HKEX tightens ESG disclosure rules for listed companies
Corporate reporting of ESG activities expected to rise
HONG KONG Exchanges and Clearing (HKEX) is responding to increasing demand for information disclosure on environmental, social, and governance (ESG) activities of listed companies by requiring more comprehensive and uniform ESG reporting that are more in line with global standards.
The new requirements which took effect on January 1, effectively pushes each listed company to develop their own ESG strategy and produce a detailed ESG report that is in line with international trends. The new requirements also provide practical tools for preparation of the ESG report.
The new requirements are in the form of amendments to the HKEX Corporate Governance Code and related Listing Rules, also known as CG Code. Listed companies can follow those steps and procedures voluntarily, or develop their own procedures in view of their specific circumstances.
At present, the HKEX implements the ESG disclosure regulations on a “comply-or-explain” basis that was initially implemented in January 2017. The new requirements provides a standard template for ESG reports which was not previously available.
The amendments includes the following steps in enhancing ESG disclosure: establishing an ESG working group; understanding the ESG requirements and identifying information gaps in the company; determining the geographical or business boundaries for reporting purpose; assessing stakeholder’s engagement; conducting internal and external materiality assessments; and preparing the ESG report that includes the findings in the above steps.
The HKEX also issued an ESG toolkit which is intended to facilitate the preparation of the ESG report. The ESG toolkit should include information on: stakeholder’s dependence and influence on the listed company; stakeholder group’s identity and profile; stakeholder engagement plan, action plan and contingency plan; post stakeholder engagement action plan and timeline; and materiality and relevance of the information for general disclosures and key performance indicators (KPI).
The first KPI to be disclosed are types of emissions and respective emissions data. This KPI is concerned with air pollution in the locality of a listed company’s operations.
In Hong Kong and the Pearl River Delta, for example, key air pollutants are: nitrogen oxides (NOX), sulphur oxides (SOX) and respiratory suspended particles (RSP, also known as Particulate Matter, PM). These pollutants tend to be generated by motor vehicles, marine vessels, power plants, and industrial and commercial processes locally. NOX and SOX emissions are also generated from cement, construction and textiles industries.
The second KPI that has to be disclosed are greenhouse gas (GHG) emissions. This KPI is concerned with the global warming effect GHG emissions. A listed company needs to identify those operational activities which will result in GHG emissions or removals and classify these activities into direct and indirect emissions.
The majority of GHGs are emitted from fossil fuel consumption and it is likely that most issuers need to consume fossil fuel directly or indirectly to a certain extent. This KPI will be most relevant to issuers with high energy use that are involved in industrial processes such as the manufacture of cement, glass, chemicals or are involved in waste management and forestry.
The third KPI that has to be disclosed are the volume of total hazardous waste produced in tonnes. They include clinical and chemical wastes, as well as inks, dyes, paint, and lacquers products wastes, etc. Hong Kong has legislation regulating chemical wastes, clinical wastes, and hazardous chemicals. Hazardous wastes are usually collected by specialized contractors who can provide information on the quantity removed.
The fourth KPI involves total non-hazardous waste produced (in tonnes). Wastes can be divided into construction/demolition wastes, commercial wastes, residential/domestic wastes, grease trap wastes and garden wastes. Issuers should report metric tonnes, split by management method – landfill, recycled, incineration.
The fifth KPI involves the description of measures to mitigate emissions and results achieved. The sixth KPI involves description of how hazardous and non-hazardous wastes are handled, reduction initiatives and results achieved. For this KPI, issuers should set targets or policies for the reduction of wastes, and disclose measures employed to reduce wastes and the results.