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China economy

Low uptake of sustainability measures among Hong Kong and Asian firms could turn investors away

Survey by BDO finds companies are unwilling to allocate resources during times of uncertainty

PUBLISHED : Thursday, 27 September, 2018, 12:04pm
UPDATED : Thursday, 27 September, 2018, 3:33pm

Asia is failing to attach importance to environmental, social and governance (ESG) measures, falling behind Europe and the United States, which could harm investor interest, say experts.

“Europe is most ahead, led by regulations and also culture. There is more accountability and a slightly different drive – sustainability issues are more present within consumers’ mindsets,” Louise Dudley, global equities portfolio manager at Hermes Investment Management. “That moral voice is a bit louder.”

For Hong Kong-listed firms, environment and governance disclosure is ‘box-ticking’ exercise: KPMG

ESG measures track the sustainability and ethical impact of a business. Increasingly popular among investors, who are conscious that while a lack of sustainable and ethical practices might hit a company’s returns, they can enhance a firm’s transparency and reputation.

In Asia, recommended frameworks take the place of compulsory requirements, meaning companies are not forced to improve on sustainability. And this could be an issue because the level of ESG within countries is something investors do look at. “So if, for example, a country’s ESG metrics are too low, then certain investors won’t be able to invest” due to internal policies, said Dudley. 

We are not seeing companies proactively and strategically thinking about opportunities in terms of climate change
Louise Dudley, global equities portfolio manager, Hermes Investment Management

In Hong Kong, it has been mandatory for listed companies to make general disclosures about their ESG policies since 2015, when the local bourse upgraded its requirements from “recommended and voluntary” to “comply or explain”. Companies must explain how they plan to deal with operational risks that have implications for the environment and society, and if they are in line with laws and regulations. 

But companies in the city are not attaching much importance to ESG, according to Clement Chan, managing director, assurance at BDO Limited, amid current geopolitical tensions.

He had expected an improvement over last year, but it seems companies are unwilling to allocate resources during times of uncertainty, he said. A lack of resources, noted BDO, was the prime reason for lack of progress in Hong Kong.

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“We are encouraging companies to devolve resources towards their ESG performance. In the long run, this will bring positive results,” said Chan.

A survey of 400 of the most recent ESG reports, published on or before May 31, by listed Hong Kong companies was released last week by BDO, the world’s fifth-largest accountancy network.

It found only 11 per cent fully disclosed key performance indicators, although this number was up from 5 per cent last year. Only 17 per cent reported ESG goals and, among them, 8 per cent disclosed environmental targets, down from 15 per cent last year.

“We are not seeing so much opportunity out of Hong Kong at the moment,” said Hermes Investment Management’s Dudley. “We are not seeing companies proactively and strategically thinking about opportunities in terms of climate change.”

Dudley said she did not expect regulation elsewhere in Asia, where many countries are at the early stages of developing their economies. 

The Sustainable Development Goals set by the United Nations in September, 2015 were a catalyst for many countries to think about ESG, said Dudley, followed by the Paris Agreement in December, 2015. More recently, in May the European Commission announced new rules for institutional investors to disclose how sustainable their investments are.

Investors are also taking note. As of August, 2017 more than 1,750 investment managers from 50 countries had signed up to the UN supported Principles of Responsible Investment, which promote the incorporation of ESG measures into the investment process. These managers are responsible for more than US$70 trillion in assets.

But disclosure in Asia remains low, potentially putting companies out of favour with investors. Only 30 per cent of senior executives from more than 200 Hong Kong-listed companies thought ESG measures were good for business in terms of attracting investors seeking long-term investment, according to a joint survey by KPMG, electric company CLP Holdings and the Hong Kong Institute of Chartered Secretaries, published on September 13.

Why Hong Kong firms need to do better on environment, social and governance risks disclosure

Although 70 per cent acknowledged the value of ESG measures, only 37 per cent said they had actually integrated these into their strategic planning.

But there are some positives. China’s top-down approach has been forcing businesses to put money behind green opportunities and technologies. Although levels of disclosure are low and foreign investment is hard, Chinese strategies towards helping climate change could be emulated across Asia, and the country may potentially leapfrog Europe, said Dudley.

“We are expecting developments in China to continue to have an impact and, if, into next year, we see more positive benefits from that, then we expect the rest of Asia to look at it favourably. 

“On climate change, China could leapfrog Europe because it has that strong top-down ambition and the ability to input swift regulation. Whereas in Europe and the US, you tend to get more pushback, from industry bodies particularly,” she said.

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