Deloitte Risk Advisory | 2020

Changes on ESG reporting requirements -Dec 2019

2© 2020. For information, contact Deloitte China.

Melissa has more than 20 years of professional experience in risk management, internal audit and ESG reporting, and is the Business Risk Leader at Deloitte Risk Advisory in Hong Kong.

Melissa has clients across a wide spectrum of industries including the public sector, energy and resources, real estate development, construction, hotels, advertising, telecommunications, manufacturing and retail.

She was a key member of the project team that developed a Corporate Governance Toolkit for the HKIoD, conducting numerous related workshops and pilot coaching sessions. She has also contributed to the development and drafting of a corporate governance guide for small and medium-sized enterprises published by the Efficiency Unit.

Deloitte speaker

Melissa FungPartner, Risk Advisory Deloitte China

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CONSULTATION CONCLUSIONS: REVIEW OF THE ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORTING GUIDE AND RELATED LISTING RULES

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Background

• ESG risks present financial, operational and compliance risks to companies instead of just CSR/reputational issues

• Investors are increasingly willing to invest in sustainable companies/funds and other financial products

• Global regulatory landscape in ESG is enhancing rapidly

Process

• Comprehensive review of Hong Kong’s ESG framework

Outcome

• Ensure the framework remains fit for purpose

• Promote the quality of ESG performance and reporting

• Catch up with public expectations and international best practices

Why upgrade?

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Today’s Topics

1 Major changes adopted 6

2 Implications and next steps 9

3 How Deloitte could support 18

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Major changes adopted

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Reporting

• Main board and GEM issuers must publish ESG reports within 5 months after the year-end date

• Explanation of the applications of relevant reporting principles and boundaries is a must

• Encouraging independent assurance• Postpone the implementation date to financial

years commencing on or after 1 July 2020

Environmental

• Requiring disclosure of significant climate-related issues and actions to manage them

• Requiring disclosure of company’s targets set for environmental KPIs and steps taken to achieve them

• Disclosure of greenhouse gas emissions to further break down into Scope 1 and 2 emissions

Governance

• Mandatory disclosure of the board’s consideration of ESG issues, which must include:

the board’s oversight of ESG issues;

The process used to identify, evaluate and manage material ESG-related issues; and

How the board reviews progress on targets

Social

• All social KPIs to be upgraded from “recommended disclosures” to “comply or explain” provisions

• Requiring disclosure of supply chain environmental and social risks management, and promotion of environmentally preferable products and services

• Requiring disclosure of anti-corruption training provided to directors and staff

Major changes adopted

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Major changes adopted

General Disclosures Environmental Social Information on:

(a) the policies; and(b) compliance with relevant laws

and regulations that have a significant impact on issuer

Aspect A – Environmental

• Air and greenhouse gas emissions, discharges into water

and land, generation of hazardous and non-hazardous

wastes• Efficient use of resources

• Minimizing the impact on the environment and natural

resources• Identifying and mitigating

significant climate-related issues

Aspect B – Social

• Employment• Occupational safety and health

• Training and development• Prevention of child and forced

labor• Environmental and social risks

management of supply chain• Product health and safety,

advertising, labelling and privacy matters

• Bribery, extortion, fraud, moneylaundering

• Community engagement

Aspect A1 – Emissions

• Types of emissions and emissions data

• Direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions and

intensity• Total hazardous waste produced

and intensity• Total non-hazardous waste

produced and intensity• Emissions targets and steps taken

to achieve them• How hazardous and non-hazardous

wastes are handled, reduction targets and steps taken to achieve

them

Aspect A2 - Use of resources• Direct and/or indirect energy

consumption• Water consumption and intensity

• Energy use efficiency targets and steps taken to achieve them

• Issue in sourcing water, water efficiency targets and steps taken

to achieve them• Total packaging materials used for

finished products produced

Aspect A3 - The environment and natural resources

• Significant impacts of activities on the environment and natural

resources and the actions taken to manage them

Aspect A4 – Climate change

• Significant climate-related issues which have actual/potential impact

on the issuer, and actions taken to manage them

Aspect B1- Employment

• Total workforce• Employee turnover rate

Aspect B2 - Health and safety

• Number and rate of work-related fatalities for past three years

• Lost days due to work injury• Occupational health and safety

measures, and their implementation and monitoring

Aspect B3 - Development and training

• Percentage of employees trained• Average training hours per

employee

Aspect B4 - labor standards• Measures to review employment

practices to avoid child and forced labor

• Steps taken to eliminate such practices when discovered

Aspect B5 - Supply chain

management• Number of suppliers by

geographical location• Practices relating to engaging

suppliers, number of suppliersengaged with practices

implemented, and their implementation and monitoring

• Practices used to identifyenvironmental and social risks

along the supply chain, and their implementation and monitoring

• Practices used to promote environmentally preferable

products and services, and their implementation and monitoring

Aspect B6 - Product responsibility

• Percentage of total products sold or shipped subject to recalls for

safety and health reasons• Number of complaints and how

they are dealt with• Practices relating to observing

and protecting intellectual property rights

• Quality assurance and recall procedures

• Consumer data protection and privacy policies and their

implementation and monitoring

Aspect B7 - Anti-corruption• Number of concluded legal cases

regarding corrupt practices and the outcomes of the cases

• Preventive measures and whistle-blowing procedures, and their

implementation and monitoring• Anti-corruption training provided

to directors and staff

Aspect B8 - Community investment• Focus areas of contribution

• Resources contributed to the focus area

Existing KPIs under ‟recommended disclosures” that will become ‟comply or explain” provisions

Newly-added ‟comply or explain” disclosure requirements

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Implications and next steps

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Governance Structure

• Board statement setting out the board’s consideration of ESG issues

Board’s oversight of ESG issues

The board’s commitment, objectives and strategies to

manage ESG

How the ESG risks and opportunities are assessed and

embedded into the business strategies

How to ensure effective risk management and internal

control system are in place

Process used to identify, evaluate and manage material ESG-related issues (including risks to the issuer’s businesses)

The resources and composition of the working group

(senior management and ESG expert)

How to execute ESG strategy and report to the Board

How to identify and communicate with key stakeholders

to address their concern

Conduct internal (by senior management) and external

(by stakeholders) materiality assessment to identify

important ESG issues

How the board reviews progress made against ESG related goals and targets

Implications and Next Steps – Mandatory Disclosure Requirements

Implications and Next Steps

Establish an effective governance structure on ESG which promotes Board’s involvement, facilitating risk management, decision making and information exchange

Formalize ESG approach and strategy

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Reporting Principles and Boundary

• Explanation of application of reporting principles

Materiality – the issuer must disclose the process for the selection of material ESG factors, including a description of significant stakeholders identified, the process and results of the issuer’s stakeholder engagement (if any), and the criteria for the selection of material ESG factors

Quantitative – requiring disclosure of information on the standards, methodologies, assumptions and/or calculation tools used, and source of the conversion factors used for the reporting of emissions/energy consumption (where applicable)

Consistency – requiring disclosure of changes to methods/KPIs used, or factors affecting meaningful comparison

• Explanation of reporting boundary

Explaining the ESG report’s reporting boundary, disclosing the process used to identify the specific entities or operations that are included in the ESG report

Example: Financial contribution, scale, location, nature, impact

Implications and Next Steps

Develop a consistent reporting methodology for KPIs, including scope, definition, calculation and aggregation, etc.

Perform materiality assessment which helps analyze stakeholders’ key concerns

Implications and Next Steps – Mandatory Disclosure Requirements

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Social KPIs

• Upgrade the disclosure obligation of all KPIs from recommended disclosures to “comply or explain” provisions

Aspect B1- Employment• Total workforce• Employee turnover rate

Aspect B2 - Health and safety• Number and rate of work-

related fatalities for past three years

• Lost days due to work injury

• Occupational health and safety measures, and their implementation and monitoring

Aspect B3 - Development and training• Percentage of employees

trained• Average training hours per

employee

Aspect B4 - labor standards• Measures to review

employment practices to avoid child and forced labor

• Steps taken to eliminate such practices when discovered

Aspect B5 - Supply chain management• Number of suppliers by

geographical location• Practices relating to engaging

suppliers, number of suppliers engaged with practices implemented, and their implementation and monitoring

Implications and Next Steps – Social KPIs Disclosure Obligation Upgrade

Aspect B6 - Product responsibility• Percentage of total

products sold or shipped subject to recalls for safety and health reasons

• Number of complaints and how they are dealt with

• Practices relating to observing and protecting intellectual property rights

• Quality assurance and recall procedures

• Consumer data protection and privacy policies and their implementation and monitoring

Aspect B7 - Anti-corruption• Number of concluded legal

cases regarding corrupt practices and the outcomes of the cases

• Preventive measures and whistle-blowing procedures, and their implementation and monitoring

Aspect B8 - Community investment• Focus areas of contribution• Resources contributed to

the focus area

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Implications and Next Steps – Social KPIs Disclosure Obligation Upgrade

Newly Added Social KPIs

• Clarify on “employment types” of a KPI

“employment types” should include “full- and part-time” staff

• Revise a KPI on fatalities to require disclosure of

the number and rate of work-related fatalities occurred in each of the past 3 years including the reporting year

• Introduce a new KPI under “Anti-corruption” to require disclosure of

Anti-corruption training provided to directors and staff

• Introduce new KPIs under “Supply chain management” to require disclosure of the issuer’s

Practices used to identify the environmental and social risks along the supply chain, and how they are managed and monitored

Practices used to promote environmentally preferable products and services when selecting suppliers and how they are implemented and monitored

E.g. Supplier ESG Assessment > Supplier Code of Conduct > Regular Monitoring > Capacity Building

Implications and Next Steps

Examine the materiality of the Social KPIs, and identify the existing information gap on reporting them

Establish a reporting mechanism for the Social KPIs with assigned information owners

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Environmental KPIs

• Require disclosure of a description on targets set and steps taken to achieve them

Emissions, Energy Use, Water Efficiency, Waste Reduction

• Require disclosure of Scope 1 and Scope 2 emissions

Scope 1 – Direct emissions from operations that are owned or controlled by the company

Scope 2 – “Energy indirect” emissions resulting from the generation of purchased or acquired electricity, heating, cooling and steam consumed within the company

Implications and Next Steps – Revising Environmental KPIs

Diagram showing examples of Scope 1 and Scope 2 GHG emissions

Implications and Next Steps

Review vision on ESG and examine the “to-be” state on environmental performance

Evaluate the forms of target(s) to be established, i.e. directional statement / qualitative target / quantitative target

Establish mechanism to monitor progress towards achieving the target(s) set

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Implications and Next Steps – Aspect on Climate Change

Climate Change

• Introduce a new aspect (i.e. “comply or explain”) for climate-related issues

General Disclosure – policies on measures to identify and mitigate the significant climate-related issues which have impacted, and those which may impact the issuer

KPI – requiring a description of the significant climate-related issues which have impacted, and those which may impact the issuer, and the actions taken to manage them

Implications and Next Steps

Re-evaluate existing risk exposure to climate-related issues, including the physical changes and so-called ‘transition’ risks caused by climate change

Determine the policy and procedures on tackling climate-related issues

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Independent Assurance

• Encourage independent assurance on ESG information

Issuers may seek independent assurance to strengthen the credibility of ESG information disclosed;

and describe the level, scope and processes adopted for assurance clearly in the ESG report

Implications and Next Steps – Encourage Independent Assurance

Implications and Next Steps

Implement assurance readiness program

Review reporting mechanism to assess whether it provides a guarantee that the information disclosed is “true and fair”

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The ESG Report

• Printed form of ESG reports

Clarify that irrespective of whether a shareholder has elected to receive the issuer’s corporate communication electronically or otherwise generally, where the ESG report does not form a part of any issuer’s annual report, the issuer is not required to provide printed form of the report to shareholders unless responding to their specific requests in relation to the ESG report. However, given the increasing importance of ESG information, issuers are required to notify shareholders that the ESG report has been published on the Exchange’s and the issuer’s websites

Implications and Next Steps – Listing Rule Amendments

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How Deloitte Could Support

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Assist in interpretation of HKSE’s requirements by experienced ESG experts, reducing the management efforts for compliance

Perform gap analysis to evaluate what listed companies should do in order to satisfy the new disclosure requirements

Advise on design of effective and efficient data collection mechanism, which smoothens the reporting process to reduce risk and enhance data integrity

Perform climate risk assessment and develop climate action plan

Support the development and implementation of appropriate targets, for emissions, energy, water, waste, etc.

Assist in compiling the ESG report in accordance with the HKSE’s requirements and international ESG reporting standards

Provide independent assurance on ESG data contained in the ESG report

How Deloitte could support

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