Key Highlights and Recommendations on Dealing with the Latest HKEX ESG Reporting Guide

The Hong Kong Exchanges and Clearing Limited (HKEX) published the "Consultation Conclusions on Review of the Environmental, Social and Governance Reporting Guide and related Listing Rules" on 18 December 2019. The Conclusions provide the details of HKEX responses to the market feedback about the “Consultation Paper on Review of the Environmental, Social and Governance Reporting Guide and related Listing Rules” published on 17 May 2019. Also, it gives the final decision on the proposed changes of the Consultation Paper.

To help you to get well-prepared for the latest Guide, we provide the key highlight and recommendations as below:

1. Effective Date of the Guide

The new Guide will be effective for financial years commencing on or after 1 July 2020.

2. ESG Report Publication Timeframe

The publication timeframe of ESG report is shortened, from publishing ESG report within 3 months after publishing annual report to publishing ESG report within 5 months after the financial year-end.

Recommendation

Please pay attention to the effective date of the Guide when developing ESG report. The following table shows the adoption of the new Guide for companies with different financial year-end. For the reporting companies that are publishing standalone ESG report and may be required to shorten the existing publication timeline, please educate and communicate with the ESG Working Group at least 6 months prior to the applicable ESG report project that are required to meet the new Guide’s publication timeframe. This can make the project resources more well-managed and well-prepared.

3. Mandatory Disclosure Requirements (MDRs) Addition

• Issue a broad statement setting out the board’s governance on ESG.
• Disclose the application of Reporting Principles “materiality”, “quantitative” and “consistency”.
• Explain reporting boundary identification.

Recommendation

The board statement should cover the followings:

• The board’s oversight of ESG issues, including progress of target achievement.
• The board’s management of material ESG issues, including ESG risk management.
• The board’s view of ESG issues relations with the business.

The ESG Working Group of the companies should educate the board about such requirement of board statement. And then the Working Group can discuss with the board to set up an ESG Committee that is empowered by the board. The Committee is responsible for developing ESG plan, implementing ESG, setting performance target, reviewing performance, reporting to the board and so on. Before developing ESG plan, the Committee can do ESG materiality assessment with the board together. ESG issues influence to the financial performance and business operation are the 2 main factors when considering the importance level of ESG issues. After doing materiality assessment, the board and the Committee can do risk assessment on ESG issues so as to find the link between material ESG issues and various levels of ESG risk. When classifying ESG risk, probability of risk occurrence and influence of risk can be adopted.

For disclosing the application of materially reporting principle, the reporting companies are recommended to do stakeholder engagement and materiality assessment to gain an objective analysis to prioritize ESG issues. Common key stakeholders to engage are employee, customer, supplier, investor and so on. The companies can use quantitative methodology like online survey or qualitative methodology like focus group and face-to-face interview.

For disclosing the application of quantitative reporting principle, the reporting companies are required to show the calculation methodology of key performance indicators (KPIs). For example, for greenhouse gas (GHG) emissions accounting, the companies can share the accounting standard or guideline, emission factor reference, etc.

With the adoption of consistency principle, the companies are required to explain the area of disclosure that is inconsistent with the previous report. They can be reporting boundary, GHG accounting boundary, GHG accounting methodology, etc.

When identifying reporting boundary in terms of reporting site or business, the common factors are below:

• Revenue contributed
• Profit margin
• Percentage of ownership
• Future development

4. Comply or Explain Provisions

4.1 Environmental Area

• Add A4 Climate Change as the new environmental aspect.
• Set target in the form of directional statement or quantitative description for material environmental aspects, such as, emissions, energy consumption, water consumption and waste generation. 

Recommendation

To disclose climate change mitigation, the reporting companies can firstly identify the relations between climate change and the business. For instance, do extreme weathers (super typhoon, heat wave, tsunami, etc) affect your business operation? Then, the companies can think who and how to mitigate the impact of the extreme weathers if yes.

The reporting companies can consider setting up directional statement or quantitative description target for material environmental aspects depending on maturity level and available resources. If setting up quantitative target, “SMART” principle including specific, measurable, achievable, relevant and time-bound is suggested to be applied.

4.2 Social Area

• Upgrade all recommended disclosure of Key Performance Indicators (KPIs) to “Comply or Explain” level.
• Add managing ESG risk for the supply chain.
• Add anti-corruption training for directors and staff.

Recommendation

For the reporting companies that do not disclose all social KPIs, please consider to do data analysis after data collection. Together with the result of materiality assessment, the companies can make an objective judgement to decide on disclosing all social KPIs or not. If not, the companies should explain why some social KPIs are not disclosed.

The companies can develop a supplier assessment mechanism that involves relevant ESG issues. Supplier assessment can be conducted internally via inviting the key suppliers to do self-assessment or arranging internal audit team to do onsite assessment. To enhance assessment quality, the companies can consider appointing independent auditing body for help. After assessment, the companies can classify suppliers with different performance level. For the suppliers that perform below average, the companies can request them to make corrective action or remove them from the supplier list.

To maintain corporate governance performance, the companies should provide internal or external anti-corruption training for directors and staff. Training can be taken in the forms of face-to-face workshop or online lecture.

5. Recommended Provisions

5.1 Independent Assurance

Encourage the reporting companies to seek for independent assurance for data credibility enhancement.

Recommendation

It is expected that HKEX will enhance the independent assurance level in the future. The companies can plan to seek for independent auditing body to do gap analysis of data assurance. This can help the companies to get familiarized with the assurance process. Though accreditation is not required for delivering ESG report assurance service at this moment, the companies can consider the service provider’s sustainability-related accreditation, international recognition, project reference, project team competency and company history for choosing the right service provider.

Your Training Options

SGS Academy offers a variety of training courses covering ESG, GRI, sustainability and social systems. Click here to learn more about the courses. Enroll online and enjoy 10% discount.

Enquiry

Please contact Ms. Zonta Yung via Email or WhatsApp at +852 9839 0262 in regard to this recommendation, ESG Reporting Solution and SGS Sustainability services.