Hong Kong firms urged to work harder as social and governance compliance deadline looms

PUBLISHED : Friday, 04 November, 2016, 9:03pm
UPDATED : Friday, 04 November, 2016, 9:24pm

As the first ever deadline draws closer for Hong Kong’s listed firms to comply with their obligation to make disclosures on their environment, social and governance (ESG) policies, a study showed that they need to work harder to ensure compliance.

As most of the companies have financial year-ends in December, they will need to release the information no later than three months after their next set of annual reports are released next year.

“Demand for help in ESG compliance has been rising steadily throughout this year as companies are actively doing work to ensure compliance,” Tony Wong, founder of Alaya Consulting told the South China Morning Post.

His firm helps listed companies meet disclosure obligations or provide third-party assurance on the quality of the disclosure.

“Adopting sustainable practices is no longer an option but a growing requirement, creating both potential challenges and opportunities,” Wong said.

Following a public consultation exercise, Hong Kong Exchanges and Clearing (HKEX), the operator of the local bourse, last December upgraded the ESG requirement – in effect since January 2013 – from “recommended and voluntary” to “comply or explain”.

Publishing ESG information is crucial in demonstrating a company’s commitment in sustainability
Tony Wong, Alaya Consulting

It is now mandatory for listed firms to make general disclosures on their ESG policies, how they intend to deal with the operational risks that have far-reaching implications for the environment and society at large, and whether they are in compliance with laws and regulations, for the financial years starting January 1 or later this year.

For next year and later, firms will need to further make disclosures on measurable key performance indicators such as targets and achievements.

Failure to comply requires explanations.

According to a report by Hong Kong-based Alaya, which examined the sustainability reporting practices of Hong Kong’s 200 largest listed companies by market capitalisation as of July 5, only 60, or 30 per cent issued ESG reports last year.

Among the remainder, just 30.5 per cent included ESG information in their annual reports, while the rest offered no such disclosure.

“Publishing ESG information is crucial in demonstrating a company’s commitment in sustainability,” Wong said.

The 200 firms are constituents of either the Hang Seng Index or the MSCI Hong Kong Index. Hong Kong has some 1,944 listed firms.

The research covered the firms’ annual reports and separate ESG reports, but not their websites or social media postings, Alaya said.

If using next year’s more demanding rules, only 26.7 per cent of the companies satisfied requirements.

Although most of the ESG reports examined followed guidelines or frameworks issued by the Hong Kong bourse, Global Reporting Initiative (GRI), Shanghai Stock Exchange or guidelines issued by Chinese Academy of Social Science, two followed “no particular framework at all”.

GRI pioneered sustainability reporting standards in the late 1990s, which are the world’s most widely adopted guidelines used in over 90 countries, according to the Holland-based organisation.

Of the 60 ESG reports covered by Alaya’s study, their average length was 74 pages, with 10 reports exceeding 100 pages.

Wong said he would suggest companies only include “material” information that “matters” as advocated by the Hong Kong bourse’s guidelines and GRI.

Some 68 per cent of the 60 reports are in Chinese and English, with 23 per cent only in Chinese and 9 per cent in English only.

About 45 per cent of the 60 reports were vetted by third parties for quality assurance based on various assurance standards.

Although external assurance is not mandatory under Hong Kong’s disclosure rules, Wong said it would help bolster investor confidence in the reliability and credibility of the information.