Hong Kong and HKEX ESG Reporting Requirements and Laws in 2024 - Last Updated: January 2, 2024
As an international financial hub and home to the Hong Kong Stock Exchange (HKEX), Hong Kong is an important region for environmental, social and governance (ESG) laws, regulations, and investor disclosure. In line with other major financial centers like London, Hong Kong and the HKEX are increasingly integrating ESG factors and reporting requirements for listed companies and fund managers. While Hong Kong itself does not have ESG laws, there are three regulatory ESG reporting requirements with both mandatory and "comply or explain" components – one for Hong Kong listed companies, one for investment fund managers, and one for ESG funds.
Hong Kong recently established a Green and Sustainable Finance Cross-Agency Steering Group, a multi-regulator steering group co-lead by the Hong Kong Monetary Authority ("HKMA"), the HKEX, and the Hong Kong Securities and Futures Commission ("SFC"). The goals of this steering group are to:
- Position Hong Kong as a leader in green and sustainable finance
- Develop common green and sustainable finance and investment standards and frameworks
- Support education, career development, and best practice-sharing in Hong Kongs ESG and sustainable investment ecosystem
- Fill key ESG gaps identified by market participants
- Help Hong Kong's financial ecosystem transition towards carbon neutrality, with targets of a 50% emissions reduction by 2035 and net zero by 2050
As the evolution of global, Hong Kong, and HKEX ESG regulations and requirements can be challenging to track, we’ve prepared this guide to summarize the major HKEX reporting requirements, and what they mean for organizations and investors in 2024.
Key Hong Kong and HKEX ESG Reporting Rules and Requirements in 2024
- HKEX ESG Reporting and Disclosure - In 2016, the HKEX introduced a requirement for listed companies to publish annual ESG reports including specified mandatory disclosures, and requiring other disclosures on a comply or explain basis. These requirements were upgraded in 2020 and 2022, partly to steer issuers and reporting toward more TCFD-aligned climate risk disclosure. HKEX’s requirements on ESG reporting are set out in the "ESG Reporting Guide" in Appendix 27 of the Main Board Listing Rules and Appendix 20 to the GEM Listing Rules. Part B of the ESG Reporting Guide sets out mandatory disclosure requirements for ESG reports which require a statement by listed company boards on their approach to ESG management and how they review the company’s progress towards ESG-related targets. A “comply or explain” provision in Part C of the ESG Reporting Guide requires listed companies to disclose reasons for any deviation from, or failure to report on, any provisions. Reasons for not reporting on a comply or explain provision might include confidentiality constraints, lack of ESG materiality, or legal restrictions.
- Hong Kong Securities and Futures Commission (“SFC”) ESG Disclosure - Separate from HKEX, Hong Kong's SFC also implemented ESG requirements for SFC-authorized unit trusts and mutual funds that incorporate ESG factors as their key investment focus and use ESG investment risks and opportunities as their primary investment objective or strategy. See below for further SCF ESG disclosure guidance.
- Hong Kong's Biodiversity Strategy and Action Plan (BSAP) - Hong Kong's BSAP is an action plan designed to enhance biodiversity conservation and support sustainable development in Hong Kong. The first BSAP ran from 2016 to 2021, and partially achieved six of its 20 targets, according to detailed analysis. Future updates to a revised Hong Kong BSAP are expected. While the BSAP does not institute formal ESG reporting obligations, Hong Kong organizations and funds looking to include biodiversity reporting in their ESG disclosure should consider BSAP's original Aichi targets, as well as the newer Kunming-Montreal biodiversity framework.
Hong Kong HKEX ESG Reporting Requirements
HKEX requires specific company-level disclosures from listed Hong Kong entities, including the board's oversight of ESG matters, targets for certain environmental KPIs, and disclosure of the impact of significant climate-related issues, risks, and opportunities
Unless exempted, all registered companies in Hong Kong subject to the Companies Ordinance (CO) must prepare an annual director's report that, per Section 388(3) , 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," including material ESG issues.
To comply with these ESG disclosure requirements, companies should include a business review section that outlines:
- Material company issues, risks, uncertainties, opportunities, and other considerations - which could include material ESG or climate risk topics
- Key business KPIs and financial performance indicators
- A discussion of the company's environmental policies and performance
- A discussion on the company’s s compliance with the relevant laws and regulations that have a significant impact on the company
- Information about the company's key relationships with stakeholders (employees, suppliers, etc.) that have a material impact on the company
- An overview of the company's corporate governance, which could include ESG governance
Hong Kong companies that meet certain exemption criteria (like private companies below a certain annual revenue threshold) do not have to disclose this information. This guidance is generally applicable to companies publicly listed on the HKEX.
Additionally, companies listed on the HKEX are mandated to disclose:
Required HKEX ESG Governance Disclosure
- The board's oversight of ESG issues
- The board's approach to ESG strategy and management
- The organizations ESG targets and goals, and quantitative indicators of progress toward achieving those goals
Additional HKEX ESG disclosure falls under "comply or explain" information on four environmental and eight social ESG areas:
Required HKEX ESG Environmental Disclosure
- GHG emissions
- Resource and energy usage
- Environmental performance
- Climate change and climate risk
Required HKEX ESG Social Disclosure
- Employment
- Employee health and safety (EHS)
- Employee development and training
- Labor standards
- Supply chain management
- Product responsibility
- Anti-corruption
- Community investment
The HKEx also requires listed issuers to disclose how they apply the reporting principles of “materiality,” “quantitative,” and “consistency” within their ESG reporting and disclosure. The fourth principle of “balance” (i.e., unbiased information) should be self-evident from the issuer's ESG report contents and data.
SCF ESG Fund and Investment Reporting Requirements
SCF requires ESG funds to include ESG-related information in their offering documents, as well as disclose how the fund's ESG strategy is measured and monitored, what methodologies, assumptions, and ESG data sources are used, at least annually.
In October 2020, Hong Kong's SFC published a consultation paper on the “Management and Disclosure of Climate-related Risks by Fund Managers”, recognizing the disclosure value and potential financial risks climate change presents for businesses and investments. In the consultation paper, the SFC proposed amending its Fund Manager Code of Conduct to require fund managers to consider climate-related risks in their investment and risk management processes, make appropriate disclosures to meet investors’ growing demand for ESG and climate risk information, and combat “greenwashing”.
Following this initial consultation paper, the SFC proposed ESG disclosure requirements across four key investment themes:
- Governance
- Investment management
- Risk management
- ESG and climate risk disclosure
This guidance was further amended in June 2021 by the SFC’s issue of its "Circular to management companies of SFC-authorised unit trusts and mutual funds –ESG funds", which sets out guidelines on enhanced disclosures for funds that incorporate ESG factors as a key investment focus. The circular imposed a new requirement (effective January 1, 2022) for ESG funds to conduct and disclose periodic assessment and reporting of how ESG factors are incorporated into their strategy, risk management, and investor communications. These assessments are now due yearly (annually), and should provide comparative analysis vs. previous period assessments. The SFC also maintains a publicly accessible central database of all SFC-authorised ESG Funds on its website.
In a regulated ESG funds' offering documents, the following ESG disclosure information must be included:
- ESG focus: a description of the fund's ESG focus (climate, decarbonization, sustainability, green bonds, etc.) and list of ESG criteria used
- ESG investment strategy: a statement on the binding elements and significance of the ESG investment strategy or strategies used, how those strategies are implemented throughout the investment process on an ongoing basis, and the process for considering ESG criteria (as well as whether an exclusion policy is adopted by the fund).
- Asset allocation: A description of the fund's minimum asset allocation to ESG investments
- Reference benchmark(s): Any applicable ESG fund benchmarks
- Additional information: A list of additional sources of information on the ESG fund, like the fund manager's website
- Risks: The key risks associated with the fund's focus, strategy, asset allocation, and investment process
Any ESG Fund that doesn't disclose this information or meet its annual reporting requirements under the 2021 Circular will be removed from the SFC’s authorized list of ESG funds on the SFC's website.
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Other Hong Kong ESG Regulatory Rules
In addition to the specific regulatory requirements above, Hong Kong has in recent years strengthened relevant ESG-related laws such as, among others, the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, Prevention of Bribery Ordinance, and the Employment Ordinance. We expect more change will come in the future.
A Few Helpful Hong Kong ESG Reporting Recommendations
Your Next Steps With Hong Kong ESG Reporting
Global attitudes, stakeholder expectations, proxy voting trends, and shareholder activism in relation to ESG issues have evolved significantly in recent years, a trend we expect will continue. As a result, we anticipate Hong Kong and various financial regulatory authorities will continue to adopt additional ESG regulations and reporting requirements.
As you can tell from the length of this article alone, there are a lot of new and evolving Hong Kong ESG reporting and disclosure laws that have recently been passed, as well as others likely to go into effect in 2024 and future years. In fairness, all these regulations can feel very complex and daunting. However, from a positive perspective:
- Most of these laws are being phased in over several years, synthesizing public and market participant commentary
- Hong Kong regulators recognize they're at the forefront of global economic sustainable transition, and are looking to help Hong Kong companies and ESG funds successfully adopt and implement these changes
- There's sufficient time to implement the necessary measures, standards, process changes, and reporting capabilities to keep pace on the corporate and listed disclosure side
- There are lots of existing market resources to help organizations and investors track, manage, and report around these changes more efficiently and effectively, including Brightest's software and services
For organizations in the early stages of their Hong Kong ESG reporting journey or considering an IPO on the HKEX, we have a few general recommendations, additional reading, and suggested next steps:
ESG leadership structure - Ultimately, the board has a responsibility to oversee ESG issues, and to assess the potential ESG risks to a company’s overall strategy. Clarify the board's role, structure, and processes around ESG, including which committee(s) will review and decide on ESG matters. Your company will likely also want to set up one or more ESG working groups, comprising senior management and staff, to report to the board.
Materiality assessment - The principle of Materiality is embedded in Hong Kong's ESG disclosure standards, particularly within TCFD-aligned reporting and the concept of double materiality. Materiality essentially asks and attempts to answer a fundamental question: what are the most important (re: material) ESG, climate, and sustainability risks and considerations for a business or investment? If your organization hasn't already done so, a materiality assessment can help determine what your top ESG issues, targets, risks, and priorities should be in relation to regulatory or investor ESG reporting strategy. In turn, this can help clarify where to focus, what to prioritize, and what aspects of pending or forthcoming Hong Kong or other international legislations and developments that matter most to you. HKEX recommends listed companies complete a materiality assessment.
Understand the laws in depth - A full, in-depth breakdown of each Hong Kong law and disclosure requirement is outside the scope of this piece. That said, if your organization or fund meets Hong Kong ESG disclosure criteria, work with your leadership, directors, legal counsel, auditors, and other stakeholders to learn your organization's specific obligations under each law.
ESG data systems and process - While this might go without saying, in order to report your organization's ESG information, you need to know what it is - with a high degree of accuracy. Your materiality process can help guide you toward the main ESG themes you may need to focus on and collect data around. Many organizations start their ESG reporting with relatively simple spreadsheets, surveys, and documents, but things can get complex fast - particularly for larger companies. If you're an organisation with a medium-to-large or complex environmental footprint, you likely need dedicated sustainability reporting and data management software, like the kind we design here at Brightest to help organizations stay compliant with international ESG reporting requirements. Ongoing report archiving, version control, audit readiness, and governance are all important to think about if you're reporting annually.
Further reading - Our free guide to starting an ESG reporting program provides additional, detailed guidance and insights on how to measure and report your ESG disclosures in line with TCFD, Hong Kong requirements, and other standards.
