Demand Toothless HKEx for Forcing Public Listed Companies to Compulsory Disclose CSR Information

Press Release

Demand Toothless HKEx for Forcing Public Listed Companies to Compulsory Disclose More CSR Information

Hong Kong Confederation of Trade Unions (HKCTU) and Labour Action China (LAC) held a press conference this morning. Both organizations have demanded Hong Kong Exchanges and Clearing (HKEx) to make the disclosure of information related to labor rights mandatory for all Hong Kong listed companies. In response to the HKEx’s recent consultation on the Review of the Environmental, Social and Governance (ESG) Reporting Guide, the executive director of HKCTU Mr Mung Shiu-tat said, “this public consultation is done in the black box by HKEx and the listed companies. Although HKEx has recommended information relating to employment and labor standards raised to ‘comply or explain’ from ‘recommended disclosure’, HKEx does not explain what would be the consequences if a listed company fails to follow suit. It is utterly window dressing. Workers, general publics and investors ought to know the corporate social responsibility (CSR) practices of those listed companies because they are stakeholders too”.

 

A former trade union representative of Kwoon Chung Motors, Mr Wong Hin Wai, was invited. Mr Wong stated that there was no pay rise in a decade. He was sacked for representing his fellows in a negotiation with the company. But Kwoon Chung Motors never discloses how they treated their employees to the public.

 

A victim of suspected occupational diseases works for Hwa Sun (Guangdong), a subsidiary of Johnson Electric, was there to talk about his leukemia due to the violation of OSH regulations. Likewise, Johnson Electric failed to disclose these OSH problems, as well as the potential risk caused by these violations.

 

We recommend

  1. Mandatory disclosure – because “comply or explain” in certain aspects is not strong enough to make listed companies to disclose information;
  2. Enlarging the scope of disclosure – the recommendations are not suffice on the aspects of employment, health and safety, labour standards, supply chain management;
  3. Punishment is needed – there should be a clear mechanism for punishment if listed companies are found violating labour law and the requirement of disclosure.


Hong Kong Confederation of Trade Unions and Labour Action China

 

Our Recommendations to the Consultation on the Review of the Environmental, Social and Governance Reporting Guide

 

Preface

Information of Hong Kong listed companies are related to the public interest and hence it should be transparent for public scrutiny and protection of investors interests. Exchanges around the world are continuing to improve the transparency on environmental, social and governance (ESG) of listed companies in recent years. In July 2015, Hong Kong Exchanges and Clearing Limited (HKEx) proposed a consultation paper (consultation paper) on the Review of Environmental, Social and Governance Reporting Guide.

 

Just as mentioned in the Overview of the consultation paper, “[t]he Guide was intended to be the first step in an evolutionary process, with the longer term goal of achieving better and more comprehensive ESG reporting amongst our issuers”. HKCTU and LAC believe what are recommended in this consultation paper could not be served to achieve this long-term objective. Therefore, we recommend:

 

  1. Mandatory disclosure – because “comply or explain” in certain aspects is not strong enough to make listed companies to disclose information;
  2. Enlarging the scope of disclosure – the recommendations are not suffice on the aspects of employment, health and safety, labour standards, supply chain management
  3. Punishment is needed – there should be a clear mechanism for punishment if listed companies are found violating labour law and the requirement of disclosure.

 

1. “Comply or explain” is not suffice to force listed companies to disclose information

 

If an issuer deviates from the ESG Guide, it must provide a reasonable explanation under the so-called "comply or explain" approach. In 2005, the London School of Economics conducted a research to examine this approach affected the quoted companies floating on London Stock Exchange. The findings found that companies would only provide poor explanations for their non-compliance. What is more, one in every five cases of non-compliance would not give any explanation at all.

 

This fully illustrates that the listed companies would abuse this flexibility in order to avoid the disclosure of ESG information deliberately. Meanwhile, the consultation paper failed to elaborate how this approach could encourage more listed companies to disclose ESG information. In contrast, HKEx admitted that “many issuers are waiting for the recommended disclosures of the ESG Guide to be upgraded to “comply or explain” before they begin to report”. (para 72, Consultation Paper) HKEx understands thoroughly that listed companies might not voluntarily disclose ESG information unless there is such a specified regulation.

 

Mandatory disclosure is the trend in global financial market

In fact, a number of financial markets have made ESG disclosure mandatory. Shanghai and Shenzhen stock exchanges have already done it in 2009. Singapore Exchange (SGX) announced in October 2014 that sustainability reporting for listed companies is mandatory in the near future. Similarly, all quoted companies in the United Kingdom are subjected to disclose information on greenhouse gas emission, human rights, gender diversity.

 

Most Hong Kong Investors Favor Mandatory Disclosure of ESG Information

Oxfam Hong Kong has interviewed 42 institutional investors including note-issuing banks, assets management and insurance companies, more than 85% of the respondents said that ESG factors are taken into account at the time of investment; nearly 65% even said that HKEx should force listed companies to disclose ESG information and the government should legislate it.

 

2. Insufficient Information on Employment and Labour Relations under the Current Guide

We believe that the disclosed information on employment and labour relations is insufficient under the current Guide. Labour relations are significant to business operations. If labour relations is not properly dealt with by an enterprise or its subcontractors / suppliers, it would have a negative impact on its shareholders and other stakeholders.

 

Taking the 40 days’ strikes of Hongkong International Terminals (HIT) in 2013 as an example. It was caused by HIT failing to intervene the disputes on wage and labour conditions of its outsourcing providers, which led to its loss of $100 million, as estimated by Citibank, as well as the damage of its public image. Hutchison Whampoa Limited merely mentioned 1% loss to the container throughput in its 2013 annual report, but it did not specify the actual loss caused by this strike.

 

Moreover, the rights to the freedom of association and collective bargaining are fundamental to CSR on labour standards. Enterprises must guarantee itself, its outsourcing providers / suppliers in line with international labor standards, and work in good faith with unions and worker representatives in collective bargaining.

 

Enterprises are required to disclose information relating to labor standards and labor relations in many jurisdictions. In the United Kingdom, medium-sized enterprises and large corporations must disclose information about employee participation in corporate affairs in their board of directors’ reports. The Australian also encourage corporate disclosure on the sustainability in economic, environmental and social affairs in reference to the UN treaties and OECD guidelines. Shanghai and Shenzhen stock exchanges require listed companies to disclose information relating to the protection of workers’ rights.

 

Therefore, we believe that HKEx should refer to ILO conventions and the OECD Guidelines for Multinational Enterprises to enrich the disclosure requirements on labor rights and labor relations. For the Employment and Labor Standards and Operating Practices, more information of labor standards and labor relations should be added and covered its subsidiaries and suppliers. Specific amendments in the following aspects are as follows (Proposed amendments refer to table):

 

A. Aspect B1: Employment

Good benefits and working conditions can increase employees' sense of belonging, but can also minimize labor disputes. It can ensure enterprises to focus on business development. Therefore, we propose to add KPI “B1.3: Total workforce by bands of monthly salary and weekly working hours” and “B1.4: Total workforce by forms of employment (permanent contracts, short-term contracts, part-time, agency)”.

 

B. Aspect B2: Health and Safety

At present, the Guide requires the disclosure of the number and percentage of deaths related to work, as well as the number of working days lost due to work-related injury. It is not enough to help the public to understand the OSH policies and measures. We recommend including the disclosure of the list and inventory of potentially hazardous substances or equipment, and how the protective measures are provided in the general disclosure. Also we recommend to add KPIs on "Total number of cases by different categories of work-related injuries and occupational diseases" and "The rate of accident in every 1000 workers."

 

C. Aspect B4: Labour Standards

Four ILO core values are the elimination of forced labor, the abolition of child labor, the equality of opportunity and treatment, the freedom of association and collective bargaining. However, the proposed Guide on labor standards cover only the general disclosure and KPIs of child and forced labor, but the other two cores are missing.

 

As mentioned, employment relations are essential to business development. The protection of the rights to collective bargaining is core to normal labor relations. According to the OECD Guidelines for Multinational Enterprises,

1) Respect the rights of employees to establish or join trade unions and representative organizations of their own choosing, and initiate collective bargaining;

2) Provide necessary facilities and information to employee representatives in order to assist in reaching effective collective bargaining

3) On major business change, particularly to the case of collective dismissal or severance, workers representatives and organization must be informed

 

Therefore, we recommend the addition of “Information on (a) the policies; and (b) compliance with relevant laws and regulations that have significant impact on the issuer relating to the protection of the freedom of association and the right to collective bargaining" to the Aspect of Labour Standards. Also, we suggest to add KPI “B4.3: Forms, frequency and effectiveness in communicating with employee representatives and staff organization".

 

On the equality of opportunity and treatment, it is recommended to add“Information on (a) the policies; and (b) compliance with relevant laws and regulations that have significant impact on the issuer relating to the elimination of discrimination on employment” to the general disclosure in Aspect B4: Labour Standards. KPIs “B4.4: Total workforce (managerial and professional) by gender and nationality” and “B4.5: Total number of senior management by gender and nationality”.

 

D. Aspect B5: Supply Chain Management

Transnational corporations are increasingly dependent on their supply chain under the fierce of globalization. These suppliers might have negative environmental and social impacts to the listed corporations. For instance, Yue Yuen’s Dongguan plants was discovered for social insurance arrears, which led to an industrial action last year. Yue Yuen Industrial is the supplier for numerous well-known international brands, such as, Nike and Adidas. These strikes are certainly having a negative impact to the production and image of those transnational corporations. But the proposed recommendations is not suffice for public scrutiny on those suppliers.

 

Therefore, we recommend to modify KPI B5.1 to “the list of suppliers and their address by geographical region” and to add KPI “B5.3: Total violations of relevant labour regulations and international labor standards in the host State by suppliers”

 

3. A Clear Punishment Mechanism for Failing to Follow the Guide

HKEx should formulate a punishment mechanism to deal with any listed company for failing to comply with the Guide. Even when there is a requirement for mandatory disclosure, this Guide would be rendered toothless where punishment is not available. If HKEx is genuine to better reporting, laying out a set of penalties can give listed companies a clear message. We propose to amend the Listing Rules and prescribe penalties, including the issue of reprimand or a public statement, suspension or delisting and other reasonable and proportionate measures.

 

  1. Strengthening the supervision of listed companies, their subsidiaries and suppliers to comply with labor legislation

Apart from our feedback to this Consultation Paper, we hope HKEx can consider strengthening the regulation to listed companies, their subsidiaries and suppliers, and hence punishing those enterprises for violating labor laws of Hong Kong or elsewhere. Our recommendations are as follows:

 

  1. Provisions relating to compliance with labor legislation
    1. When a complaint of a listed company or its subsidiary is founded on sufficient evidence for the violation of labour laws in Hong Kong or other jurisdictions, the licensed corporation of the listed company must be immediately notified, to take prompt and effective remedial action, and to submit a detailed report including remedial action within the specified time;
    2. That listed company shall publish its offending matter in the conspicuous location of its annual reports and ESG reporting. Letters should be sent all investors to disclose the offence in order to alert and help them to understand the potential risk.
    3. All annual reports of listed companies should be uploaded to the website of HKEx. A list of companies found for violation should also be accessible for public viewing
    4. If there is no improvement or significant violation to the labour laws in the host State is discovered, HKEx should investigate. Set up an independent commission of inquiry to make further investigation whenever it is necessary. Appropriate disciplinary action should follow suit, that includes public reprimand, revoke or suspend a license and fined.

 

  1. Verification of compliance to labour laws
    1. Verification of no violation to any Hong Kong or overseas labour laws should be required as a pre-condition for approval to the IPO
    2. To promote this policy, the Listing Rules should immediately modified accordingly
    3. HKEx should immediately seek clarification with the company that rectification policies are formulated and responses are addressed to the alleged violation. In the absence of satisfactory reply, the listing procedures should be put on hold.

 

18 September 2015

 

 

 

Appendix       Proposed New Guide in the Consultation Paper (Only Aspects B1 to B5 are listed, our recommendations are in italics and underlined

 

B. Social

Aspect B1      Employment

General Disclosure                 

Information on:

  1. the policies; and
  2. compliance with relevant laws and regulations that have a significant impact on the issuer

relating to compensation and dismissal, recruitment and promotion, working hours, rest periods, equal opportunity, diversity, anti-discrimination, and other benefits and welfare

 

KPI B1.1         Total workforce by gender, employment type, age group and geographical region

KPI B1.2         Employee turnover rate by gender, age group and geographical region

KPI B1.3         Total workforce by bands of monthly salary and weekly working hours

KPI B1.4    Total workforce by forms of employment (permanent contracts, short-term contracts, part-time, agency)

 

Aspect B2      Health and Safety

General disclosure                 

Information on:

  1. the policies; and
  2. compliance with relevant laws and regulations that have a significant impact on the issuer

relating to providing a safe working environment and protecting employees from occupational hazards.

KPI B2.1        Number and rate of work-related fatalities.

KPI B2.2        Lost days due to work injury.

KPI B2.3         Total number of cases by different categories of work-related injuries and occupational diseases

KPI B2.4         The rate of accident in every 1000 workers

KPI B2.5        Description of occupational health and safety measures adopted, how they are implemented and monitored

 

Aspect B3     Development and Training

General Disclosure  Policies on improving employees’ knowledge and skills for discharging duties at work. Description of training activities.

 

Note: Training refers to vocational training. It may include internal and external courses paid by the employer.

KPI B3.1  The percentage of employees trained by gender and employee category (e.g. senior management, middle management)

The average training hours completed per employee by gender and employee category.

 

Aspect B4     Labour Standards

General Disclosure                        

Information on:

(a) the policies; and

(b) compliance with relevant laws and regulations that have a significant impact on the issuer

relating to preventing child and forced labour

 (b) Information on:

the policies; and

(b) compliance with relevant laws and regulations that have a significant impact on the issuer relating to the protection of the freedom of association and the right to collective bargaining

Information on (a) the policies; and (b) compliance with relevant laws and regulations that have significant impact on the issuer relating to the elimination of discrimination on employment

 

KPI B4.1 Description of measures to review employment practices to avoid child and forced labour.

KPI B4.2 Description of steps taken to eliminate such practices when discovered.

KPI B4.3 Description of Forms, frequency and effectiveness in communicating with employee representatives and staff organization

KPI B4.4 Total workforce (managerial and professional) by gender and nationality

KPI B4.5 Total number of senior management by gender and nationality

 

Aspect B5  Supply Chain Management

General Disclosure  Policies on managing environmental and social risks of the supply chain

KPI B5.1        The list of suppliers and their address by geographical region (Original: Number of suppliers by geographical region.)

KPI B5.2  Description of practices relating to engaging suppliers, number of suppliers where the practices are being implemented, how they are implemented and monitored

KPI B5.3        Total violations of relevant labour regulations and international labor standards in the host State by suppliers

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