The Hong Kong Exchanges and Clearing Limited (HKEX) updated Guidance Letter GL86-16 for new IPO applicants in July, adding requirements on ESG disclosures. In particular, the Guidance Letter states that “it is important for applicants to put in place mechanisms that enable them to meet the Exchange’s requirements on ESG well in advance so that they are in compliance upon listing.” Before the update, disclosure of ESG risks were broadly being narrated in the “Risk Factors” section, description of some of the key and emerging ESG risks such as climate change, cyber security and infectious diseases, etc. was lacking. To ensure compliance upon listing, applicants now have to make sure all critical management approaches are in place subject to the ESG risks faced by the applicants. The time needed to make this happen will be similar to preparing an annual ESG report.
Alaya Consulting is supportive of HKEX actions on enhancing management of ESG by corporates. This is the natural next step following the more stringent ESG disclosure requirements introduced last year. As a member of the Sustainable Stock Exchange, HKEX is well positioned to benefit from becoming the frontrunner for being an ESG investing hub.
The Guidance Letter also states that “The board of directors of an applicant is collectively responsible for its management and operations, including the establishment of such mechanisms. Directors are expected to be involved in the formulation of such mechanisms and related policies. Applicants are therefore recommended to appoint directors, including independent non-executive directors, as early as possible so that directors can engage in the formulation of the necessary mechanisms and policies on corporate governance and ESG.”
Legal and auditing experts traditionally play a significant role in preparations for listing by new applicants and this update of the Guidance Letter ensures that applicants appoint an ESG expert to advise on compliance on disclosure of environmental and social management approaches. Appointment of directors to ensure ESG compliance and the level of their involvement in formulating management approaches to key ESG topics may pose challenges to listing applicants. Judging from the existing ESG disclosure requirements for issuers, board involvement remains the least touched upon area due to a lack of perceived value from ESG.
As a leading ESG advisory, Alaya has been advising leading listed companies to extract value from ESG reporting, including overhaul of management systems, attainment of improved ESG ratings, inclusion in renowned sustainability indexes, as well as receiving industry accolades for ESG reporting. We are determined to advise listed companies to generate further value from ESG by optimizing their management approaches on material topics and at the same time, bringing positive outcome to both the company and the environment and the community.
The most recent update complements HKEX previous policies on ESG reporting issued in May 2019. To ensure listed companies reach better social and governance performance, the HKEX required new applicants to disclose additional information on a broad diversity policy.