Nov/Dec 19 Legal Update
ESG: HKEX consultation conclusions; reports review; investor trends
It is important to note that the proposals focus on the board’s governance and roles, beyond “technical reporting”. They are broadly the same as the original proposals, but will become effective for financial years commencing on or after 1 July 2020 (instead of Jan).
Key areas that may involve further work include the board’s roles in specified areas; target-setting for “environmental” KPIs; “social” KPIs; and “climate change” disclosure.
While the actual reporting will be done at a later stage, companies need to set up their governance structure, refine relevant policies/systems/processes as soon as possible, enabling the eventual reporting process.
What you should know:
Summary of changes
- Mandatory disclosure of board statement on ESG
— Board oversight of ESG issues
— Board’s ESG management approach and strategy; process used to evaluate, prioritise and manage ESG issues (including risks)
— Board review of progress made against ESG targets; how they relate to the business
- New mandatory disclosure, to explain
— “Reporting principles”: e.g. “materiality”; how are material ESG factors selected?
— “Reporting boundary”: process used to identify entities
- “Environmental” KPIs revised
— E.g. disclosure on targets, and action steps
- (New “Aspect” added) “climate change” disclosure
— Significant climate-related issues that have impacted/may impact issuer
— Mitigation actions
— KPIs upgraded to “comply or explain”
— (New) supply chain management KPIs
— (New) anti-corruption KPI (training to directors and staff)
- Shortened timeframe for ESG reporting
— Within 5 (not 4 as originally proposed) months of year-end
- No printed form of ESG reports
— Where separate ESG report
— Save per shareholder special request
- Encourage independence assurance
What you should do:
Your first action steps include
- Management to perform a gap analysis
- Organize board training, re: rule changes, impact on the company, and investor trends generally (see (iii) below: SFC’s asset managers survey)
- Review governance structure: whether help of board committee needed (e.g. for review of targets)
- Review investor feedback on ESG
HKEX will provide further guidance and FAQs on implementation.
What you should know/do:
In line with the consultation conclusions, HKEX highlighted:
- The need for board-level engagement
- Significance of undertaking a “materiality assessment”
In addition, the followings are noteworthy:
- Every “comply or explain” provision must be addressed: some have omitted to explain, where some provisions are inapplicable to their circumstances
— Non-compliance without giving considered reasons is a breach of the Listing Rule
- Properly determined whether to “comply” or “explain”?
— Some companies chose to “comply” with provisions which do not appear to be relevant to their industries
This is a useful survey on investor trends regarding ESG. A strong interest in ESG among asset management firms surveyed is noted. The findings, summarized below, are useful for your ESG board training.
What you should know:
Summary of key findings
- A strong interest in ESG matters noted, among firms currently active in asset management surveyed
— (83%) considered at least one ESG factor when evaluating a company’s investment potential
— 68% (of the above sub-group) saw ESG factors as a source of financial risk
— Only 35% consistently integrated, instead of on ad hoc basis, ESG factors in investment/ risk management
- But 64% of firms currently active in asset management surveyed plan to strengthen ESG practices in the next two years
- Management of climate risks – SFC will promote this including by developing standards and providing practical guidance
Also in this issue