16 July 2020
Late last year, the Hong Kong Stock Exchange issued its consultation conclusions on proposals to enhance the Environmental, Social and Governance (ESG) Reporting Guide and related Listing Rules. Significant changes in relation to disclosure of an organisation’s safety and labour practices will be in force for firms with a reporting period commencing on or after 1 July 2020. Specifically, listed companies will be required to disclose information on the composition and turnover rate of their workforce, the details of workplace deaths and injuries, specifics of their health and safety measures and information on employee training. Such information was previously only a recommended area of disclosure whereas going forward, organisations will need to report in detail on such matters or provide considered reasons for not doing so.
New “comply or explain” approach to labour and safety
While certain ESG disclosures will become mandatory (primarily relating to the role of the board and preparation of the ESG report), more relevant for HR teams is that other disclosures will be elevated from “recommended” to being required on a “comply or explain” basis for issuers with financial years commencing on or after 1 July 2020.
Specifically, previously recommended “KPI” disclosures on social aspects, such as employment and labour practices, will be elevated to “comply or explain” disclosures. Reporting will be required on matters such as:
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Total workforce composition by gender, employment type, age group and geographical region, and employee turnover rate by gender, age group and geographical region.
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Number and rate of work-related fatalities that have occurred in each of the last three years and days lost due to work injury.
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Health and safety measures adopted, and how they are implemented and monitored. This will include measures relating to both physical safety and to non-physical safety (such as mental health programmes).
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Training activities to improve employees’ knowledge and skills, including the percentage of employees trained by gender and employee category and average training hours completed per employee by gender and employee category.
Other aspects of social governance reporting on labour standards related to preventing child and forced labour, supply chain management and anti-corruption have also been upgraded to “comply or explain” status. To the extent that HR teams are involved with engagement and management of irregular workers and third party labour agents or suppliers, they will play a greater role on management and reporting of these aspects.
The Stock Exchange notes that there is no “one-size-fits-all” framework for ESG reporting and it is important to assess what is material to a business. Where an aspect of the ESG Reporting Guide is not material or relevant, a company should explain this, rather than simply confirming compliance without giving any meaningful explanation. The Stock Exchange reminds companies that an explanation is not a less preferred or secondary option where a provision in the ESG Reporting Guide is immaterial to a company.
Implications for HR teams
As certain ESG reporting requirements are directly related to HR functions, HR teams will need to be involved in collating data and assisting with the preparation of reports from an early stage. HR practitioners in companies that are listed on the Stock Exchange should already be familiar with ESG reporting. However, as the changes now require HR-related aspects to be specifically addressed in the ESG report on a “comply or explain” basis, HR will need to be closely joined up with the business to feed into the ESG reporting, including on strategies and actions on other ESG aspects.
The Stock Exchange indicated that its proposal to upgrade the disclosure obligation of Social KPIs from recommended disclosures to “comply or explain” emphasises equal treatment of environmental and social risks and aims to raise organisations awareness of the possible impact and risks arising from such social issues. This aligns with recent examples of where social factors such as reports of a toxic organisational culture or serious misconduct by senior executives have had a direct impact on an organisation’s share price and financial performance. HR teams should not view ESG processes as merely a compliance exercise but should actively lead aspects of the organisation’s ESG strategy and engage with leaders in the business to manage long term risk and to drive sustainable growth. HR practitioners must be across the ESG requirements and actively be identifying and analysing any structural weakness in their organisation’s social governance. This may involve auditing data on compliance with policies and attendance at training, reviewing employee complaints and exit interview responses, considering employee engagement feedback and undertaking continuous analysis to identify areas of concern.
Broader focus on social governance and increased employee activism
The increased focus on environmental, social and governance is not limited to companies listed on the Stock Exchange. Workforce activism is a key concern for many organisations, as demonstrated by the Herbert Smith Freehills Future of Work report in which 80% of respondents predicted an increase in workforce activism. Top triggers for workers included pay and benefits, status of contract workers, corporate social responsibility and diversity. Individual and collective employee activism around workplace safety and diversity has escalated dramatically in recent months. ESG reports provide ready data for workers to draw on so cannot be considered as simply a compliance exercise.
For further information, please contact:
Gareth Thomas, Partner, Herbert Smith Freehills
gareth.thomas@hsf.com
