SFi’s HKEX ESG Recommendations & Final Consultation Outcome

On 18 December 2019, the Stock Exchange of Hong Kong Limited (HKEx) published its Consultation Conclusions: Review of the Environmental, Social and Governance Reporting Guide and Related Listing Rules with respect to its May 2019 Consultation Paper, the consultation period for which closed on 19 July 2019.  The Consultation Conclusions were published together with the findings of HKEx’s latest review of Environmental, Social and Governance Practice Disclosure (ESG Disclosure Review).

SFi reviewed the final consultation conclusions against our recommendations delivered to HKEX in our SFi response letter. See our detailed review below.

1. Shortened Timeframe for ESG Reporting & Cut Printing

Original HKEX proposals	SFi Recommendation	Consultation Outcome
Shorten the deadline to disclose ESG reports to align with publication of annual reports (i.e. within three months (GEM issuers) or four months (Main Board issuers) after the financial year-end).	Require issuers to publish the ESG report at the same time as their financial statements and update the Main Board Listing Rule 13.91 and GEM Listing Rule 17.103 to reflect this. Such a requirement for ESG disclosure in annual reports would improve the integration of ESG into financial reporting.	Proceed with shortening the deadline for publication of ESG reports with a revised timeframe of within 5 months from the financial year-end date.
Cut Printing
Printed ESG Report not required (unless responding to shareholders’ specific request), with a notification of online publication.	Printed formats of the ESG report does not contribute to additional tangible value for the ESG reporting itself and instead contributes to an unnecessary environmental footprint.	Original HKEX proposal adopted.

2. Introduced Mandatory Disclosure Requirements (“MDR”) to cover a) Board's Role, b) Reporting Principles and c) Reporting Boundaries

Board's Role
ORIGINAL HKEX PROPOSALS	SFi RECOMMENDATION	CONSULTATION OUTCOME
Mandatory Disclosure Requirement on board’s statement covering: - Board’s oversight of ESG issues. - The process used to identify, evaluate and manage material ESG-related issues (including risks to the issuer’s businesses); - Board’s ESG management approach, strategy, priorities and goals/targets; and - How the board reviews progress made against ESG-related goals and targets.	We agree it is important for the board to have oversight of ESG issues and that they should be involved in identifying, evaluating and managing ESG-related issues. However, we also believe integrating both financial and non-financial performance requires leadership and support from the board and senior management. HKEX should clarify the respective responsibilities of both the board and senior management. In addition, HKEX’s should incorporate these views into the HKEX Corporate Governance Code – currently the boards responsibilities are listed as financial reporting, auditing, general risk management, internal control and delegation. Beyond the disclosure requested of the board, the board should work to understand how sustainability is tied to business strategy and model. Boards are in a unique position to connect sustainability with corporate purpose and strategy, and should work with management to go beyond material ESG risks to define the broader universe of risks and the stakeholders involved.	Proceed with requiring disclosure of board statement covering all original listed items, with revised wordings to provide clarity.
Reporting Principles
ORIGINAL HKEX PROPOSALS	SFi RECOMMENDATION	CONSULTATION OUTCOME
Mandatory Disclosure Requirement on how the issuer has applied the Reporting Principles in the preparation of the ESG report. Amend the Reporting Principles on “materiality” to make it clear that materiality of ESG issues is to be determined by the board, and that the issuer must disclose a description of significant stakeholders identified, process and results of the issuer’s stakeholder engagement, and criteria for selection of material ESG factors. Amend Reporting Principles on “quantitative” to: - Require disclosure of standards, methods, assumptions, calculation tools, conversation factor sources for energy/emissions consumption. - Consistency: clarify KPIs for historical data must be measurable, targets can be expressed by way of directional statements or quantitative descriptions.	We agree there is a lack of disclosure on how reporting principles are applied in the issuers' reports and support the MDR requiring an explanation regarding this. We believe integrating both financial and non-financial performance requires leadership and support from both the board and senior management also - management should identify the material issues and the board has a role to play in challenging an appropriate level of rigor and attention to the needs of a broader universe of stakeholders, critical to driving shareholder values, that enable prioritisation of and allocation of resources to ESG matters that are material to the business. We agree with proposals to amend the Reporting Principles to require information on the standards, methods, assumptions, and source of conversion factors, but believe HKEX needs to be explicit and to recommend specific methods for calculating KPIs.	Issuers should follow all four Reporting Principles in preparing ESG reports (materiality, quantitative, consistency, balance). It will be mandatory to disclose: • Materiality: (i) Process to identify and criteria for the selection of material ESG factors; (ii) a description of significant stakeholders identified; and the stakeholder engagement process and results (if any) Quantitative: disclose standards, methodologies, assumptions, calculation tools used, source of conversation factors for emissions/energy reporting. Consistency: any changes to methods or key performance indicators (KPIs).
Reporting Boundary
ORIGINAL HKEX PROPOSALS	SFi RECOMMENDATION	CONSULTATION OUTCOME
Mandatory Disclosure Requirement of the ESG’s report boundary, disclosing process used to identify specific entities or operations included in the report.	We agree issuers should disclose the process used to identify the specific entities or operations included in companies ESG reports, but issuers should also state entities and operations excluded from the report scope.	Original proposal adopted. Proceed with requiring explanation of reporting boundary. Mandatory to disclose the process used to identify the specific entities or operations that are included in the ESG report, and explain any change in scope.

3. Disclosure of climate-related issues

Climate Change
ORIGINAL HKEX PROPOSALS	SFi RECOMMENDATION	CONSULTATION OUTCOME
Introduce a new Aspect A4 requiring: Disclosure of policies on measures to: - identify and mitigate significant climate-related issues that have impacted, or may impact the issuer; and - a KPI requiring description of the climate-related issues that have or may impact the issuer and actions to manage them.	We agree with the proposed changes to introduce a new Aspect A4 requiring disclosure of policies and a KPI on measures to identify and mitigate significant climate-related issues. However, HKEX should strengthen all climate-related language that informs investors of the true gravity of the climate crisis.	Original proposal adopted. Introduce a new Aspect related to climate change (“comply or explain”) comprising: • Policies on identification and mitigation of significant climate-related issues that have impacted and may impact the issuer; and • A KPI description of the significant climate-related issues that have impacted and may impact the issuer, and the actions taken to manage them.

4. Introduced targets for environmental KPIs

ORIGINAL HKEX PROPOSALS	SFi RECOMMENDATION	CONSULTATION OUTCOME
Amend environmental KPIs to require disclosure of a description of targets set regarding emissions, energy use and water efficiency, waste reduction. etc., and steps taken to achieve them.	Yes, we agree, however capacity is a challenge for medium and small companies with large companies better positioned to absorb the associated costs of ESG reporting. To avoid this becoming a "box ticking" exercise for small to medium companies we propose HKEX set out a capacity building plan to support so these companies can leverage resources to improve the quality of ESG reporting	Original proposal adopted. Require disclosure of a description of targets set regarding emissions, energy use and water efficiency, waste reduction, etc. and steps taken to achieve them.

5. Require Scope 1 and Scope 2 greenhouse gas emissions (“GHG”) to be disclosed

ORIGINAL HKEX PROPOSALS	SFi RECOMMENDATION	CONSULTATION OUTCOME
Revise an environmental KPI to include scope 1 and 2 GHG emissions.	Yes, we agree. While not all companies will have Scope 1 emissions from operations due to the nature of their business, they will have Scope 2 emissions which is indirect energy emissions created by the business purchasing electricity, heating, cooling and steam consumed.	Original proposal adopted.

6. Upgraded the disclosure obligation of social KPIs

ORIGINAL HKEX PROPOSALS	SFi RECOMMENDATION	CONSULTATION OUTCOME
Upgrade the disclosure obligation of all social KPIs to “comply or explain”.	We agree with the proposed amendments and stress that Environment and Social considerations are interconnected, with social KPIs no less important than environmental and vice versa. HKEX should note the increased focus on the social dimension of ESG and note the increased spotlight on human rights and labour standards (Liechtenstein Initiative).	Original proposal adopted. Upgrade of the disclosure obligation of all social KPIs to “comply or explain”.
Upgrade the disclosure obligation of all social KPIs to “comply or explain”. Revising a KPI to clarify “employment types should include “full and part-time” staff.	Yes, agree.	Original proposal adopted with clarification that “full and part-time” staff are non-exhaustive examples of employment types.
Amend the KPI on fatalities to require disclosure of the number and rate of work-related fatalities occurred in each of the 3 years including the reporting year.	Yes, agree - disclosure of the number and rate of work-related fatalities is best practice in many jurisdictions. In addition to disclosing against this KPI, the report should outline how this risk is being managed and make recommendations as to how improvements can be made in respect of each fatality.	Original proposal adopted.
Introduce supply chain management KPIs including: - Description of practices used to identify environmental and social risks along the supply chain, how they are implemented and monitored. - Description of practices used to promote environmentally preferable products and services when selecting suppliers.	Yes, agree.	Original proposal adopted.
Introduce a new KPI requiring disclosure of anti-corruption training provided to directors and staff.	Yes, we agree - in addition disclosure of number of staff disciplined or dismissed due to non-compliance with anti-corruption policy/policies should be introduced and disclosure of costs of fines, penalties or settlements in relation to corruption.	Original proposal adopted.

7. Encouragement to seek independent assurance

ORIGINAL HKEX PROPOSALS	SFi RECOMMENDATION	CONSULTATION OUTCOME
Encouraging issuer’s to seek independent assurance to strengthen credibility of ESG information disclosed.	We agree with the proposed recommendations but highly encourage HKEX to reference standards such as ISAE3000 and AA1000 used internationally for assurance purposes. At a minimum, HKEX should require companies to have internal ESG audits conducted. In addition, HKEX should outline why companies should seek assurance in the Guide and the benefits associated.	Original proposal adopted. Encourage issuers to seek independent assurance to strengthen the credibility of disclosed ESG information. Requirement to clearly describe the level, scope and processes adopted for assurance in the ESG report where independent assurance is obtained.