changes on esg reporting requirements - dec 2019...implications and next steps –aspect on climate...
TRANSCRIPT
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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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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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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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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