Hong Kong Stock Exchange (HKEX) has stated in its Analysis that HK companies need to improve their ESG disclosures in the following aspects:
1) Lack of clarity regarding disclosure on the Board’s responsibilities and duties.
2) Lack of specific ESG working group with sufficient ESG knowledge reporting to the board.
3) Lack of both internal and external materiality assessment.
4) Failure to disclose information on compliance with the relevant Laws and Regulations to affirm that the issuer has ensured compliance.
5) Lack of ESG risk identification which can be minimized by a strategic approach to sustainable management.
How can HK issuers prepare for possible updates of the ESG reporting guide, based on the HKEX’s expectations stated above?
Board’s responsibility
Board of Directors is required to demonstrate that it bears the responsibility for ESG strategy and risk management to ensure the internal control is effective enough to meet the targets. Directors are strongly recommended to address specific ESG risks and opportunities, and state the assessment method used by the ESG working group to establish and meet targets concerning ESG.
Determining materiality
Illustrating the overall ways used for prioritizing issuer’s significant economic, environmental and social impacts that have material influence on decisions of stakeholders will become more essential. Senior managers are recommended to conduct an internal materiality assessment to reflect the identification of material issues. To collect stakeholders’ feedback and expectations on material issues, key stakeholders should conduct an external materiality assessment.
Setting targets for environmental KPIs
Issuers should start formulating performance targets on environmental KPIs, and then disclose performance measured in terms of these targets with sufficient details of calculation method, and also report if they have succeeded or failed to meet these targets. Smart data solutions – online data management system and process enhancement – can significantly improve reporting from various locations of operations, compared to manual data collection. By effectively incorporating ESG data collection into the work routine, issuers can provide complete and accurate metrics and calculations in compliance with HKEX standards.
Aligning with TCFD
Issuers may need to assess climate change risks and report the relevant management approach. Using accumulated climate data and financial implications of weather-related operational impacts significantly improve management of risks related to climate-related events, thereby improving the business performance also. HKEX had referred to TCFD disclosure recommendations last December:
- Governance – the Company’s governance policies and procedures related to climate-related risks and opportunities.
- Strategy – the actual and potential impacts of climate-related risks and opportunities on the Company‘s businesses, strategy and financial planning where such information is material.
- Risk Management – how the Company identifies, assesses and manages climate-related risks.
- Metrics and Targets – the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
For further information regarding TCFD recommendation on climate-related risk, check out Alaya’s insights at https://www.alayaconsulting.com.hk/2018/12/28/hkex-refers-to-tcfd-disclosure-recommendations/
