ESG in Practice

ESG has been, and will continue to be, an evolutionary journey. Issuers have to continuously learn and improve in order to meet stakeholders' increasing expectations. To encourage peer learning and modelling, we sought to highlight good ESG practices adopted by some of our issuers in this section. The focus areas, namely (i) board and governance, (ii) materiality assessment, (iii) climate change and TCFD, (iv) stakeholder engagement and (v) social issues, align with the focus in our 2019 ESG consultation, and are selected with reference to major international sustainability reporting frameworks and feedback from stakeholders.

Mandating climate-related disclosures aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) framework by 2025 across relevant sectors is one of the priorities of the Green and Sustainable Finance Cross-Agency Steering Group. Against this backdrop, we will prioritise board governance and climate-related disclosures when reviewing our ESG reporting regime going forward.

The examples are selected based on inputs from the SFC's Public Shareholders Group, the Hong Kong Institute of Certified Public Accountants and feedback received in our stakeholders' engagement. Not all of the examples are relevant for all companies and all circumstances, and issuers should not “copy and paste” the language in their reports to avoid boilerplate language and ineffective reporting that lacks substance and meaningful information. Each example provides an illustration of where the company has thought about and demonstrates how to enhance the value of their disclosures. Highlighting aspects of good reporting by a particular entity should not be considered as an evaluation of that entity's report as a whole. The examples are intended to serve as a conduit to highlight good practice, and push for further improvements in the quality and usefulness of disclosures.

We will update the focus areas and examples from time to time to reflect the latest ESG regulatory concerns and developments, as well as potential improvement areas for our issuers' ESG practices.

Board and governance

Integrating material ESG issues into a company's strategy can contribute to better risk management, leading to long-term resilience and sustainability of the business. Strong board oversight and management of ESG issues boosts investors' confidence in the company and improve the company's access to capital. Investors have increasing demand on information about the systems, governance structure and company culture that lies beneath how the company manages material ESG issues. The ESG Reporting Guide requires issuers to disclose the issuer's ESG governance, including the board's oversight of ESG issues; its ESG management approach and strategy; and how the board reviews progress made against ESG-related goals and targets.

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Materiality assessment

Materiality is the threshold at which ESG issues determined by the board are sufficiently important to investors and other stakeholders that they should be reported. A comprehensive description of a company's processes for identifying and assessing material ESG risks demonstrates the legitimacy and genuineness of the company's efforts in addressing investors' concerns with ESG issues. The ESG Reporting Guide requires issuers to outline the process and criteria adopted to identify material ESG issues, and the process and results of stakeholder engagement conducted (if any).

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Climate change and TCFD

With climate change being a global concern and focus, investors are demanding more information on how climate issues and related policy change could impact an issuer's assets, business operations and financials. Our ESG Reporting Guide has incorporated key elements of the TCFD recommendations on climate-related financial disclosures, such as requiring board's oversight of ESG matters, targets for certain environmental KPIs and disclosure of impact of significant climate-related issues. In light of the direction towards mandatory TCFD-aligned climate-related disclosures by 2025, issuers are encouraged to start reporting in accordance with the TCFD recommendations the soonest.

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Stakeholder engagement

Issuers are encouraged to engage their stakeholders proactively in order to stay ahead and better prepare themselves to deal with the risks or threats that various ESG issues could bring about. The ESG Reporting Guide requires a description of significant stakeholders identified, and the process and results of the issuer's stakeholder engagement. As different stakeholder groups have different interests and perspectives, it is a good practice to disclose the key concerns together with the issuer's responses according to stakeholder groups. Feedback from stakeholder engagement is not confined only to ESG issues, as the exercise may cover aspects relating to the company's business and operation.

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Social issues

Impacts of social issues on a company's operation can be of no less importance than environmental risks. Under the ESG Reporting Guide, aspects under both “Social” and “Environmental” are subject to the same “comply-or-explain” basis. Issuers should consider their own business value chain and identify social aspects that are material to them for disclosure. In this section, we have chosen practices in relation to supply chain (see Aspect B5 of the ESG Reporting Guide) and product quality control (Aspect B6 of the ESG Reporting Guide) for illustrative purposes.

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