Curated experts in sustainability fields who can thoroughly elaborate their view based on their accumulated knowledge and experience
Partner-Head of Asset Management & ESG
Dentons Hong Kong LLP
Vivien Teu is a corporate and commercial lawyer with more than 20 years of experience in Asia. She is a qualified solicitor in Hong Kong, Singapore, and Malaysia as well as England and Wales, specializing in the areas of asset management, investment funds, and financial services. Vivien has developed a unique focus in her practice on corporate and regulatory issues around environmental, social, and governance matters including sustainable finance and responsible investment.
A recipient of the Thought Leader of the Year – North Asia award at the inaugural Thomson Reuters Asian Legal Business Women in Law Awards 2021, Vivien currently holds the following positions - Partner, Head of Asset Management & ESG at Dentons Hong Kong, a member of the Dentons Global ESG Steering Group and as Global Sustainable Finance Lead. Aside from her legal practice, she is an Advisory Board Member of the Asia Venture Philanthropy Network, a Hong Kong Board Director of EMpower – The Emerging Markets Foundation, and a member of the B Lab Asia Regional Standards Advisory Group.
In April 2023, the Stock Exchange of Hong Kong Limited (“SEHK”) published a consultation paper (the “Consultation Paper”) which contains amendments to the Hong Kong Exchanges and Clearing Limited (“HKEX”) Listing Rules to require all SEHK-listed issuers to comply with enhanced climate-related disclosures in their ESG reports. The proposed amendments are intended to be largely aligned with the IFRS’ International Sustainability Standards Board Climate-related Disclosures Standard (“ISSB Climate Standard”), the Exposure Draft of which was published in March 2022 and the official adopted version issued on 26 June 2023.
Alongside the ISSB Climate Standard, the ISSB also published the General Requirements for Disclosure of Sustainability-related Financial Information, being the first two Sustainability Disclosure Standards adopted by the IFRS. These are broadly welcomed by the market as bringing a new chapter for corporate sustainability reporting, with the expectation to be adopted across jurisdictions and capital markets as a global baseline for sustainability-related financial reporting. The ISSB Climate Standard has been developed with the framework of the recommendations of the Taskforce for Climate-related Financial Disclosures (“TCFD”) and the IFRS will take over from the TCFD in further global efforts to drive the practice and quality of corporate disclosures on climate-related risks and opportunities.
HKEX had significantly upgraded the ESG reporting requirements for SEHK-listed companies since July 2020, in particular imposing mandatory disclosure on board engagement on material ESG risks and issues, introduced "comply or explain" requirements on environmental aspects including reporting on greenhouse gas emissions and climate-related issues and impact. In this connection, significant materials and guidance have since been provided to the market to encourage and facilitate issuers to make TCFD-aligned disclosures. Further, Hong Kong Green and Sustainable Finance Cross Agency Steering Group expressed clear policy intent to mandate TCFD by 2025 and for the financial sector to manage climate risks and accelerate the growth of green and sustainable finance in Hong Kong. Along with Hong Kong government's 2050 net zero carbon goal that would require industry-wide transformation to a low-carbon economy, climate-related disclosure requirements are of critical importance to support organizations, both corporates and financiers, to manage climate risks and opportunities and move towards concrete and strategic transition pathways.
Mandating climate-related disclosures is also key for Hong Kong's position as a leading capital markets and sustainable finance hub, aligning and keeping high standards for issuers along with international developments of the ISSB standards for sustainability reporting. When the final requirements are introduced following the end of the public consultation, this will be a new chapter for corporate issuers on climate-related financial disclosures in annual ESG reporting along its annual financial reporting.
Overview of the enhanced requirements
It is proposed for the enhanced climate-related disclosures to be introduced through a new Part D to ESG Reporting Guide of the HKEX Listing Rules, while the ESG Reporting Guide would be elevated to ESG Reporting Code, Part D to be mandatory. The new requirements are expected to be adopted in 2024, while certain requirements shall be under interim provisions for the first two reporting years following the proposed effective date of 1 January 2024, such as disclosures on financial effects of climate-related risks and opportunities, scope 3 emissions (further discussed below) and certain cross-industry metrics.
Mirroring the principles in the ISSB Climate Standard and TCFD, the proposed requirements focus on four key areas covering governance; strategy; risk management; metrics and target.
Governance – issuers will be required to disclose their governance process, controls and procedures for overseeing and managing, specifically, climate-related risks and opportunities; this includes (among others) disclosure on appropriate skills and competencies available to oversee strategies to respond to climate-related risks and opportunities, the management’s role in assessing and managing climate-related risks and opportunities and how the board’s oversight is exercised, and whether dedicated controls and procedures are applied to climate-related risks and opportunities;
Strategy – the existing ESG Reporting Guide already requires issuer to generally disclose the board’s ESG management of ESG issues and describe the significant climate-related issues which have impacted or may impact the issuer and the relevant actions taken to manage them, while the proposed requirements more specifically expect issuers to consider the different nature and types of climate-related risks which may impact the issuer, in particular highlighting the need to consider such potential risks on a forward-looking basis over the short, medium or long term, and also to consider what such risks would mean or could impact the issuer’s business model, strategy, cash flows, finance and cost of capital, over the following disclosure requirements:
the issuer’s assessment of material climate-related risks and, where appropriate, opportunities, and their impact on issuer’s business operations, business model and strategy, which should cover expected time horizon for identified physical or transition risks to have material impact on the issuer and the link to its strategic planning horizons and capital allocation plans;
the issuer’s transition plans in response to climate-related risks and opportunities identified, including changes to the business models and strategies, any adaptation and mitigation efforts, and any climate-related targets set, including in particular any greenhouse gas emission targets and the extent to which the target relies on the use of carbon credits (whether through carbon removal or emission avoidance);
the resilience of issuer’s strategies (including its business model) and operations to climate-related changes, developments or uncertainties, including disclosure on the extent of assets and business activities at risk and the implications for its strategy and business model (such as how it would need to respond to the anticipated effects during transition to a low-carbon economy, access to finance and cost of capital, products and services shift or reskilling of workforce), which shall be assessed using a method of climate-related scenario analysis that is commensurate with the issuer’s circumstances; and
the current (quantitative where material) and anticipated (qualitative) financial effects of climate-related risks and opportunities (if any) (including financial position, financial performance and cash flows), with an expressed expectation that issuers should account for climate-related matters in its financial statements in accordance with financial reporting standards as applicable;
Risk management – while there is currently no specific requirement to disclose the risk management process on climate-related risks, the proposed enhanced requirement will mandate issuers to disclose the process to identify, assess and manage climate-related risks, including how it assesses likelihood and effects of such risks, how climate-related risks are prioritized relative to other risks (including use of risk-assessment tools), monitored and managed in the overall risk management process, and where applicable, any process used to identify, assess and manage climate-related opportunities (if any);
Metrics and target – the existing ESG Reporting Guide require issuers to disclose emissions, waste, energy consumption and other environment key performance indicators on a “comply or explain basis”, whereas under the proposed requirements, issuers are expected to disclose specific items, key ones being:
scope 1, scope 2 and scope 3 greenhouse gas emissions1 - disclosure of scope 3 emissions should include categories of significant upstream and downstream activities along the value chain that have been included, the basis of selection and measurement for including or excluding in its value chain, while during the interim period of two years, issues who have not yet disclose required information on scope 3 emissions should disclose information to enable investors to understand the issuer’s upstream or downstream activities along the value chain and its work plan, progress and timetable for making the required disclosure;
the amount and percentage of assets or business activities vulnerable to physical and transition risks, respectively, as well as the amount and percentage of assets or business activities aligned with climate-related opportunities, and the amount of capital expenditure, financing or investment deployed towards climate-related risks and opportunities, with a two-year interim period for complying with quantitative disclosure on each of these;
if applicable for issuers who maintain an internal carbon price, to disclose the internal carbon price and how that was applied in the issuer’s decision-making;
how climate-related considerations are factored into executive remuneration policy.
Implications for corporate governance, strategy and the sustainable finance landscape
The enhanced disclosures are likely to significantly impact the way issuers govern their business and corporate finance considerations. As issuers are required to provide more detailed information on their climate-related risks and opportunities, including how the issuer controls and manages climate related risks, their impact on the issuers’ business operations, business model and strategy, along with clear expectation for setting climate-related targets and transition planning, these should lead issuers to consider the resilience and long-term viability of assets and business models, the ability to generate returns in a sustainable manner that mitigates or reduces climate-related risks, towards operating in a low-carbon economy.
In our view, the clear expectation for disclosure of transition plans in response to climate-related risks and opportunities identified, including changes to business models and strategies, any adaptation and mitigation efforts, and climate-related targets will mark an important shift from corporate sustainability reporting on historical emissions data removed from corporate strategy, towards forward-looking GHG emissions target setting as part of corporate strategic planning. Such target setting by issuers, and cumulatively across the economic system and through the value chain, are necessary towards Hong Kong's and global target-setting and net zero commitments. We suggest issuers should describe or disclose how their target setting relates to its transition plan and strategy, how the transition changes or efforts are intended to meet the GHG emission targets, and although it is not mandatory, issuers should consider or aim to adopt where possible targets that are science-based or Paris-aligned2. This could be described as an additional basis or rationale for targets set or a net zero commitment (if any) of the organization, for issuers to make concrete and ambitious target-setting but to safeguard against greenwashing.
The enhanced climate disclosure requirements may also help to drive innovation in climate-related technologies and business models. Companies that can demonstrate their ability to manage climate risks and capitalize on climate-related opportunities may be more attractive to investors and customers, which could create incentives for companies to develop new products and services that are better suited to a low-carbon future. As it stands, the proposed requirements are expected to be effective from 1 January 2025, issuers should already be considering and preparing to comply with the proposed requirements.
More comprehensive and reliable information on climate risks to investors are likely to lead to more informed investment decisions, which, in turn, could drive capital towards companies that are better positioned to manage climate risks and take advantage of climate-related opportunities. By requiring companies to provide more detailed and reliable information on their climate-related risks and opportunities, HKEX is promoting greater transparency and accountability in the corporate sector, which could ultimately help to drive more sustainable business practices and investment decisions.
With more robust transition planning in issuers’ corporate strategy and assessment of how climate-related risks and opportunities could impact the issuer’s business model, strategy, cash flows, finance and cost of capital, this could lay foundation and drive more use of sustainable financing instruments such as green or sustainability-linked loans, green or sustainable trade or supply chain financing, or issuance of green or sustainability-linked bonds, and specifically transition finance. These will support Hong Kong’s continued efforts to promote sustainability across the corporate finance, broader banking sector and financial markets.
Partner, Head of Asset Management & ESG
Dentons Hong Kong LLP
Dentons Global ESG Steering - Sustainable Finance Working Group Lead
With thanks to Tracy Lei, Associate, Dentons Hong Kong LLP, for her contribution to this article
In the continued “mainstreaming” of corporate environmental, social, and governance (ESG) performance, let us focus on “G” as we start the new year. Hong Kong, one of the earliest jurisdictions of listed companies to have introduced ESG reporting and its requirements, has undergone several rounds of updates since the first iteration in 2013. Under the revised ESG Reporting Guide issued in July 2020, one of the key enhancements is a focus on board governance and oversight of ESG issues. The enhanced ESG disclosure framework requires mandatory reporting on the board’s engagement and oversight on ESG matters and “comply or explain” disclosure on four environmental aspects and eight social aspects, with each aspect covering general disclosures on the issuer’s policies and/or compliance with laws and regulations (as applicable), and key performance indicators (“KPIs”).
ESG Practice Disclosure On 25 November 2022, the Hong Kong Stock Exchange published its 2022 Analysis of ESG Practice Disclosure (“2022 Analysis”). The 2022 Analysis presented significant improvement for disclosures on board oversight and management of ESG issues, from a review of 400 sample ESG reports published for the financial year which ended on 30 June 2021, 31 December 2021, and 31 March 2022. However, issuers were reminded about the requirement to also disclose how the board monitors the progress of ESG-related goals and targets set, and that failure to comply with this requirement would constitute a breach of the Listing Rules.
Issuers are recommended to disclose information on the relevant processes, controls, and procedures used to monitor and manage ESG matters, which may involve elaboration on the following:
relevant expertise or skills of the board, or the designated committee or management-level positions, for effective oversight on ESG matters
interaction between the board and designated committee or the management-level positions, including the frequency and form of reporting to the board
frequency of the board’s discussion on ESG issues
internal and external resources and expertise available for the ESG management process
alignment of ESG governance with an issuer’s business strategy
On specific environmental or social aspects, the 2022 Analysis emphasized climate disclosures, TCFD -aligned climate reporting and adoption of TCFD recommendations, whereas issuers were recommended to enhance disclosures on supply chain risk management and green procurement practices.
Board Responsibility and Oversight on ESG Issues As a background, under the enhanced ESG Reporting Guide, all listed issuers are required to include in the annual ESG report a mandatory statement on the board’s oversight of ESG issues, the board’s ESG management approach and strategy, including the process to evaluate, prioritize, and manage material on ESG issues, how the board reviews progress made against ESG-related goals and targets, and how these relate to the issuer’s businesses. The ESG Report must also disclose how the company addresses materiality in ESG factors, describe any stakeholder engagement and the significant stakeholders identified, and the process and results of the issuer’s stakeholder engagement.
As a matter of corporate governance and according to the Listing Rules , the Board of Directors is collectively responsible for the
management and operations of the company. This would include the responsibility to address ESG issues, as well as to discharge the disclosure obligations of the company. A company’s internal governance mechanism to supervise the management of ESG issues may vary and there is no standard practice. However, under the ESG Reporting Guide, a listed company is required to disclose the company’s ESG governance structure to allow investors and stakeholders to assess the company’s commitment and efforts in ESG matters and the quality of its ESG governance.
Furthermore, as elaborated in the “Leadership Role and Accountability in ESG – Guide for Board and Directors” published by HKEX in March 2020, the board of directors of a company should take leadership and accountability in:
overseeing the assessment of the company’s environmental and social impacts
understanding the potential impact and related risks of ESG issues on the company’s operating model
aligning with what investors and regulators expect and require
enforcing a materiality assessment and reporting process to ensure actions are well followed through and implemented
promoting a top-down culture to ensure ESG considerations are part of the business decision-making process
Pursuant to the most recent corporate governance review and the updated Corporate Governance Code published in December 2021 (“CG Update”), the linkage between corporate governance and ESG and the board’s responsibility for effective governance and oversight of ESG matters were emphasized, with the stated intention to drive effective corporate governance practices and ESG measures beyond a box-ticking exercise. Effective for the financial year commencing on or after 1 January 2022, listed companies are required to publish ESG reports at the same time as the publication of the annual reports.
Stakeholder Engagement and Communication with Shareholders Another key CG Update relevant to ESG governance is the new mandatory disclosure and annual review of the issuer’s shareholders’ communication policy and stakeholder engagement. This should cover the channels for shareholders to communicate their views on matters affecting the issuer, steps taken to solicit and understand the views of shareholders and stakeholders, and a statement of the issuer’s review of the implementation and effectiveness of the shareholders’ communication policy conducted within the year and including how it concludes. The intention is to introduce effective two-way communication for companies to actively solicit feedback from shareholders and engage with shareholders and other stakeholders (including employees, customers, suppliers, and investors) to achieve long-term success. There is also an upgrade to the Code Provision requiring issuers to establish a whistleblowing policy and system for stakeholders (employees, customers, and suppliers) to raise concerns in confidence and anonymity with the audit committee of the issuer (or any designated committee comprising mostly of independent non-executive directors) about possible improprieties in any matter related to the issuer.
Corporate Purpose, Values, and Strategy for Long-Term Sustainability Emphasizing the link between corporate governance and ESG, the CG Update stipulates that:
corporate governance provides the framework within which the board forms their decisions and builds their business
the entire board should be focused on creating long-term sustainable growth for shareholders and delivering long-term values to all stakeholders
an effective corporate governance structure allows issuers to have a better understanding to evaluate and manage risks and opportunities (including environmental and social risks and opportunities)
Remarkably, the CG Update introduced a new Code Provision on corporate strategy, business model, and culture. This new code requires the board to align the company’s culture with its purpose, values, and strategy, to instil and continually reinforce the organization’s values of acting lawfully, ethically, and responsibly. Culture is explained as intertwined with the company’s purpose which it seeks to achieve and the strategy to deliver long-term success, and when aligned with strategy and leadership, results in a shared purpose and long-term sustainability.
Board directors of listed companies are therefore expected to establish and take into account corporate purpose, values, strategy, and culture as part of corporate governance and oversight of ESG risks and opportunities. In this regard, addressing climate-related risks are the policy’s priority and is considered urgent. This should be regarded as one part of an issuer’s overall corporate governance and management of ESG issues, along with other environmental or social aspects that are material to the issuer’s businesses.
On risk management and internal control, the CG Update also highlights that the board is responsible for evaluating risks which include material ESG risks in achieving the issuer’s strategic objectives, and ensuring appropriate and effective risk management and internal control systems are in place. In addition, the board is also responsible for the annual review of the issuer’s ESG performance and report.
Directors’ Duties With such clear expectations on the board’s responsibility on ESG issues, directors of listed companies should be mindful of the discharge of directors’ duties in this regard.
Under the Hong Kong Companies Ordinance (Cap. 622) which has codified the directors’ statutory duty of care, a director must exercise reasonable care, skill, and diligence, specifically about the general knowledge, skills, and experience that may reasonably be expected of a person carrying out the functions concerning the company, and the general knowledge, skills, and experience that the director must have.
The Hong Kong Companies Registry (“CR”) has published “A Guide on Directors’ Duties” which outlines the general principles of directors’ duties based on case law and statute. All directors of Hong Kong companies are advised to read the Guide which is made accessible from the CR, the Hong Kong Exchanges and Clearing Limited (“HKEx”), the Securities & Futures Commission (“SFC”), the Official Receiver’s Office, and the Hong Kong Monetary Authority (“HKMA”).
Among the principles covered in the said guide, ‘Principle 1’ states the duty to act in good faith for the benefit of the company as a whole, while ‘Principle 2’ refers to the duty to use powers for a proper purpose for the benefit of the members as a whole. These are elaborated to require a director of a company to act in good faith in the best interests of the company, meaning that a director must uphold a duty to act in the interests of all its shareholders, present and future. Furthermore, in carrying out this duty, a director must, as much as possible, regard the need to achieve outcomes that are fair between its members, and that the primary and substantial purpose of the exercise of a director’s powers must be for the benefit of the company.
As noted above, the updated Corporate Governance Code emphasizes the responsibility of the board for effective governance and oversight of ESG matters and further states that the entire board should focus on creating long-term sustainable growth for shareholders and delivering long-term values to all stakeholders. The board should also work on developing an effective corporate governance structure that allows issuers to have a better understanding to evaluate and manage risks and opportunities including environmental and social risks and opportunities.
Other than the listed companies, the Companies Ordinance mandates all registered companies in Hong Kong (unless exempted) to prepare an annual directors’ report which, among other requirements, “must contain particulars of any other matter that is material for the members’ appreciation of the state of the company’s affairs and the disclosure of which will not, in the directors’ opinion, be harmful to the business of the company”. The directors’ report should contain a business review section which includes a description of the company’s principal risks and uncertainties, details of important events affecting the company that has occurred within the financial year, and an indication of likely future development in the company’s business. Furthermore, the business review must include, to the extent necessary for an understanding of the development, performance, or position of the company’s business, including:
an analysis using financial key performance indicators (defined to mean “factors by reference to which the development performance or position of the company’s business can be measured effectively”)
a discussion on the company’s environmental policies and performance, and the company’s compliance with the relevant laws and regulations that have a significant impact on the company
an account of the company’s key relationships with its employees, customers and suppliers, and others that have significant impacts on the company and on which the company’s success depends
While companies that meet certain specified criteria may qualify for simplified reporting and be exempted from the said requirement for business review (for example, private companies with revenue or assets below certain thresholds), the requirements are generally applicable to public companies. In any case, such requirements of the Companies Ordinance provide a solid reference for directors of Hong Kong companies in considering appropriate management approaches to address business risks including environmental and social factors in corporate business activities. For smaller companies, it is perhaps never too early to establish a solid governance structure as a foundation for growth and organizational purpose, values, and strategy.