Introduction

On 5 November 2021, the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) issued an analysis of initial public offering (“IPO”) applicants’ corporate governance (“CG”) and environmental, social and governance (“ESG”) practice disclosure in 2020/2021 (the “Review”). In the Review, the Stock Exchange emphasised that there have been an increasing awareness of the investors on CG and ESG performance of a company when investment decisions are being made. As such, IPO applicants are advised to properly disclose matters related to CG and ESG in their listing documents in accordance with the Guidance Letter on Producing Simplified Listing Documents Relating to Equity Securities for New Applications HKEX-GL86-16 (the “Guidance Letter”).

CG practice disclosure

Upon analysing the practice of the 121 IPO applicants seeking a primary listing on the Stock Exchange between July 2020 and June 2021 (“Applicants”), the Stock Exchange made the following observations and recommendations:

Board’s involvement

All Applicants properly included their CG measures in their prospectuses. The Stock Exchange observed that IPO applicants should also make comprehensive disclosures of their director’s roles in CG, including: (i) oversight structure; (ii) engaging an external compliance advisor; and/or (iii) mechanisms for continuously monitoring the implementation of CG measures and regular review of their effectiveness (at least annually). Also, although some Applicants included a compliance culture statement, they mainly rely on boilerplate statements. The Stock Exchange recommended that the statement should disclose details regarding: (i) the board’s commitment towards lawful and ethical operation; (ii) measures to ensure compliance culture is embedded (supported by examples); and (iii) the effectiveness of the measures.

In addition, in line with previous amendments to the Corporate Governance Code to tickle the problem of independent non-executive director holding seven or more listed company directorships (“Over-boarding INED”), the Stock Exchange requested IPO applicants to replace any Over-boarding INED. Since June 2021, no IPO applicants with an Over-boarding INED have been accepted.

Board diversity

The Stock Exchange clearly indicated that IPO applicants seeking a listing status in Hong Kong are not expected to have single gender boards. To achieve gender diversity at Board level, not only should IPO applicants disclose their board diversity policies, but they are also recommended to set measureable objectives to continually evaluate their policies after listing. The Stock Exchange also encouraged IPO applicants to develop a pool of experienced employees with gender diversity to prepare them for board positions. The Stock Exchange reminded IPO applicants that they must fulfil their gender diversity commitment set out in the prospectuses.

Environmental, social and governance disclosure

The Stock Exchange has given a succinct overview of the IPO applicants’ environmental, social and governance disclosure performance with helpful guidelines and recommendations for future IPO applicants as guidance.

Governance of ESG matters

The Stock Exchange has divided ESG governance into 3 areas. In respect of compliance of applicable environmental laws and regulations, and material impact non-compliances (“ESG Compliance”), 98% of the IPO applicants have made corresponding disclosures as required under the Guidance Letter. In respect of the second area – board’s oversight of ESG matters and directors’ collective responsibility for forming mechanisms and policies to meet the Stock Exchange’s ESG requirements (“ESG Oversight”), only around one-third of the IPO applicants have made such voluntary disclosures. The Stock Exchange reminded IPO applicants that ESG Oversight is part of a good corporate governance and it is important for the board to identify ESG issues that are material to the operations of a company, assess the impacts, and formulate plans to address or mitigate such risks. Examples of ESG Oversight include board discussions, regular review of ESG risk management policies and engaging external advisor to advise the Board of the ESG related matters.

In sharp contrast to ESG Compliance, only 11% of the IPO applicants have disclosed their assessment of the materiality of ESG risks to the IPO applicant’s business, and the integration of ESG risks into an applicant’s risk management and internal control framework (“ESG Materiality Assessment and Risk Management”). The Stock Exchange stressed that proper risk management would improve a company’s resilience, and quality disclosures in the prospectus are conducive to investors’ evaluation of a company. It is important for IPO applicants to identify material ESG risks and disclose the identification process or selection criteria. The Stock Exchange noted that generic “negative statements” by simply stating that the company is not subject to any material ESG risks do not provide meaningful information for understanding how the board arrives at such conclusion. The Stock Exchange expects further explanation from the IPO Applicants supported by quantitative data.

Disclosures on Environmental Issues

The Stock Exchange considered it is healthy to see a vast majority of IPO applicants have disclosed environmental issues in the prospectuses and around two-thirds have even made disclosures in at least one key area under the Environmental Subject Area (as stated in Appendix 27 of the Listing Rules). The Stock Exchange encourages IPO applicants to further disclose how a company’s business operations could materially impact the environment and nature resources and policies to mitigate such impact. For instance, IPO applicants may identify the types of key pollutants that might be generated during business operations, or disclose quantitative information of the pollutants and greenhouse gas emissions.

In respect of climate-related issues (such as energy consumption and carbon footprint), around 60% IPO applicants have made disclosure. As reported in our December 2021 newsletter entitled “Heads-up to listed companies for the need of climate disclosures”, the Stock Exchange expects mandatory TCFD-aligned climate-related disclosures by 2025, therefore, the Stock Exchange advised IPO applicants to consider the following climate-related issues and make appropriate disclosures in their prospectuses:

1. climate change-related issue oversight, such as the board’s overall responsibility and role of the management in overseeing, evaluating and managing climate-related risks and opportunities, and details of any policy to address climate-related issues;
2. actual and potential impact of climate-related risks and opportunities on business, strategy and financial performance;
   
3. identification and assessment of climate-related risks and opportunities over short, medium and long term, their impact on business, strategy and financial reporting and steps taken to mitigate such risks; and
   
4. quantitative information on the metrics and targets used to assess and manage climate-related risks.

Further to the Hong Kong Government’s announcement of Hong Kong’s Climate Action Plan 2050 in October 2021, to align with such decarbonisation targets, the Stock Exchange encourages IPO applicants to employ and disclose infrastructure or technology to reduce carbon emissions and control climate-related risks.

Disclosures on social issues

Most IPO applicants have included disclosures on social issues in their prospectuses, mainly around occupational health and safety. Nonetheless, the Stock Exchange encouraged IPO applicants, especially those with businesses involving substantial supply chains or subcontractors, to identify, monitor and manage environmental and social risks which are related to the supply chain, such as by citing international recognitions and certificates as eligibility criteria for suppliers or listing out factors to evaluate a supplier’s suitability.

Conclusion

By reviewing disclosure performances of the IPO applicants, the Review provides helpful guidance on how the up-coming IPO applicants may make qualitative CG and ESG disclosures. As more investors take into account of CG and ESG factors when making investment decisions, transparency of a company’s CG and ESG information in the listing document will play a vital part alongside with the business or financial disclosure of an IPO Applicant.