Safety First: More Required on ESG from Directors and Officers in Hong Kong

Introduction

Amendments to the Hong Kong Stock Exchange Environment, Social and Governance (ESG) Reporting Guide will take effect on 1 July 2020. Under the revised rules, the board of a listed company is required to make certain health and safety disclosures. This change reflects the increasing scrutiny of occupational health and safety (OH&S) compliance in Hong Kong.

In 2019, over 42,000 industrial accidents and occupation injuries were officially reported to the Labour Department.¹ That said, labour activists estimate that over half of work-related injuries go unreported each year.² This is often due to loopholes in multi-layered sub-contracting practices that enable employers to avoid liability. In a top-down approach, the new ESG reporting requirements will impose a more active duty on directors and officers to improve safety governance and risk management in listed companies. It is hoped that the move will enhance the transparency of board-level reporting, triggering a ‘race to the top’ to improve the quality of corporate governance in Hong Kong.

A Comparative View on Health and Safety Laws

Under the Occupational Health and Safety Ordinance, every employer must ensure the health and safety at work of all his employees so far as reasonably practicable. ³ An employer who breaches this duty could be liable to a maximum fine of HK$500,000 and up to six months’ imprisonment.⁴ If a director or officer consents or connives to the employer’s offence, they can be personally liable for the same offence.⁵

Compared to other common law jurisdictions such as Australia, however, Hong Kong’s safety laws are relatively lenient on directors and officers. Most Australian jurisdictions impose a positive and continuous obligation on them to exercise due diligence for OH&S, ensuring that companies comply with safety-related duties and obligations.⁶ This duty prevails even where directors leave decision-making to management.⁷

In Hong Kong, the supervisory duty for OH&S largely falls upon employers. As labour unions and the media continue to question the adequacy of the territory’s safety laws and penalties, we expect regulatory bodies to further scrutinise the accountability of directors and officers. So far, no director has been reportedly prosecuted, nor has any employer been imprisoned for safety violations.⁸ Nevertheless, the revised ESG disclosure requirements is a positive step toward enhancing workplace safety in Hong Kong.

Upgraded Disclosure Requirements for Health and Safety

Many listed companies face additional OH&S risks that are increasingly important to stakeholders. For instance, companies employing contractors in high-risk occupations may face serious reputational and operational damage from incidents such as employee fatalities.

As the board has an overall responsibility for the company’s ESG strategy and reporting, directors should be aware that the revised reporting requirements make previously recommended disclosures on social matters compulsory.⁹ In relation to health and safety governance, listed companies are required to identify and disclose the following health and safety KPI:

1. The number and rate of work-related fatalities occurred in each of the past three years including the reporting year;
2. Lost days due to work injury; and
3. Description of occupational health and safety measures adopted, and how they are implemented and monitored.

This disclosure obligation will be upgraded to a ‘comply or explain’ level, meaning that listed companies must report on the mentioned KPI or provide considered reasons otherwise. For example, where the board is unable to make the required disclosures due to legal restrictions, this should be explained in the ESG report. For ESG reports published separately from the company’s annual report, the deadline for publication will be shortened to five months after the end of the financial year.¹⁰

We expect that compulsory disclosure OH&S track records will increase board-level oversight over workplace safety and hopefully mitigate occupational risks over time. Apart from reporting on ‘comply or explain’ provisions, the board is encouraged to disclose other OH&S-related KPI. Doing so will enhance transparency in the company’s operations, helping stakeholders and investors make informed decisions.

Other Key Changes to Note

Concerning ESG reporting generally, the amendments also require the board to issue a mandatory statement of disclosure containing the following:

• Disclosure of the board’s oversight of ESG issues;
• The ESG management approach and strategy, including the processes used to evaluate, prioritise and manage material ESG-related issues; and
• How the board reviews progress made against ESG-related goals and targets, explaining the relevance to the company business.

When preparing a ESG report, the board will need to explain in detail how the reporting principles of ‘materiality’, ‘quantitative’ and ‘consistency’ had been applied. You can find more details on the changes here.

The Next Steps

The outcomes of poor OH&S measures can be detrimental to the company’s reputation and overall interests. As good practice, directors and officers should always take reasonable steps to make workplace safety a priority. The following steps can be taken:

1. Communicate: establish a culture of constructive dialogue between the board and employees on OH&S matters. Actively obtain reports and inquire into any suspicious or missing information.
2. Review: regularly assess whether internal policies and measures adequately discharge the risks of workplace accidents and injury. If necessary, seek expert opinion on the proper protections that should be implemented and allocate sufficient resources to address these concerns.
3. Monitor: if management decisions are delegated, make consistent enquiries to ensure that supervisory work is done competently and responsibly in compliance with safety laws.
4. Educate: put rigorous training in place to ensure that employees and contractors understand all inherent risks to the company’s business operations. Make sure appropriate tools and resources are provided to tackle workplace hazards.

With the revised reporting guide in mind, it is hoped that enhancing board-level oversight will ultimately promote a culture for good corporate governance in Hong Kong.