On 16 April 2021, the Stock Exchange of Hong Kong Limited (SEHK) issued a consultation paper (the "Consultation") seeking public comment on proposed amendments to the SEHK's Corporate Governance Code and Listing Rules intended to promote good corporate governance practices among listed companies and IPO applicants. Amidst the global surge in interest around environmental, social and governance (ESG) principles, the SEHK recognizes in the Consultation that "[g]overnance and oversight of ESG matters, and management of material ESG risks (including climate-related risks), are an integral part of good corporate governance." Accordingly, among the various proposals in the Consultation, the SEHK seeks to elaborate upon the link between corporate governance and its existing ESG reporting regime (the "ESG Reporting Guide"), align the publication of ESG reports with international best practices and promote gender diversity among listed issuers.
In this Legal Update, we highlight the various proposals in the Consultation related to ESG and gender diversity, as well as the growing interest in similar diversity proposals among financial markets regulators in other jurisdictions around the world. In a forthcoming Legal Update, we will focus on gender diversity and other key corporate governance proposals covered by the Consultation.
The Consultation Proposals
ESG and Corporate Governance: The ESG Reporting Guide currently mandates reporting on a range of ESG topics, from emissions to supply chain management, on a comply-or-explain basis for issuers listed on both the Main Board and Growth Enterprise Market. Since July 2020, the ESG Reporting Guide has also required issuers to disclose information regarding their governance of ESG issues in general. In the Consultation, the SEHK seeks to further elaborate upon the linkage between ESG and its expectations on corporate governance with proposals that would:
- Describe the relationship between corporate governance and ESG in the introductory section to the Corporate Governance Code as follows:
"Linkage between Corporate Governance and Environmental, Social and Governance (“ESG”)
Corporate governance provides the framework within which the board forms their decisions and build their businesses. The entire board should be focusing on creating long-term sustainable growth for shareholders and delivering long-term value to all stakeholders. An effective corporate governance structure allows issuers to have a better understanding and evaluate and manage risks (including environmental and social risks) and opportunities. The ESG Reporting Guide set out in Appendix 27 to the Exchange Listing Rules provides a framework for issuers to identify and consider what environmental risks and social risks may be material to them. The board should be responsible for governance of ESG matters to ensure oversight of ESG matters, as well as assessment and management of material environmental and social risks. Issuers are required to disclose environmental and social matters in ESG reports in accordance with the ESG Reporting Guide."
- Specifically refer to the ESG Reporting Guide and ESG risks in the existing risk management provisions of the Corporate Governance Code, for example, by adding the italicized text to the existing provision below:
"The board is responsible for evaluating and determining the nature and extent of the risks it is willing to take in achieving the issuer’s strategic objectives, and ensuring that the issuer establishes and maintains appropriate and effective risk management and internal control systems. Such risks would include, amongst others, material risks relating to ESG (please refer to the ESG Reporting Guide in Appendix 27 to the Exchange Listing Rules for further information)."
ESG Reporting: Currently, issuers are required to publish ESG reports in accordance with the ESG Reporting Guide no later than five months from the end of the financial year. The SEHK recognizes, however, that global best practices are aligning around the simultaneous publication of non-financial ESG information and financial information. The alignment of financial and non-financial reporting is potentially beneficial to both issuers, who may leverage a more fulsome set of year-end data to develop more coherent forward-looking strategies, and investors, who will have a more comprehensive and timely picture of a company's performance. Accordingly, the proposals in the Consultation would require issuers to publish their ESG reports at the same time as their annual reports, effective for financial years commencing on or after 1 January 2022.
Gender Diversity: Diversity is a key ESG consideration that is attracting the attention of regulators around the world. The SEHK cites research finding links between board effectiveness and diversity, but notes that in 2020 only 12.7% of Hong Kong listed companies' directorships were held by women and almost a third of issuers had no female directors at all. In order to address this lack of gender diversity among listed companies, the proposals in the Consultation would:
- Confirm that diversity is not achieved with a single-gender board;
- Give listed issuers with single-gender boards a three-year transition period to appoint at least one director of the absent gender;
- Confirm that IPO applicants are not expected to have single-gender boards;
- Require all listed issuers to set and disclose numerical targets and timelines for achieving gender diversity, both at the board level and across the workforce (including senior management); and
- Require boards to review the implementation and effectiveness of diversity policies annually.
The gender diversity proposals in the Consultation echo recent efforts to promote diversity by financial regulators in other key international financial centres. In the United States, NASDAQ is now working with the Securities and Exchange Commission to finalize a proposal to institute a comply-or-explain board diversity objective for listed companies of at least two "diverse" directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. In the United Kingdom, the Financial Conduct Authority is currently working with the Prudential Regulation Authority on a joint approach to diversity and inclusion for financial services firms, as well as considering whether to implement diversity requirements as part of its premium listing rules. Meanwhile, the Financial Services Agency in Japan is considering amendments to its Corporate Governance Code that would require companies to disclose policies and measurable targets on diversity in senior management.
The SEHK proposes to implement the revisions to the Listing Rules and the Corporate Governance Code for financial years commencing on or after 1 January 2022. The SEHK will also "review the [corporate governance/ESG] disclosures in prospectuses to provide further guidance to IPO applicants this year" and provide guidance on adopting the TCFD Recommendations when disclosing climate change-related information in compliance with the ESG Reporting Guide. The Consultation closes 18 June 2021.
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