Hong Kong Listed Companies: New ESG Reporting Requirements and Modern Slavery

The Prevalence of Modern Slavery is Increasing

In 1926, The League of Nations’ Slavery Convention sought to suppress slavery and the slave trade. Almost a century later, the International Justice Mission (IJM) estimates there are over 40 million people in the world today who are trapped in slavery (in fact more than any other time in human history), that slavery generates £100 billion annually and that 1 in 4 victims are children. Victims may be physically, verbally and/or sexually abused and are not able to escape, much less find other work or protect their families. UK-based Anti Slavery International cites 5 significant impacts of Covid-19 on slavery, exacerbating an already serious problem. The pandemic (1) creates new risks and abuses. as the vulnerable are more confined than ever, (2) increases the vulnerable falling into slavery traps, (3) worsens discrimination, (4) increases risks against migrant workers, and (5) disrupts anti-slavery efforts.

The United Nations Convention Against Transnational Organized Crime 2000 and its accompanying supplement, the Protocol to Prevent, Suppress and Punish Trafficking in Persons, Especially Women and Children (“UN TIP Protocol”) put together an umbrella definition for “trafficking in persons” to mean the “recruitment, transportation, transfer, harbouring or receipt of persons, by means of the threat or use of force or other forms of coercion, of abduction, of fraud, of deception, of the abuse of power or of a position of vulnerability or of the giving or receiving of payments or benefits to achieve the consent of a person having control over another person, for the purpose of exploitation. Exploitation shall include, at a minimum, the exploitation of the prostitution of others or other forms of sexual exploitation, forced labour or services, slavery or practices similar to slavery, servitude or the removal of organs.” This definition reveals the enormity of practices which can serve to enslave vulnerable human beings, even in today’s world.

The stories of rescued slaves are endless but not enough. Modern day slaves can be made to work in places as varied as brick factories, brothels, fishing boats, deforestation facilities, mines, rice mills and even sweet factories. IJM writes about “Kofi”, who was only eight years old when his mother told him the man at the door would take him away to live a better life and to receive a proper education, one his mother could not possibly afford. Sadly, for two very long years Kofi was instead forced to work as a slave on Lake Volta in Ghana. Every day he was made to wake at dawn to fish and dive deep into the lake to untangle fishing nets that were caught on underwater tree stumps. He was finally rescued one day when an unfamiliar boat pulled up close to him and he saw that it was filled with police officers (along with IJM staff members).

Obvious ways to eradicate slavery include the enactment and enforcement of statutory and regulatory measures with criminal prosecution for violations. This must occur at the earliest production stage of slave-related goods and services. However, the US State Department has estimated that only 9,000 prosecutions take place around the world annually for human-trafficking related offenses. Moving even further down the supply chain, the final consumption of goods and services by consumers can be guided to some extent by lists produced by organizations such as End Slavery Now’s Slave Free Buying Guide.

Supply Chain Governance is Paramount

Somewhere in between the production and consumption of a good or service lies an entire supply chain of first, second, third (and even beyond) tiers of suppliers. Manufacturers and distributors have a role to play in enforcing top-down compliance with anti-slavery initiatives. After California’s 2010 Transparency in Supply Chains Act was enacted, the UK’s Modern Slavery Act 2015 has become a pioneer in the movement against modern slavery in the last decade. Consolidating and simplifying existing offences into a single act with suitably severe punishment for those convicted, this legislation has sparked the enactment of similar laws such as Australia’s Modern Slavery Act 2018 and the 2020 Child Labour Due Diligence Act in the Netherlands.

Hong Kong’s Disappointing Ranking

It is disappointing to note that in 2016, researchers who compiled the Global Slavery Index included Hong Kong among the ten jurisdictions where the least amount of governmental anti-slavery effort has been made, alongside other notable countries like Central African Republic, the Democratic Republic of Congo, Equatorial Guinea, Eritrea, Guinea, Iran, North Korea, Papua New Guinea and South Sudan. In the Global Slavery Index findings for 2018, Hong Kong ranked 6th to last in the Asia Pacific region (below China) for its government response rating, only slightly ahead of Brunei, Papua New Guinea, Pakistan, Iran and Korea.

Hong Kong was downgraded to “Tier 2 Watch List” by the US Department of State’s 2020 Trafficking in Persons Report, where the government “does not fully meet the minimum standards for the elimination of trafficking”, although the report acknowledged the government is making significant efforts. Hong Kong lacks a comprehensive anti-trafficking law that would criminalize all forms of trafficking in line with the UN TIP Protocol. Countries currently with a Tier 1 rating in the Asia Pacific region include Australia, Japan, South Korea, New Zealand, Philippines, Taiwan. This ranking has been criticized as using US-centric rather than international rules so it is unclear whether Hong Kong would rate differently under another yardstick.

ESG Reporting Required of Listed Companies

Thanks to efforts by various stakeholders, stock exchanges around the world have taken it upon themselves to require listed companies to produce annual Environmental, Social Governance (“ESG”) reports, the “Social” portion of which deals with elements of modern slavery. The Hong Kong stock exchange (the Exchange), which regulates all Hong Kong listed companies, has required issuers to produce annual ESG reports since 2017 with certain “comply or explain” disclosures. Other disclosures have been voluntary. (Prior to 2016, all disclosures were purely voluntary). However, the South China Morning Post reported on 1 January 2020 that Hong Kong listed companies were given an “F” on ESG report cards by professional services firm BDO as only 39% of 500 randomly selected ESG reports fully complied with “comply or explain” disclosure requirements in relation to environmental key performance indicators (KPIs). This is despite the fact that ESG reporting reveals to issuers how they can reduce operating costs while growing revenues from sustainable development, practising better governance and increasing risk mitigation. BDO summed up the situation by stating Hong Kong issuers lag behind in their disclosure standards as compared to comparable issuers in other major regimes such as the UK and the US. In fact, Hong Kong issuers ranked 32nd out of 35 markets with respect to ESG disclosures. The United Nation’s Sustainable Stock Exchanges Initiative ranked Australia, Japan and Thailand much higher than Hong Kong in the Asia Pacific region.

Increasing demands and concerns by potential institutional and private investors, shareholders, employees, other stakeholders (in an often viral social media environment) as well as heightened legislation at an international level renders it incumbent upon Hong Kong listed companies to consider the potential risks not only in terms of the potential loss of reputation/prestige but actual loss in terms of customers and/or the seizure of goods if ESG risk areas are not adequately addressed, in particular aspects related to modern slavery.

New Upgraded Requirements for Hong Kong Issuers

All Main Board issuers in Hong Kong must be prepared to comply with the 2019 Amendments to the Appendix 27 Environmental, Social and Governance Reporting Guide (“revised Guide”) for their financial reporting periods beginning on or after 1 July 2020. Growth Enterprise Market (GEM) issuers have comparable provisions in their Appendix 20 Environmental, Social and Governance Reporting Guide.

Why this is important - Social Key Performance Indicators (KPIs) in particular have been upgraded from voluntary disclosure to “comply or explain” disclosures, such as disclosing the number of suppliers per geographical region, the practice of identifying social risks along the issuer’s supply chain as well as how these practices are implemented and monitored.

The revised Guide’s Part C “comply or explain” provisions speak specifically to social aspects in delineating KPIs for employment, health and safety, development and training, labour standards, supply chain management, anti-corruption and community investment. GEM companies have comparable provisions and KPIs to comply with or explain.

The revised Guide also includes general disclosure requirements such as a statement from the board of directors outlining its consideration of ESG matters, its ESG management approach and strategy as well as how the board reviews progress against ESG goals and targets. Materiality, quantitative and consistency principles as applied by the Hong Kong issuer need to be described, as well as the reporting boundaries of the ESG report (i.e., entities/operations that have been included in the ESG report as well as explanations for any changes in reporting boundaries). Unfortunately none of the disclosures has a specific modern slavery focus, whereas NASDAQ, for example, requires specific disclosures in relation to child and forced labour.

The Exchange in Hong Kong has noted that infrastructures will need to be put in place well before data gathering commences. For example, important stakeholder engagement may be a meaningful exercise to undertake before data collection, dissemination and report production has begun under the revised Guide.

Best Practices for Companies

Global best practices to prevent modern slavery would include but not be limited to creating a transparent code of conduct and providing adequate and appropriate training to employees. For Hong Kong issuers, the code of conduct would at a minimum confirm the issuer’s adherence to the revised Guide but may be extended to include adherence to provisions in other legislation relevant to issuers (such as the UK’s Modern Slavery Act 2015, California’s Transparency in Supply Chains Act or Australia’s Modern Slavery Act 2018) or internationally recognized labour standards, such as the International Labour Organization’s Ethical Trading Initiative Base Code that includes basic tenets including but not limited to the following:

- employment is freely chosen;

- child labour shall not be used;

- living wages are paid; and

- no harsh or inhumane treatment is allowed.

Issuers could choose to participate in or sign the United Nations Global Compact. This sustainability initiative focuses on the corporate sector and its mission is to encourage businesses to incorporate principles related to human rights, labour, the environment and anti corruption. This includes producing an annual Corporate Responsibility and Inclusion Statement that describes how the principles of the UN Global Compact have been integrated across the issuer’s business(es). This would include a statement about principle 1 (the protection of internationally acclaimed human rights) and principle 4 (the elimination of all forms of forced and compulsory labour).

Appropriate employee and supplier training, mapping the company’s supply chain through to second and third tier suppliers and beyond, seeking supplier cooperation through written pro forma agreements (stating compliance with all relevant anti-slavery legislation) and using template risk assessment guidance plans in respect of present and future suppliers are other common best practices that forward looking companies have adopted.

The Exchange suggests that Independent assurance will provide credibility to an issuer’s ESG reporting. Such independent assurance should be accompanied by disclosure in relation to the level, scope and processes adopted in the independent assurance.

Conclusion

We need to eradicate slavery globally as a matter of urgency. It is clear that Hong Kong issuers lag behind their global counterparts in identifying, recording and disclosing as well as preventing modern slavery. If governments are slow or loathe to act, stakeholders in publicly listed companies have a genuine role to play, by lobbying regulators for transparent supply chain disclosure and the enforcement of anti slavery laws and regulations. Evolving stock exchange regulations around the world may very well nudge each other along, and can be the impetus for small, progressive changes in Hong Kong.

Jurisdictions

Doctoral Candidate, University of Hong Kong - Department of Politics and Public Administration


Helena Hu is a member of the Law Society of Ontario and the Law Society of Hong Kong. She has over 15 years' work experience as a lawyer and compliance professional and has held a variety of senior roles within multinational financial institutions in Hong Kong. Her work experience has been focused primarily on asset management, IPOs, post-listing regulatory and compliance matters and ESG reporting. Helena is currently a doctoral candidate at The University of Hong Kong in the Department of Politics and Public Administration, researching modern slavery. She is a blog writer on RegTech, AI and other topical legal issues.