify environmental and social risks along the supply chain, and practices used to promote environmentally preferable products and services when selecting suppliers (KPI B5). There are similar important reporting obligations relating to bribery, extortion, fraud and money laundering and also whistle-blowing procedures and how they are implemented and monitored (KPI B7).
These positive changes form part of a pattern across major financial exchanges aimed at improving ESG reporting. Whether these prove effective or operate as simply more corporate ‘boiler-plating’ remains to be seen.