HKEX Requires Additional Disclosure on CG and ESG Matters by IPO Applicants

The Stock Exchange of Hong Kong Limited (“HKEX”) has recently published an updated Guidance Letter HKEX-GL86-16 for IPO applicants (“Guidance Letter”) which emphasizes the board of directors of an IPO applicant should ensure necessary corporate governance (CG) and environmental, social and governance (ESG) mechanisms are built into the listing processes in order to promote sustainability, good corporate governance, and diversity. According to the 3.7(a) & (b) under E. “Business” section of updated IPO Guidance, IPO applicants are required to :

1. put in place relevant mechanisms that enable them to meet the Exchange’s requirements on CG and ESG well in advance so that they are in compliance upon listing. The board of directors of an applicant is collectively responsible for its management and operations (including the establishment of such mechanisms); and
   
   
2. appoint directors (including independent non-executive directors) as early as possible so that directors can engage in the formulation of the necessary mechanisms and related policies on CG and ESG.

Further to the amendment to the Guidance Letter made in May 2019 to require additional disclosure on (i) ESG matters (including material information on applicants’ environmental policies, and details of the process used to identify, evaluate and manage significant ESG risks) and (ii) gender diversity of the board in the listing documents of new applicants, HKEX has taken this as an extra step to strengthen the disclosure obligation of ESG information by IPO applicants. It is a prerequisite for listing applicants to get braced for ESG mechanisms and relevant disclosure in spite of the fact HKEX does not make ESG report as a mandatory disclosure requirement in the listing document for the time being.

It is advisable for pre-IPO companies to establish good corporate governance and enhance board’s oversight of ESG matters including identification and control of material ESG risks in advance not only to cope with the potential queries raised by HKEX but also to echo with the call for ESG information by institutional investors upon their decision-making process.

Click here to read the updated Guidance Letter HKEX-GL86-16 for IPO applicants.

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