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ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORTING FOR COMPANIES LISTED ON

THE HONG KONG STOCK EXCHANGE

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Hong Kong / Shanghai / Beijing / Yangon

www.charltonslaw.com


INDEX

What is ESG reporting? 1

Growing importance 1

Reporting period 3

Director involvement 3

ESG Guide 3

Working Party 4

Stakeholder engagement 4

Key ESG Subject Areas 4

Report-scoping 8

International guidelines and standards 8

© Charltons ii

The Hong Kong Stock Exchange (the Exchange) published its Environmental, Social and Governance Reporting Guide (the ESG Guide) in August 2012 following a public consultation and the ESG Guide is now incorporated in the Exchange’s Listing Rules as Appendix 27 of the Main Board Listing Rules and Appendix 20 to the GEM Listing Rules.

The rationale for the introduction of the ESG Guide was to introduce ESG issues to Hong Kong issuers, raise ESG awareness, encourage issuers to start ESG reporting and bring ESG disclosure of Hong Kong issuers closer to international practices.

What is ESG reporting?

Corporate social responsibility (CSR), which includes environmental, social and governance (ESG) issues, is an increasingly important theme for businesses. A key driver behind the adoption of ESG practices and reporting has been the growth of responsible investment as more investors incorporate ESG criteria into their valuations and investment strategies. In essence, ESG requires companies to take responsibility for their impact on society and the environment.

CSR includes different ESG issues such as corporate governance, environmental protection, labour practices, community involvement, consumer issues, anti-corruption and supply chain management. The list is neither definitive nor exhaustive as ESG issues may vary from place to place and from industry to industry. Also, ESG priorities may shift over time.

A company may disclose non-financial ESG information relevant to its business in a report in order to address CSR. Such report may be referred to with various names such as “corporate social responsibility report”, “corporate citizenship report”, “sustainability report” and “ESG report”.

Growing importance

There is a solid business case for issuers to make ESG disclosure. Companies increasingly recognize the economic influence of external parameters, including ESG or sustainability matters. ESG reporting therefore provides companies with a framework to help corporations identify and track ESG issues.

Moreover, ESG performance and reporting is considered beneficial to companies in terms of enhanced brand value, greater employee motivation, better risk management, higher management efficiency and more potential organizational growth.

CLP Holdings makes a good example. CLP was the first Hong Kong company to publish annual environmental and safety reports back in 1997. The Director of CLP, Jeanne Ng, talked about the benefits of making consistent sustainability disclosure. “It spurs continual operational performance improvement – once you commit to a target publicly there is pressure to meet it and even where there are no targets, external stakeholders will ask and push us to think about improvement,” she says. “It also informs our stakeholders of our difficulties as well as our strengths and hopefully builds trust among our stakeholders both internally and externally.”

Investors increasingly include ESG criteria when making investment decisions, a trend noted in a number of reviews.[1] This is reflected in the emergence of various sustainability indices, for example, the Hang Seng Corporate Sustainability Index. ESG reports offer investors and relevant stakeholders a better picture of the company’s business and their environmental and social impact which, as mentioned earlier, can influence the company’s financial position directly or indirectly.

A degree of peer pressure is emerging. According to a survey conducted by KPMG in 2013, 93% of the world’s largest 250 companies now publish sustainability reports.[2] Many exchanges are introducing different measures to encourage or require ESG reporting, such as the London Stock Exchange, New York Stock Exchange, Australian Securities Exchange and the Mainland stock exchanges.

Examples of Jurisdictions with Mandatory ESG Reporting Requirements include the following:

Countries / Regulations
EU / Accounting Directives 78/660/EEC and 83/349/EEC amendments:
Enhanced ESG disclosure by companies employing > 500 people.
PRC / Companies Law: states that companies must bear social responsibility
A series of “Green Regulations” came into force in 2008
AU / Corporations Act 2001: compulsory product disclosure statement regarding ESG considerations
ASX Listing Rules: Revised Corporate Governance Principles and Recommendations – comply or explain regime
US (NYSE) / SEC Regulation S-K: Issuers must disclose material impact of environmental laws
NYSE Euronext: offers issuers access to a database of objective and transparent ESG information that helps companies benchmark their extra-financial policies and practices
SG / Energy Conservation Act 2012: Requires large companies to report on energy use.
UK / LSE Corporate Governance – A Practical Guide (2004)
Companies Act 2006: UK-incorporated issuers must provide in its directors’ report information about ESG matters

A Voluntary Regime for Hong Kong

Adoption of the ESG Guide is currently voluntary: MB Listing Rule 13.91 provides:

13.91 Issuers are encouraged to include information set out in Appendix 27 in the annual report regarding the same period covered in the annual report, or as a separate report.”

Issuers choosing to adopt the ESG Guide should do so for financial years ending after 31 December 2012.

Although ESG reporting is not compulsory under the Listing Rules, the Exchange has announced plans to escalate the voluntary obligation to a “comply or explain” mechanism by 2015 and a consultation on this is expected to commence in the first half of 2015. This would mean that issuers who do not report on ESG would be required to give considered reasons for not doing so in their annual reports.

Hong Kong incorporated companies (Hong Kong companies) are in any event already subject to higher ESG disclosure requirements under the new Companies Ordinance (Cap. 622) which came into effect in March 2014. This requires Hong Kong companies to disclose certain ESG matters in a “Business Review” section of their Directors’ Report.

The ESG Guide sets out what should be disclosed under each of four ESG subject areas: Workplace Quality, Environmental Protection, Operating Practices and Community Involvement.

The ESG Guide is intended primarily for issuers who are not familiar with ESG issues and are looking for a starting point to begin ESG reporting. A higher level of ESG reporting based on international guidance and standards may be adopted; the Exchange strongly recommends that issuers adopt international guidelines instead of the ESG Guidelines if they are able to do so. International guidelines that issuers may consider include: Global Reporting Initiative’s Sustainability Reporting Guide, the Carbon Disclosure Project, and the KPIs for ESG – A Guidelines for the Integration of ESG into Financial Analysis and Corporate Valuation (version 3.0) published by the Society of Investment Professionals in Germany.

Reporting period

ESG disclosure can be included in the annual report for the same period covered by the annual report. Alternatively, issuers can include the information in a separate report which need not be issued at the same time, or cover the same period, as the annual report. The Exchange however encourages issuers to report on the same period as for their annual reports (Paragaph 4 of Appendix 27). The report can be published in printed form or on the issuer’s website.

Director involvement

The issuer’s board of directors should be primarily responsible for the preparation of ESG reports, although the compilation of the report may be delegated to employees or a committee that reports to the board.

ESG Guide

General steps in preparing an ESG report include establishing a working team, engaging stakeholders, conducting a materiality assessment, defining the desired reporting boundary, collecting data internally and externally and writing the ESG report.

Working party

Issuers are recommended to set up an internal working party or CSR committee with sufficient understanding of ESG to assess its performance.

Stakeholder engagement

Issuers should engage with their stakeholders when determining material aspects and Key Performing Indicators (KPIs) to be reported on. Stakeholders are parties that have interests in, or are affected by the decisions and activities of issuers, such as shareholders, business partners, employees, suppliers, sub-contractors, consumers, regulators and the public. Stakeholder engagement can be conducted through meetings, conferences, workshops, advisory committees, round-table discussions, focus groups, questionnaires, web-based forums etc.

Appendix 27 suggests that an ESG report may disclose:

·  issuers’ stakeholders and the basis for their identification;

·  the activities arranged to engage stakeholders, the objectives and how it responded to their views; and

·  a mechanism for stakeholders to provide feedback.

Key ESG Subject Areas

The ESG Guide sets out four key subject areas for reporting:

A.  Workplace Quality

B.  Environmental Protection

C.  Operating Practices

D.  Community Involvement

Corporate governance is not included as it is dealt with separately in the Corporate Governance Code in Appendix 14 of the Main Board Listing Rules and Appendix 15 of the GEM Listing Rules.

Each of the above areas is divided into three sections:

1)  Aspect(s) – ESG aspects for each area;

2)  General disclosure – general disclosure recommendations; and

3)  KPIs – disclosure that issuers can make to measure its performance under each area.

The table below sets out a summary of the ESG Guide’s reporting recommendations.

Area A Working Quality
Aspect A1: Working conditions
General Disclosure Recommendations / Information on policies and compliance with matters relating to compensation and dismissal, recruitment and promotion, working hours, rest periods, diversity and other benefits and welfare.
KPIs / Total workforce and employee turnover rate by categories.
Aspect A2: Health and safety
General Disclosure Recommendations / Information on policies and compliance with matters relating to provision of a safe working environment and protecting employees from occupational hazards.
KPIs / Information on fatality number and rate, lost days due to work injury and occupational health and safety measures.
Aspect A3: Development and training
General Disclosure Recommendations / Information on policies for improving employees’ knowledge and skills.
KPIs / Information on training activities provided and training hours completed by each employee.
Aspect A4: Labour standards
General Disclosure Recommendations / Information on policies and compliance with matters relating to prevention of child or forced labour.
KPIs / Information on measures to avoid child and forced labour and to eliminate those practices when discovered
Area B Environmental Protection
Aspect B1: Emissions
General Disclosure Recommendations / Information on policies and compliance with matters relating to air and greenhouse gas emissions, discharges into water and land, generation of hazardous and nonhazardous wastes, etc.
KPIs / Information on emission types and data, amounts of greenhouse gas emissions, hazardous waste produced and non-hazardous waste produced measures to mitigate emissions and handling procedures for hazardous waste and non-hazardous waste.
Aspect B2: Use of resources
General Disclosure Recommendations / Information on policies relating to efficient use of resources including energy, water and other raw materials.
KPIs / Information on energy and water consumption, energy use efficiency initiatives, water efficiency initiatives and total packaging material used.
Aspect B3: The environmental and natural resources
General Disclosure Recommendations / Information on policies relating to minimizing the operation’s significant impact on the environment and natural resources.
KPIs / Information on significant impacts of activities on the environment and natural resources.
Area C Operating Practices
Aspect C1: Supply chain management
General Disclosure / Information on policies relating to risk management of supply chain.
KPIs / Information on number of suppliers by geographical region and practices relating to engaging suppliers.
Aspect C2: Product responsibility
General Disclosure Recommendations / Information on policies and compliance with matters relating to health and safety, advertising, labelling, privacy and methods of redress.
KPIs / Information on product recalls, complaints, protection of intellectual property rights, quality assurance process and consumer data protection and privacy policies.
Aspect C3: Anti-corruption
General Disclosure Recommendations / Information on policies and compliance with matters relating to bribery, extortion, fraud and money laundering.
KPIs / Information on cases regarding corrupt practices, preventive measures and whistleblowing procedures.
Area D Community Involvement
Aspect D1: Community investment
General Disclosure Recommendations / Information on policies to understand the needs of the community in which the issuer operates and ensure the issuer’s activities take into account the community’s interests.
KPIs / Information on areas of contribution such as education, labour needs and culture etc. and the resources allocated to such areas.

The ESG Guide published by the Exchange provides only a brief framework as a first step guidance for issuers. The Business Environment Council has compiled a list of questions that investors are likely to ask when evaluating performance of a company and categorise them according to the ESG Guide.

A)  Work Place Quality

•  Has your company had any issues or complaints related to working conditions?

•  How do you retain top talent and ensure knowledge management within your organisation?

•  Has your company violated any laws or regulations related to health, safety and labour standards?

B)  Environmental Protection

•  Has your company previously had any incidents related to environmental spills or accusations related to environmental pollution?

•  Is your company’s energy and/or resource consumption significantly larger than that of your peers in the same industry?

C)  Operating Practice

•  Has your company been accused of corruption or had any fines or penalties assessed related to corruption?

•  Do you have significant customer-facing activities and customer data collection policies?

•  Do your peers have programmes in place to monitor environmental and social impacts throughout the supply chain?

D)  Community Involvement

•  What are your community or social impacts and activities?

Report-scoping

Since the ESG Guide is designed to help issuers start ESG disclosure and move towards the adoption of international best practice, it allows issuers considerable.

The Exchange does not expect listed issuers to report on all their operations from the start. They may prioritise those areas, aspects and KPIs that are relevant to their business and those having material environmental and social impact. Definitions are not provided for each KPI in the ESG Guide. Issuers are therefore encouraged to explain how the KPIs are calculated and include information that is necessary for interpreting the KPIs.