Blue chips pushed to go green
Hong Kong blue chips are being urged to improve their disclosure on environmental and social issues or risk losing out on investment from a growing number of global funds that adopt socially responsible standards.
Few Hong Kong companies are included in global sustainability indices and those that are face exclusion if they do not improve reporting standards, according to a report entitled Missing Out from international consulting group Environmental Resources Management (ERM).
Of the 33 companies listed on the Hang Seng Index, only three are included in the Dow Jones Sustainability Index, which adopts a best-in-class approach to identifying leading sustainable companies by sector.
The companies are Li & Fung, New World Development and Swire Pacific.
Hutchison Whampoa and Hang Seng Bank are part of the FTSE4Good index which screens companies by socially responsible investment (SRI) standards, avoiding sectors such as tobacco, weapons and nuclear power.
Companies not part of these indices are automatically excluded from the portfolios of passive fund managers tracking an SRI index. In addition to the indices, Cathay Pacific Airways, Cheung Kong (Holdings), Hong Kong and China Gas, Johnson Electric, MTR Corp and PCCW have been assessed by SRI analysts. Only the MTRC and CLP Holdings publish information that meets emerging reporting requirements, according to the report.
'If transparency on sustainability issues does not improve in line with regional and global good practice, SRI funds will invest in companies outside Hong Kong,' the report warned.
'SRI indices and funds increasingly view good reporting as a factor in their investment decisions,' said James Muir, senior consultant at ERM and author of the report.
Moves by pension funds to incorporate SRI standards have boosted the popularity of ethically screened funds. In 2000, the British government introduced a new requirement that occupational pension funds should state in their investment policies the extent to which they take account of SRI issues.
In February, the California Public Employees Retirement Benefit Scheme (Calpers) - one of the biggest pension funds in the United States with about US$150 billion under management - generated a storm in regional markets with the announcement it was blacklisting some Asian countries for not meeting certain standards that included human rights.
As of April, Asia-Pacific had a mere 7 per cent allocation in the Dow Jones Sustainability Index, with 52 per cent invested in European companies and 40 per cent in the Americas.
According to the FTSE Group, there are more than 50 retail ethical funds in Britain alone, the value of which has grown from GBP199.3 million (about HK$2.38 billion) in the second quarter of 1989 to GBP3.7 billion in the fourth quarter of 2000 - an increase of more than 1,750 per cent.
In the US, US$2.5 billion is under SRI management, the report states. Compound annual growth of SRI funds has been 22 per cent in the US and 33 per cent in Britain since 1995.
Barchester Green Investment expects retail ethical funds in Britain to be worth GBP10 billion by next year. Mr Muir said there were several Hang Seng Index companies that were doing 'reasonably well' on the SRI front, but were not publishing the information externally.
'[These companies] are probably not comfortable with exactly where they are, or what the data shows. In particular, the diversifieds. For them, trying to get hold of information in a consistent form is very difficult,' he said.
Mr Muir added that the corporate culture in Hong Kong was different to the US and Europe where companies published information even if it was not complete.
'Inevitably, environmental and social issues are very dynamic, they are always changing. It is difficult to say there is a point where you have solved all the environmental and social issues.'
Mr Muir said SRI funds and indices had also slightly different criteria and companies needed to adopt a suitable strategy to meet their requirements. He urged companies to take the first step in creating a framework for sustainable reporting which could be reviewed annually in line with financial performance.
He also cautioned qualifying companies to review their status to avoid dropping out of SRI indices. From September, FTSE4Good will require constituents to meet more comprehensive standards in the areas of environmental policy, management systems and reporting.
Edmund Harriss, who manages Hong Kong portfolios at Investec Asset Management, said many pension funds used SRI standards but few pursued them exclusively.
'Pension companies are obliged to bring the best returns for their clients. They will comply as far as they are able but if there is a conflict between pensioner and SRI policies, the pensioner will win it. This is what they are obliged to do,' he said.
Fund managers said Asia was relatively underweight in global portfolios at present, making it difficult to quantify the possible effects of the SRI issue on global fund flows.
Mr Muir urged market regulators to raise the level of debate on ethical screening to help Hong Kong become a regional leader in SRI issues.
