New | Hong Kong joins push for sustainable stock exchanges
Exchange laying foundation for listed firms in providing environmental, social and governance information to help market investors
A low-profile but potentially game-changing consultation by Hong Kong Exchanges and Clearing on strengthening how listed companies report on sustainability issues, such as carbon emissions, working hours and pollution, closes on Friday.
The consultation signals the Hong Kong stock exchange's intent to join other Asian exchanges, including Malaysia and Singapore, in using listing requirements to improve sustainability reporting.
This is a significant and positive development because as a major listing destination for China's companies, Hong Kong is laying the foundation for them to adopt global best practices. It can therefore play a vital role in closing the gap of information disclosure between the East and the West.
By showing how to break down one of the main barriers to creating more sustainable capital markets, HKEx and its peers are creating momentum for others to follow suit.
Investors find company reports most informative and useful when the content is material, meaningful and comparable with their peers. While the effort shown by some firms in enhancing their sustainability disclosure in recent years is appreciated, we need a more strategic approach.
If the environmental, social and governance information that investors receive is incomplete and underlying methodologies vary from company to company and over time, then it becomes next to impossible to use that information to make investment decisions.
Stock exchanges hold the key to change. The globalisation of the financial sector has provided strong incentives for stock exchanges in different jurisdictions to collaborate.
For a long time, investors have been able to rely on the fact that financial indicators, such as a company's profit and loss statement, are calculated in a comparable way across exchanges. We know we are comparing "apples with apples" whether a company is listed in Hong Kong, Helsinki or Houston.
Now, we are taking one step forward, with a holistic and integrated view to incorporating non-financial, yet material information into our analysis. We seek quality and comparability when it comes to data, such as useful metrics for carbon emissions, energy efficiency and water usage.
By working together, stock exchanges can use their listing requirements and market influence to ensure investors have the consistent, comparable and high-quality material environmental, social and governance information they need to make informed, long-term decisions.
Much work has been done on this, notably by US non-profit sustainability organisation Ceres.
Over the past two years, Ceres has brought together some of the world's largest investors to draft the "investor listing standards proposal" - a document detailing how stock exchanges can integrate sustainability disclosure into their listing rules, and what they should prioritise in order to help investors.
Ceres also gathered the support of more than 100 investors, with US$9 trillion of assets under management, who signed a joint letter to the International Organisation of Securities Commissions, the global umbrella organisation of regulators, calling on it to drive this agenda forward.
The organisation has so far failed to respond to that call to action, which is why it is even more encouraging that Asian stock exchanges such as Hong Kong are now demonstrating the global leadership required.
What is most astonishing about sustainability listing requirements is the clear demand for them from both investors and companies.
Many companies see enormous benefits in a more standardised sustainability reporting system. It would significantly reduce the overwhelming and different kinds of requests they receive for sustainability information and would help them align data collection and report production cycles.
The demand from investors is also obvious. Investors with more than US$60 trillion of assets under management have signed the United Nations-backed principles for responsible investment, which call for better sustainability reporting, and according to the CFA Institute, 61 per cent of investment professionals agree that public companies should be required to report at least annually on sustainability indicators.
Perhaps most reassuring is that stock exchanges themselves are increasingly calling for this change to listing requirements. A 2012 survey of major exchanges found 76 per cent of them agreed that they had a responsibility to encourage better corporate disclosure on sustainability, and more than a third agreed such measures should be mandatory.
