Decoding the consultation conclusions to the HKEx's ESG Guide
In December 2015, the Hong Kong Stock Exchange ("HKEx") released the consultation conclusions regarding requirements for Environmental, Social and Governance ("ESG") reporting for listed companies, set out in Appendix 27 of the Main Board Listing Rules and Appendix 20 of GEM Rules. In the consultation conclusions, the HKEx confirmed the following requirements:
- Timeline: Listed companies must disclose ESG information on an annual basis for the same period covered in their annual reports, starting from financial years commencing on or after 1 January 2016.
- Responsibility: Boards have overall responsibility for their companies' ESG strategy and reporting. They are also responsible for evaluating and determining their companies' ESG-related risks and for ensuring that appropriate and effective ESG risk management and internal control systems are in place. Management should report to Boards on the effectiveness of these systems.
- Reporting format: An ESG report may be presented as information in the company’s annual report, in a separate report or on its website. Whichever format is adopted, the ESG report should be published on the HKEx's website and the company’s website. Where not presented in the company’s annual report, it should publish this information as close as possible to, and in any event no later than three months after, the publication of its annual report.
- Scope of entity: An ESG report should also state which entities in the company’s group and/or which operations have been included in the report. If there is any change in such scope, the company should describe them and explain the reasons for them.
- Reporting principles: Materiality, Quantitative, Balance and Consistency
- Report contents:
• The ESG report should state the company’s approach, strategy, priorities and objectives for the management of ESG and explain how these relate to its business.
• Narratives descriptions of policies and compliance to relevant rules and regulations relating to eleven environmental and social aspects, as well as disclosures of key performance indicators ("KPIs") relating to the environment, on a "comply or explain" basis with effect from financial years commencing on or after 1 January 2016 and 1 January 2017 respectively.
The above requirements indicate the increasing public concern regarding companies' ESG performance in addition to financial and operational performance. ESG reporting can help a company to manage the expectations of its stakeholders, including investors, customers, employees and the wider community, with respect to its ESG performance, communicate any strong aspects of this performance and thereby enhance the level of trust in its brand and its reputation.
Benefits and challenges of ESG and ESG reporting for companies
Effective implementation and reporting of ESG can bring benefits to companies such as by:
- Strengthening their corporate governance and providing better insights into and controls over environmental and social risks;
- Enhancing the level of trust in and reputation of their brands;
- Meeting government, stock exchange and other regulatory requirements;
- Providing improvement fund-raising opportunities in capital markets;
- Increasing customer satisfaction through promoting responsible value chains;
- Improving retention of talent through focusing on employees' growth and development; and
- Creating shared values between the business and its wider community.
Common challenges faced by companies in the implementation and reporting of ESG are:
- Establishing ESG leadership, vision and business practices within the organization;
- Insufficient time and resources for developing an infrastructure for ESG and ESG reporting;
- Lack of in-house expertise for managing and reporting on ESG; and
- Unavailability of ESG data and
- Unsatisfactory ESG performance or reporting, leading to reputational damage.
Recommendations for listed companies
In order to prepare for the upcoming ESG requirements, listed companies should:
- Clearly define roles and responsibilities across the company, including the Board, management, business units and subsidiaries, for ESG reporting;
- Engage stakeholders to understand their concerns and analyse the company's operations to identify ESG impacts and management priorities;
- Formulate relevant ESG management approaches, policies and programmes, and integrate these into business practices;
- Establish KPIs in order to quantify and measure ESG performance; and
- Compare ESG performance over time and with industry peers, and develop strategies and plans for continuous improvement.
Deloitte has a professional Sustainability service team which offers services to clients across the full spectrum of ESG performance including assistance with strategy development, managing ESG risks, developing ESG reporting systems and policies and ESG report-writing, as well as providing independent assurance of ESG information.