Hong Kong SAR: Round-up of latest ESG announcements and developments this Autumn

Hong Kong Stock Exchange

The Hong Kong Stock Exchange (SEHK) announced at COP26 last month that it has joined the Glasgow Financial Alliance for Net Zero (GFANZ) and the Net Zero Financial Service Providers Alliance (NZFSPA) as part of its ongoing commitment to the long-term sustainable development of global financial markets.

In November 2021, SEHK:

• published Guidance on Climate Disclosures to listed issuers to facilitate TCFD-aligned reporting;
• published an analysis of IPO applicants’ corporate governance and ESG practices in 2020/2021; and
• announced the launch of a new centralised ESG educational platform – the ESG Academy.

In December 2021, the SEHK also:

• published the conclusions to its April 2021 consultation paper which considered a range of topics such as board independence and gender diversity;
• published a practical Net-Zero Guide for Business to help guide companies in developing a pathway to net zero; and
• announced a partnership with leading ESG data providers to display SEHK-listed companies’ ESG metrics.

Guidance on Climate Disclosures

Since July 2020, ESG reporting required under Appendix 27 of the Listing Rules has incorporated certain TCFD recommendations, such as requiring board oversight of ESG matters, targets for certain environmental KPIs and disclosure of the impact of significant climate-related issues. As the goal is to achieve mandatory TCFD-aligned climate-related disclosures by no later than 2025, the SEHK is encouraging listed issuers to start reporting in accordance with the TCFD recommendations soon. The Guidance on Climate Disclosures aims to provide practical guidelines to help issuers comply with the TCFD disclosure recommendations.

ESG disclosure in IPO prospectuses

The SEHK published the “Analysis of IPO applicants’ corporate governance and ESG practice disclosure in 2020/2021” that reviews IPO applicants’ practices on corporate governance, board diversity and other ESG matters. The SEHK evaluated the prospectuses of new applicants seeking a primary listing on SEHK between July 2020 and June 2021 (totalling 121 applicants) and also tracked progress made by newly-listed issuers on diversity by reviewing their corporate governance reports. In the report, several notable points are:

• INED over-boarding – The SEHK explained that, since June 2021, it has adopted a stringent approach in requesting IPO applicants to consider replacing any over-boarding INED and has not accepted any IPO applicant with an over-boarding INED. To note, “over-boarding of an INED” means the person holds seven or more listed company directorships.
• Board diversity - Since May 2019, IPO applicants with a single-gender board are required to set targets to achieve board gender diversity and disclose such targets in their prospectus. The SEHK noted that the percentage of applicants with one-gender boards has dropped from 30% in 2019 to 21% in 2020, with a further reduction to 12% in the first half of 2021. The SEHK recommends applicants prioritise achieving board gender diversity. On a related point, the SEHK has decided to adopt its earlier proposal and require IPO applicants which will submit their listing applications on or after 1 July 2022 to have diverse gender boards, as discussed below.
• Achievement of ESG targets – The SEHK indicated that it will take follow-up action in checking an applicant’s progress in achieving the ESG commitments disclosed in prospectuses and the disclosures of their progress in corporate governance reports. The SEHK will take follow-up action if such undertakings or commitments made in the prospectus are not met. The SEHK requires issuers to explain and include considered reasons in their corporate governance reports for any failure to meet diversity commitments.

Conclusions to the Review of the Corporate Governance Code and Related Listing Rules

The SEHK published the conclusions to the consultation paper on “Review of Corporate Governance Code and Related Listing Rules” that reviewed a range of topics including board independence, gender diversity and ESG reporting timelines. Key changes are:

• Board independence - For Long Serving INEDs (that is, INEDs serving more than 9 years): (i) in the shareholder circular that a Long Serving INED will be nominated for re-election, the board will need to enhance the explanation on why that INED is still considered independent and should be re-elected (for example, the factors considered, the process and the board or nomination committee’s discussion in coming to that view); and (ii) if all the INEDs on the board are Long Serving INEDs, the issuer needs to appoint a new INED at the next AGM and disclose the tenure of each Long Serving INED on a named basis in the AGM circular.
• Gender diversity - The SEHK has made it clear that a “single-gender board is not a diverse board”. The SEHK will require: (a) listed issuers with one-gender boards to appoint at least one director of a different gender no later than 31 December 2024; and (b) issuers with a commitment in their prospectus regarding the appointment of directors of a different gender to fulfil their commitment as disclosed. IPO applicants with single-gender boards must identify a director of a different gender, whose appointment will be effective upon listing, for any listing application filed on or after 1 July 2022. All issuers must review their board diversity policies on an annual basis. At the workforce level, for financial years commencing on or after 1 January 2022, listed issuers will need to disclose: (x) gender ratios in the workforce (including senior management); (y) any plans or measurable objectives the issuer has set for achieving gender diversity; and (z) any mitigating factors or circumstances which make achieving gender diversity across the workforce (including senior management) more challenging or less relevant.
• ESG Reports - Issuers are to publish ESG reports at the same time as the publication of annual reports.

The amendments will take effect on 1 January 2022, subject to relevant implementation periods and timelines. The SEHK has issued a new “Corporate Governance Guide for Boards and Directors" to assist issuers and IPO applicants to implement the new requirements.

Net-Zero Guide for Business

The Net-Zero Guide aims to provide support to companies to facilitate their net-zero transition. The Guide introduces the essential steps for businesses to develop a pathway to net zero, aiming to help companies understand their greenhouse gas emissions in terms of where they are now, where they want to get to, and how they can get there.

ESG Academy

The SEHK announced the launch of a new centralised ESG educational platform, the ESG Academy, which is to help stakeholders understand the evolving ESG requirements.

STAGE Product Repository – Equities

On 2 December 2021, the SEHK announced that it has introduced a new equities section on STAGE which will display ESG metrics and ratings of Hong Kong-listed companies, published by leading ESG data providers. The section will initially cover over 600 companies listed on SEHK. The objective is to increase access and transparency on sustainable financial products, to both institutional and retail investors, as well as provide a consolidated view of ESG ratings from different providers, enabling investors to compare companies across sectors and sources when making their investment decisions.

Hong Kong Monetary Authority

The Hong Kong Monetary Authority (HKMA) issued a statement at COP26 last month in support of the Central Banks and Supervisors Network for Greening the Financial System (NGFS) Glasgow Declaration, which reiterates the willingness to contribute to the global response required to meet the objectives of the Paris Agreement, and the commitment to expand and strengthen collective efforts towards greening the financial system.

On 3 November 2021, the IFC and HKMA announced their new climate finance initiative and on 8 December 2021, the HKMA published guidance (in the form of a circular and an annex) for banks on supporting the transition to carbon neutrality.

IFC and HKMA’s new climate finance initiative

On 3 November 2021, the IFC announced that it will partner with the HKMA and another institutional investor to create a new US$3 billion global platform for climate-smart investment aligned with the Paris Agreement. The new program, Managed Co-Lending Portfolio Program (MCPP) One Planet, combines institutional investor contributions with the IFC’s own funds to scale up climate-responsible financing for private companies in emerging markets.

HKMA Guidance for Banks on Supporting Carbon Transition

In July 2021, the HKMA consulted the banking industry on a draft Supervisory Policy Manual module which sets out the key elements of effective climate risk management. On 8 December 2021, following discussions with the banking industry on climate risk management, the HKMA put together a range of practices which banks are currently following which support the transition to carbon neutrality. The HKMA notes that some banks have developed comprehensive climate strategies and are currently implementing them in relation to their Hong Kong operations. The HKMA is therefore strongly encouraging banks to incorporate the practices it highlights in the circular and annex in order to strengthen their green and sustainability programmes. Elements of the practices covered in the circular and annex may then be incorporated into the HKMA’s greenness assessment framework.

The guidance is split into four topic areas, and the HKMA suggests that banks develop metrics to monitor their adoption of the practices, as well as keeping the board informed of progress made. The four topic areas are:

• Reducing GHG emissions of banks’ own operations – examples include the institution of metrics and KPIs to measure initiatives, such as energy-saving/water-use and waste reduction measures within offices and in-house carbon reduction schemes.
• Reducing financed emissions through portfolio alignment – for example, allocating funds to support low carbon transition and reducing the amount of funds available to high carbon activities. The HKMA also highlights the use of tools and methodologies from third party organisations to assess their portfolio alignments.
• Helping clients to transition – for example, providing financing with pricing which encourages client’s transformation to a greener model to clients. Additional practices, such as assisting clients to obtain green certification and assessment and increasing overall client awareness of climate-related issues and opportunities, are also encouraged.
• Promoting collective efforts to assist the economy to net zero transition – for example, adopting widely recognised principles such as the TCFD, as well as collaborating with policymakers, and global and regional banking sector initiatives. 

Green and Sustainable Finance Cross-Agency Steering Group

During COP26, the Steering Group reaffirmed its commitment to develop Hong Kong as a green finance hub and focused on the following three positive outcomes of COP:

• The publication by the IFRS Foundation of the prototype for the climate disclosure standard – stressing the importance of a comprehensive global baseline for climate disclosure standards providing clear regulatory expectations and improve the transparency, comparability and reliability of corporate disclosures.
• The publication of the Common Ground Taxonomy report by the International Platform on Sustainable Finance.
• Advances in building a worldwide carbon market including voluntary carbon market – there was a recognition of the opportunities for the Guangdong-Hong Kong-Macao Greater Bay Area and, under the Carbon Market Work Stream, the Steering Group will work towards developing Hong Kong into a regional carbon trading centre.

The International Sustainability Standards Board

The new International Sustainability Standards Board (ISSB) created under the IFRS umbrella, tasked with developing a "comprehensive global baseline of high-quality sustainability disclosure standards to meet investors' information needs" has been welcomed by the Hong Kong regulators.

Ashley Alders, the Chair of the IOSCO Board and CEO of the SFC, has indicated that the Hong Kong regulators have identified the ISSB new standards (to be developed) as a potential key aspect of a sustainable finance strategy. In July 2021, the Steering Group indicated its support in adopting the ISSB new standard. Therefore, it is anticipated that the adoption in Hong Kong of the ISSB new standards is a matter of when (and not whether).