Accounting and Auditing

HKEX’s latest initiative means more management transparency

Move to make listed firms include environmental, social and governance criteria in annual reports adds burdens, but others say it is not enough

PUBLISHED : Sunday, 17 September, 2017, 8:02am
UPDATED : Sunday, 17 September, 2017, 8:02am

With Hong Kong Exchanges and Clearing (HKEX) now requiring listed companies to include environmental, social and governance (ESG) criteria in annual reports, most observers see this as a positive move that promotes sustainability and encourages more far-sighted and transparent management practices.

Yet, dissonant voices can still be heard. Some suggest the extra time and expense in following the guidelines for such reporting imposes unnecessary burdens. But others say the steps don’t go far enough and want to see wider adoption of the International Integrated Reporting Council (IIRC) framework.

They believe it offers a more cohesive approach for firms to think holistically about strategy, operations, social issues and sustainability, and is a surer way to establish consistency, improve all-round performance, and build investor confidence.

“ESG in Hong Kong has had an impact; it’s a great initiative,” says Chris Joy, acting chief executive of the HKICPA (Hong Kong Institute of Certified Public Accountants). “But complying with local rules – the priority for those listed here – also has to be seen in the wider context of

non-financial company reporting requirements in other parts of the world.”

ESG in Hong Kong has had an impact; it’s a great initiative
Chris Joy, acting chief executive of HKICPA

Regarding the IIRC framework, he says the HKICPA is supportive and helped with the launch in Hong Kong. Overall, it is recognised as a positive driver, with the potential to help businesses create value and take a lead on issues, such as green living and education, which are of increasing concern to many stakeholders.

Some Hong Kong entities, such as CLP Holdings and Link Reit, have already gone down that road. In terms of action and processes, they are looking to do substantially more than the current basic requirements.

“But if other local companies have taken a decision to focus on ESG and not move to integrated reporting, I understand that,” Joy says. “We have to be mindful of what our members want and, when they are comfortable with the changes, things will then get further traction in Hong Kong.”

Joy says that it is a matter of companies continuing to adapt their thinking and coming to realise that any extra commitment of staff time and resources makes long-term sense. “Starting off with a new reporting framework is still a big step for a lot of companies,” he says. “It should be seen as a long journey where, so far, things are coming on quite well.”

Ricky Cheng, director and head of risk advisory at BDO, says many listed companies have started to think more deeply about the relationship between ESG reporting and the running of their day-to-day business since the mandatory disclosure requirement came into effect in January 2016.

ESG practices can bring benefits ... there can be long-term gains for brand, reputation and financial performance
Ricky Cheng, director and head of risk advisory at BDO

It has given rise to all kinds of initiatives: streamlining supply chain management to eliminate inefficiencies; identifying unconsidered health and safety risks in the work environment; reducing power consumption and costs: and making a corporate commitment to the principles of recycling.

“This is not done just for reporting purposes,” Cheng says, adding that, over time, such moves can make a positive difference. “ESG practices can bring benefits to a company ... once the sustainability elements are incorporated into the business operations and objectives, there can be long-term gains for brand, reputation and financial performance.”

In recent years, there has been no shortage of training programmes to bring corporate officers up to speed with the essentials of ESG reporting.

Yet Cheng says more should be done. “With their knowledge and experience of ... industries, auditors could probably do more to provide positive feedback; the IIRC could launch more activities to raise awareness about its framework among the reporting community.”