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Refer to Chinese article here.

SFi’s Policy Spotlight Series examines how Hong Kong’s regulatory and policy landscape is changing to encourage and foster sustainable finance.

In this piece we interview Grace Hui, MD, head of green and sustainable finance, Markets and Katherine Ng, MD, chief operating officer and head of policy, Listing Division at Hong Kong Exchanges and Clearing Limited (“HKEX’). We discuss the driving factors for HKEX’s move towards more stringent disclosure requirements, views on corporate-readiness and their vision in 2020. Will the latest changes be enough to raise investor confidence and demand for HKEX-listed securities? Only time will tell.

The rules of the game have changed

HKEX increased the pace of ESG requirements in May 2019 when they published a consultation paper entitled ‘Review of the Environmental, Social and Governance (ESG) Reporting Guide and Related Listing Rules’. The key focus of the consultation was to emphasise the board’s leadership role and accountability in ESG matters.

“It’s been a journey, as a lot of companies started with nothing.The question now is how we can make directors focus on these issues, and how they can meaningfully use ESG to make the company more sustainable and successful,” says Katherine.

On 18 December 2019, HKEX published its conclusions to the consultation, announcing that it will implement the new requirements proposed by the consultation, with modifications reflecting comments received, effective for financial years commencing on or after 1 July 2020. The new requirements will significantly improve Hong Kong’s regulatory framework for ESG governance and disclosure and position the Hong Kong bourse as a pioneer in driving ESG disclosure in Asia.


“We are leading the way in Asia by specifically setting out board’s responsibilities on ESG risks,” Grace says.


Grace’s team oversees HKEX policies in the listed regulation space and inputs into the Exchanges ESG initiatives. Grace says not having a unified ESG market standard presents difficulties for investors and asset managers in terms of how to recognise which issuers are doing a better job. “As a stock exchange, it’s very difficult for us to set a standard unilaterally,” says Grace. Although the EU has moved ahead with a sustainable finance taxonomy she believes it’s binary nature makes it less appropriate for developing countries in Asia. “…corporates are transitioning activities from brown to green and I believe we should find a way to support these corporates too,” says Grace.

Hong Kong Exchanges and Clearing Limited

The Stock Exchange of Hong Kong Limited (the Exchange), is a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX). It operates a range of equity, commodity, fixed income and currency markets. HKEX is a member or signatory of almost 40 initiatives promoting the sustainability and ESG agenda including World Federation of Exchanges Sustainability Principles, Sustainable Stock Exchanges Initiative, Task Force on Climate-related Financial Disclosures – a full list of supporting initiatives can be found online.

Pushing the boundary as a regulator – market feedback

HKEX received over 150 consultation responses from a broad range of respondents, including market practitioners (32), listed companies (30), professional bodies (22), NGO’s (18),  investment managers (17), individuals and others (34). “11% response rate by investment managers is quite decent given investment managers in Asia are generally quieter than their US and UK counterparts. They are finding their voices and becoming engaged. This is all very positive and a marked improvement in engagement from 10 years ago,” says Katherine.

The amendments represent a shift away from “reporting” to “management”. The focus is on board leadership and accountability of ESG. “It’s hard to argue against it. We’re quite clear that not all ESG issues are relevant to all companies, but we want directors to take their responsibility seriously,” says Katherine.

The changes contain a number of significant improvements to Hong Kong’s regulatory framework for ESG governance and disclosure including:

  • Introducing mandatory disclosure requirements to include:

– a board statement setting out the board’s consideration of ESG matters

– the application of the reporting principles ‘materiality’, ‘quantitative’ and ‘consistency’, and

– an explanation of the reporting boundaries used by ESG reports.

  • Requiring disclosure of significant climate-related issues which have impacted, and may impact, the issuer.
  • Amending the Environmental key performance indicators (KPIs) to require disclosure of relevant targets.

  • Upgrading the disclosure obligation of all Social KPIs to ‘comply or explain’.

  • Shortening the deadline for publication of ESG reports to within five months after the financial year-end.

Despite the latest regulation and policy updates, Hong Kong listed companies still lag behind their international peers with regards to ESG integration and continue to push back citing a lack of expertise as an impediment.

“Personally, I was amazed that some respondents said that directors do not have any expertise on ESG and therefore it would be hard to set a strategy for ESG. I don’t think that is acceptable. As directors you are supposed to know how to ask the right questions and to get the right data from management so you can make the right decisions,” Grace says.

Lack of expertise is no longer an excuse

A lack of ESG knowledge is often kicked about as a roadblock preventing action by listed companies. HKEX has taken a pragmatic approach and developed specific guidance material on ESG reporting rules to help directors formulate ESG strategies including:

The material is for listed company directors, but any company – including potential listing applicants can use the guide to assess their ESG risks, learn how to do a materiality assessment and identify what reporting boundaries they should be looking at, noted Grace. “As directors you need to manage all risks including ESG risks. If ESG is material to you then you must acquire the necessary expertise to manage the risks. It is not acceptable for you to brush this under the carpet and pretend nothing happened,” says Katherine. For HKEX this goes beyond just compliance and reporting, this is about a shift in attitude towards ESG. “Part of our training is attitude training. You must take it seriously. Are you going to ask intelligent ESG questions, or are you just going to approve it at the board with a one-minute discussion?” says Katherine.

This type of change cannot be simply mandated. “It is a shift in mentality,” says Katherine.

The team remarks the ESG journey is a bit like cyber security 10 years ago. No one knew much about it nor did all directors have expertise. But you made sure you acquired the appropriate cover. There is a recognition that it’s the smaller companies that will need the help and support to comply, and HKEX’s step-by-step guide will go some way in supporting these issuers. “In terms of helping issuers start the process and start the journey of putting together an ESG report, I believe HKEX has done more than any other regulator,” says Katherine.

Raising investor confidence – playing the long game

It is yet to be seen if the changes, training and guidance for listed companies will shift Hong Kong’s positioning at the global level. The local bourse ranked 32nd among 35 exchanges in 2018, according to a ranking compiled by Sustainable Stock Exchanges Initiative (SSE) – a United Nations initiative. Thailand, Australia and Tokyo all ranked ahead of Hong Kong.

Whether or not one agrees with the ranking methodologies is an entirely different debate. The truth of the matter is investors do and will continue to use such information as a signal of a countries ESG-quality.

HKEX is not put-off by Hong Kong’s current SSE ranking, noting their aim is to create something that is useful to the market and to investors.

“What is important is this change of mindset, that directors have a fiduciary duty to evaluate ESG risks and opportunities,” says Grace.

Many international jurisdictions have rapidly developed initiatives to support and incentivise investment in sustainable business, including those ranked higher on the SSE. There are several driving factors for the updates to HKEX requirements including:

  • ensuring the Listing Rules remain fit for purpose;

  • ensuring they meet stakeholders’ expectations; and

  • align with international best practice.

Feedback received from investors has been encouraging but there is also a desire to ensure companies report quality information over quantity. “Whilst investors want more, they are also realistic, and they want quality over speed,” says Katherine. Issuing consistent and complete ESG data shows investors your commitment as a company and HKEX believes that it will benefit the company in the longer-term – inevitably boosting investor confidence, profitability and sustainability. Investors want to know the company’s direction of travel and how they are managing ESG risks and improving performance against targets. HKEX have taken this onboard and kept issuers focused on ESG risk management, rather than churning out vast amounts of quantitative data.

Ultimately investors will judge companies on the strength and coherence of their ESG strategy, along with the execution of that strategy. For a complete view of investor responses to the HKEX consultation see here, including responses from HSBC, Fidelity International, BlackRock Asset Management North Asia Ltd, State Street and others.

The power of partnerships

Raising investor confidence and improving the quality of companies ESG strategy is possible with strong partnerships and global collaboration. In fact, it is critical in the development of sustainable finance markets. Climate change, investing and financing do not take place within defined borders – these issues cross geographical boundaries. It is important that Hong Kong continues to contribute and learn from the international policy scene.

“We need to work together with other regulators (SFC, HKMA, PBOC, NDRC for example), associations such as SFi, and stakeholders such as investors and asset managers, to see how we can come up with disclosure standards that are broadly acceptable and workable. The point is to enhance the overall level of comparability across all industries,” says Grace.

SFi understands that SFC has worked closely with HKEX in upgrading the ESG Reporting Guide, and the SFC approved the listing rule related changes. The SFC also announced in December 2019 its intention to establish an industry group to exchange views amongst the SFC and experts in environmental and climate risks, as well as sustainable finance. SFi welcomes this development.

Way forward and call to action for investors

HKEX is clear that urgent action from all corporates is necessary to curb global warming and reflect that “addressing climate change is our immediate goal.”

“From an environmental and social perspective, the ultimate goal would be that HKEX can have a positive impact on society and the world at large, making use of our unique position both as a regulator and as a listed corporate.”

No matter how much the Hong Kong regulator pushes for change, HKEX is clear that investors’ must step-up and take responsibility through active engagement with companies. “Private investors can engage with listed corporates as well as pre-IPO companies, education them on why exactly they want to know about their ESG strategy, and why this may be a prerequisite before considering investing in them. These corporates and pre-IPO companies need to understand that the cost of funding or capital will likely go up if they don’t do a better job on their ESG strategy, which will also likely affect the valuation of their shares,” says Grace.

“At the end of the day, HKEX requiring a disclosure is compliance; investors requesting the information allows the company to evaluate what it means to their company’s strategy and future,” says Katherine.



Note: information is subject to change and based on source data from SSE, 2020. Detailed results are found here.

(1)  China: No, however the Guidelines for Establishing the Green Financial System, published in 2016 by the People’s Bank of China together with several ministries and commissions, established a timeline according to which all listed companies in China must disclose environmental information by 2020. In the meantime, companies in China discharging key pollutants must disclose relevant environment information in their annual and interim reports. The country’s Environmental Protection Law, amended in 2015, also requires public disclosure of environmental pollution.

(2)  Japan: No, however if any environmental or social information is deemed to have a remarkable effect on investors’ investment decisions, it must be immediately disclosed. The Exchange requires every listed company to prepare a report on corporate governance, which provides investors with information on corporate governance in a comparable format. (3) UK: Listing rules are set by the regulator, not the LSE. Companies Act 2006 makes greenhouse gas emissions, human rights and diversity data now required within the front half of the annual report.

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