Effective on January 1, 2016, the Hong Kong Exchanges and Clearing Limited (HKEx) requires that all Hong Kong-listed companies disclose their environmental, social and governance (ESG) performance. The disclosure process can be time consuming and resource intensive as the company needs to collect structured data on a company-wide scale – often taking months. KPMG recently highlighted that 37% of business leaders feel that the greatest barrier to addressing ESG concerns is limited ESG knowledge and expertise. Keeping up with changing regulation isn't easy, so we thought we'd share some insights on how to simplify your ESG reporting process, and meet the HKEx's requirements.
When it comes to disclosing information, companies must follow the HKEx ESG Reporting Guide, which requires reporting to two levels – 1. Comply or explain (C), 2. Recommended (R).
In responding to increased demand for information disclosure on ESG activities, HKEx requires a more comprehensive and uniform ESG reporting framework that is more in line with global standards. The new requirements – which took effect on January 1, 2019 – forces each listed company to develop their own ESG strategy and produce a detailed ESG report that meets international expectations. The new requirements also provide practical tools for preparation of an ESG report and also a standard template for ESG reports (which were not previously available).
A good ESG report not only boosts the company’s image, but also brings you financial benefits. In recent years, responsible investment (or ESG management) has become an influential component to decision making for fund managers and investors alike. It’s based on the belief that addressing ESG issues will protect and enhance portfolio returns, especially over the longer term as companies with strong ESG profiles may be better positioned for future challenges and experience fewer instances of bribery, corruption, and fraud.
So what’s a good ESG report? It should not just give the numbers without explaining the details – the reader cannot appreciate the context substance of the performance. On the other hand, good ESG reports provide targets on key performance indicators such as carbon emission reduction, as well as an analysis on what the numbers mean for their operational risks, cost savings and business opportunities.
HKEx has issued an ESG Reporting Guide and by adopting and applying the Guide’s reporting principles (including Materiality and Balance) and guidelines on ESG, strategy and governance are still common challenges. Below we’ve outlined the top five challenges facing companies when it comes to ESG reporting:
- ESG risks and relevance are not widely discussed – lack of clear explanation of ESG impacts/risks. This is especially true for Chinese listed companies who have a relatively lower awareness of the ESG concept and the person in charge needs to initiate more internal communications and education to change employees’ mindset.
- There’s very little information on ESG governance and board involvement – an ESG governance structure is not described and board engagement in ESG governance is not clear.
- Which KPIs to be disclosed – there are 12 Environmental KPIs and 20 Social KPIs under the Guide and relevant KPIs vary for different industries.
- Tight timelines – it’s difficult to get timely and accurate performance data as the KPIs involve data from various sources. In addition, HKEx is also proposing a new deadline for publication of ESG reports to align with the publication timeframe of the annual report (ie within four months (Main Board issuers) or three months (GEM issuers) after the year-end date). An experienced language service provider with extensive resources and technology can help overcome these challenges.
- Report forward-looking information – there is often a concern that providing contextual and forward-looking information may expose the company to the threat of litigation. The use of technology, e.g. Linguist AI, can help with content creation as it has the ability to break content into parts, and re-assemble easily.
So now that each of the elements of ESG reporting are part of the mainstream dialogue between the industry and its customers, how we can tackle the challenges discussed above? Listed companies need to take into account three key areas:
- Review the ESG guidelines, ESG toolkit, ESG KPI guidelines and ESG FAQ for further details on the who, what, where and how.
- Visit the ESG section of SEHK's website for additional international guidelines and how to calculate KPIs.
- Look for an expert who has experience with business reporting, sustainability projects, and professional report writers who fully understand HKEx’s ESG requirements. They should also have the capability to deliver the report in a short turnaround. A good partner can help you prepare ESG disclosures which meet HKEx requirements – while saving time and resources.
Interested in knowing more about how SDL can help you prepare your ESG reports? Click here to contact us today.