You can’t spell IPO without ESG

July 2022

The road to an initial public offering (IPO) is a time-consuming, labour-intensive and a technically demanding process requiring multiple skillsets. Even the most well-prepared companies continue to find it challenging. Against this backdrop, the world’s leading economies are striving to achieve transition to green and sustainable practices that are aligned with the Paris Agreement. As a result, environmental, social and governance (ESG) concerns have gained significance rapidly for all stakeholders in the capital markets: issuers, investors, and regulators.

Nearly 80% of surveyed^[i] investment professionals view ESG risks as a major factor in their investment decisions, and nearly half would divest from companies they believe were failing to deliver on ESG commitments. Investment capital flowing into sustainability funds is finding focus on companies that are ESG worthy. More than $53 trillion could be invested globally in sustainability funds and portfolios by 2025, up from $37.8 trillion as of the end of 2021.

The US SEC, ISSB and EFRAG have published their respective exposure drafts on climate disclosure for public consultation respectively. This has created momentum in the development and alignment of global ESG reporting standards. Although it remains unclear how or whether different ESG reporting standards will converge, it does urge companies to get prepared in advance. No wonder ESG has become a must-have, rather than a nice-to-have, requirement for companies, especially those contemplating an IPO and seeking access to capital.

1. The HKEX ESG requirements and future developments

The current requirements

The HKEX has an established history in setting ESG requirements for IPO applicants. Back in December 2019, the HKEX ESG Reporting Guide (2019 Version)^[ii] was enhanced and incorporated Social KPIs into their “comply or explain” regime. Subsequently, the HKEX updated Guidance Letter GL86-16^[iii] for new IPO applicants in July 2020, adding requirements on ESG disclosures. Currently, the HKEX’ s ESG reporting requirements incorporate certain key recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and the HKEX published Guidance on Climate Disclosure^[iv] for helping companies to assess their response to risks arising from Climate change.

Recent observations and future trends

As pointed out in the latest PwC research^[v], the ESG Reporting Guidance (2019 Version) has created new challenges for Hong Kong listed companies. Ensuring the credibility of ESG information has become a must. Separately, the HKEX also reviewed IPO applicants’ practices in respect of corporate governance, diversity and ESG^[vi] between July 2020 and June 2021. The HKEX noted that “ESG risk management starts before listing, and it is important for IPO applicants to plan ahead to implement the necessary measures to ensure future compliance.^[vii]”

The regulatory review process for Hong Kong IPOs has always been challenging with our regulators focused on maintaining the quality of the market and ensuring accurate disclosures. With the increased interest in ESG policies, procedures and disclosed metrics, the regulators have also begun to challenge the basis of the information disclosed and the level of due diligence performed by management and the IPO sponsors. In some cases, requiring statements to be adjusted or even removed if they are unable to be substantiated by independently verifiable information. This can cause delays to the review process as issuers try to find the appropriate information to support their positions.

2. What to watch out for in an IPO

ESG considerations should be incorporated into IPO planning. Amid the rush of preparing for an IPO, applicants should expand their readiness assessments and pre-diligence work to include ESG strategy development and detailed plans for implementation, measurement, and disclosure.

Exhibition 1 Key points listed for IPO applicants

	Current requirements ⁱⁱ	What to watch out ¹
Strategy	Emphasises the Board involvement and diversity Encourages the corporate to implement the ESG initiatives from strategic level	Establish an effective governance structure on ESG, facilitating risk management, decision making and information exchange from management level
Governance	Mandatory disclosure of A board statement on the board’s oversight of ESG issues, and ESG management approach and strategy The application of reporting principles – Materiality, Quantitative and Consistency Encourages disclosure of independent assurance on ESG information	Perform materiality assessment which helps analyse stakeholders’ key concerns Build up internal reporting mechanism guarantee that the information disclosed is “true and fair”
Risk management	Disclosure of significant climate-related issues which have impacted and may impact the business	Re-evaluate existing risk exposure to climate-related issues, including both physical and transition risks
Targets & Metrics	All Social KPIs upgrade to “comply or explain”, with several newly introduced Social KPIs Disclosure of target(s) set for Environmental KPIs	Identify the existing information gap on reporting and establish a reporting mechanism for ESG KPIs with assigned information owners Evaluate the forms of target(s) to be established, i.e., directional statement / qualitative target / quantitative target

3. How PwC can help

Embedding ESG considerations into corporate management is a business imperative, the earlier you get to understand the requirements, the easier it is to seise the market opportunity and differentiate yourself from other issuers competing for capital rather than an obstacle in your IPO process. Companies that successfully integrate and govern the social and environmental issues that intersect with their business can be rewarded with better access to capital^[viii], higher market valuations and new growth opportunities. Those companies who appropriately disclose and communicate their own ESG stories will be more likely to build trust with their key stakeholders and develop a long-term value creation journey.

PwC can be a trustworthy partner alongside your IPO journey, by helping you to:

Notes:

_{[1] Please note that the Current requirements are summarised from the ESG Reporting Guidance (2019 Version) published by HKEx, and the analysis in the part of what to watch out is conducted by PwC sustainability reporting topic team under the TCFD structure

[i] PwC’s 2021 Global Investor Survey, see more https://www.pwc.com/gx/en/corporate-reporting/assets/pwc-global-investor-survey-2021.pdf

[ii] https://en-rules.hkex.com.hk/rulebook/environmental-social-and-governance-reporting-guide-0

[iii] https://en-rules.hkex.com.hk/rulebook/gl86-16

[iv] https://www.hkex.com.hk/-/media/HKEX-Market/Listing/Rules-and-Guidance/Environmental-Social-and-Governance/Exchanges-guidance-materials-on-ESG/guidance_climate_disclosures.pdf

[v] https://www.pwccn.com/en/services/sustainability-and-climate-change/publications/esg-report-2021.html

[vi] The published Review Result can be seen in Analysis of IPO applicants’ corporate governance and ESG practice disclosure in 2020/2021 (Review), https://www.hkex.com.hk/-/media/HKEX-Market/Listing/Rules-and-Guidance/Environmental-Social-and-Governance/Reports-on-ESGPD/esgreport_2020_2021.pdf

[vii] https://www.hkex.com.hk/News/Regulatory-Announcements/2021/211105news?sc_lang=en

[viii] https://www.pwccn.com/zh/services/issues-based/esg/green-transformation-apr2021.html}