The Hong Kong Stock Exchange is set to demand greater disclosure on environment, social and governance issues in what is expected to attract more Western investors to the city.
The rules, which will become effective on July 1, include making boards of directors responsible for environmental, social and governance (ESG), instead of leaving it to a small team led by mid-level executives as is currently the case.
Companies are also required to disclose how climate change will affect their business. They must also have policies on identification and mitigation of significant climate-related issues that may impact their business.
I believe we’ve now entered ESG investing phase 2.0 in Hong Kong"
HKEX initially proposed forcing listed companies to publish statements about ESG-related risks. But the Chamber of Hong Kong Listed Companies, whose members include Tencent and China Mobile, said it wants the exchange to leave disclosure to the discretion of companies.
A recent survey revealed that only 39% of 500 randomly-chosen ESG reports on or before June 30 fully disclosed their environmental key performance indicators under current "comply or explain" regime, according to a study conducted by BDO. The rest either gave incomplete or no disclosure, and failed to give sufficient explanation for them, the accounting firm said.
Only 12% of them spelt out plans to deal with climate-change issues. Only one in five among the 12 per cent have divulged information on actions taken, the study shows.
Still, the new framework is expected to attract Western investors. "This is another major step forward in terms of robustness and transparency, which reflect many leading ESG investors' approaches...I believe we've now entered ESG investing phase 2.0 in Hong Kong," Chaoni Huang, vice president of the Hong Kong Green Finance Association, told Asia Asset Management.
ESG reporting enables companies to identify opportunities to reduce operating costs and grow revenues through sustainable development, better governance and risk mitigation.
Hong Kong's listed companies have now been put on notice, and the race against the clock has started as authorities moved into the next stage of disclosure obligations on ESG reporting.