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Environmental, social and governance

Hong Kong companies strive to make environmental, social and governance integral to their business strategies

Corporate leaders in the city are coming to recognise that disclosure in areas such as ‘physical risks and carbon emissions’ helps investors understand the risks and opportunities they face

PUBLISHED : Sunday, 24 September, 2017, 2:30pm
UPDATED : Sunday, 24 September, 2017, 2:30pm

In developed markets, most notably the United States and Europe, major investors are paying even closer attention to environmental, social and governance criteria as a key factor when putting together their portfolios.

They can see that these issues have real resonance with a wide swathe of stakeholders, and that companies with a commitment to best practices and principles are well positioned to emerge as popular favourites and consistent winners.

Corporate executives in Hong Kong are gradually taking that message on board. But a little extra push is still needed to make some accept that, in a changing world, it entails something more than a healthy balance sheet, regular dividend payouts and steady growth to be considered an automatic choice and a long-term hold by fund managers and private investors.

“As ESG reporting is a relatively new topic, many companies in Hong Kong are still familiarising themselves with the requirements,” says Maria Cheng, partner and head of business reporting and sustainability for KPMG China. “Therefore, they may not yet recognise the value of integrating ESG into their operations or identifying related issues that are now important to the business and its stakeholders.”

Confirming this, a recent KPMG survey of 366 Hong Kong-listed companies found that 80 per cent of respondents met the “comply or explain” requirements of basic ESG reporting. That might seem like a solid start, but it barely scratches the surface when compared with initiatives taken and standards set in other parts of the world.

Instead of seeing the whole thing as a simple “box-ticking” exercise, Cheng exhorts corporate leaders to make ESG integral to their business strategies. They must understand how external expectations are changing the function of boardroom oversight and how market forces are being affected by some new dynamics.

“Companies should provide thorough and transparent disclosure in areas like physical risks and carbon emissions,” Cheng says. “That helps the public understand the risks and opportunities they face, as well as their strategies for dealing with challenges. There will be more focus on companies’ plans for sustained value creation and long-term interests.”

According to Ivan Tong, managing partner for climate change and sustainability services at EY Greater China, the timing and disclosure levels suggested in the ESG Reporting Guide from Hong Kong Exchanges and Clearing have so far been just right. They take due account of the speed and course of development of the issues in Hong Kong and recognise that the “drivers for change” differ between companies, countries and regions.

However, many would see it as just a starting point. There is no reason to stand still or solicit applause for a job well done.

As ESG reporting is a relatively new topic, many companies in Hong Kong are still familiarising themselves with the requirements
Maria Cheng, partner and head of business reporting and sustainability, KPMG China

“We expect the regulations to play a part in shaping the market and further warming people up to the concept of ESG management,” Tong says. “Most companies can continue to improve on the materiality of issues disclosed in their reports. These are becoming increasingly important factors for the consideration of investors, and the current disclosure requirements serve as key guidelines as to what is in the common interest.”

Certain enterprises, he notes, have demonstrated a distinct lack of enthusiasm for the idea of incorporating ESG into their businesses, as evidenced by their one-page reports. That approach, though, is unlikely to win them new fans or attract forward-looking investors.

Other instances, however, show board members moving fast to adopt and implement ESG policies to redefine their company, reposition their brand, and differentiate themselves from competitors.

“To certain companies, the shift may seem new and unfamiliar, and it may take time,” Tong says. “But fully incorporating ESG strategies into their businesses [is what investors expect to see].”

For Sammie Leung, director for risk assurance at PwC, an oft-heard comment from local clients is that the additional rules, particularly any linked to environmental data, are challenging. The complaints of smaller enterprises tend to centre on the fact that other stock markets set out disclosure requirements taking consideration of market capitalisation thresholds.

The stock exchange, though, has left a fair degree of choice and flexibility, when compared with international frameworks, such as the Global Reporting Initiatives. But, in doing so, they are also placing a certain amount of reliance on the effects to peer pressure and investor expectations to achieve the intended outcomes.

“While the rules in Hong Kong apply to all listed companies, regardless of size or industry, they are also asked to assess what content and coverage they report, based on materiality and relevance,” Leung says. “Therefore, sensible planning and scoping of an ESG report is important. Having the board of directors take overall ownership of the disclosure exercise is an effective way of drawing attention to what’s happening.”

She adds that, instead of looking for shortcuts, Hong Kong-listed companies should be taking steps to match the best global standards.

“Greater transparency in reporting non-financial information will continue to be a mega trend,” Leung says. “The younger generation now plays a powerful role in reshaping habits and do not make decision based purely on financial factors. They care about whether companies do good for the community and for the planet as a whole.”