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Nov/Dec 19 Legal Update

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ESG: HKEX consultation conclusions; reports review; investor trends

(i) HKEX published consultation conclusions on “Review of ESG Reporting Guide and related Listing Rules”.  (Click: Press release; full report; Listing Rule amendments)

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.

We must not lose sight of the board’s general roles in ESG, under current requirements (e.g. in risk management). (HKEX updated FAQs series 17 and 18: summary in our May 19 legal update).

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
  • “Social”
    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.

(ii) HKEX also published a report on its review of issuers’ ESG reporting (Click: press release, full report). There are noteworthy HKEX observations, for preparing your next report.

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


(iii) SFC published its Survey on Integrating Environmental, Social and Governance (ESG) Factors and Climate Risks in Asset Management. (Click: Press release; full report)

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


(i) HKEX issued a new semi-annual Listed Issuer Regulation Newsletter.

This issue addresses HKEX efforts in combatting “shell companies”, and observations on the new de-listing regime. These do not fall in our focus areas.

However, it also contains useful guidance on disclosure of counterparties and their beneficial owners.

(Effective Oct 19) amended Listing Rules require disclosure of identity of counterparties in “notifiable transactions”.

In addition, HKEX would “highly encourage” disclosure of the identity of the beneficial owners, particularly where the counterparties are investment holding vehicles.  This is because information in companies’ documents must be meaningful, accurate and complete in all material respects.

HKEX also reminds issuers of other new disclosure requirements in annual reports.

What you should know/do:

  • Examples: should disclose beneficial owners
    — Continuing relationships with counterparties (e.g. joint venture partners)
    — Subscribers of securities, who would hold a material interest in the listed issuer


(ii) SFC issued a statement reminding listed issuers as to disclosure obligations, focusing on information about counterparties and, (where appropriate) their controllers or beneficial owners. (Click: Press release, full statement)

The underlying principle is to ensure investors have the necessary information to make an informed assessment of the issuer’s activities.

In particular, SFC is concerned as to the use of special purpose vehicles to conceal identities as part of wider schemes to engage in market misconduct.

In parallel, it also issued a circular to asset managers on the expected conduct, in the context of dubious arrangements.

These echo recurring regulator concerns in this area (including HKEX, addressed above).

SFC gave useful examples where the identity of beneficial owners should be disclosed.

What you should know/do:

Examples: beneficial owners should be disclosed

  • Acquisitions/disposals; capital injection in targets; joint ventures
  • Identity of borrower
    — company is lending money of a material amount
  • Identity of allottees
     company issuing shares/convertible bonds
  • Information on grantees of share options
     NOT generic disclosure as “eligible grantees”
  • Use of private fund structures
     No commercial rationale

This Update in PDF