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Hong Kong companies showed off their wares at the Hong Kong Trade Development Council’s Hong Kong Toys & Games Fair and Hong Kong Baby Products Fair at Hong Kong Convention and Exhibition Centre on January 9, 2023. Photo: May Tse

Hong Kong’s small businesses stand to gain if they improve their ESG game, analysts say

  • ‘Under pressure’ with ‘the least support’, small and medium-sized enterprises nonetheless need to satisfy increasing disclosure demands, analysts say
  • ‘ESG is set to become a key factor for [SMEs] to increase their advantage, raise their reputation and attract investors,’ association president says

Small and medium-sized enterprises (SMEs) stand to attract more business opportunities from larger, listed companies if they can manage to satisfy increasing demands for disclosures about their progress on environmental, social and governance (ESG) issues, according to analysts.

“SMEs are under pressure and also probably have the least support” in terms of their ESG reporting, Angus Choi, climate and sustainability partner at KPMG China, said in an interview.

Yet the collection and analysis of ESG data is only growing in importance as countries around the world work towards pledges to reduce emissions and tackle climate change.

“Lots of large-cap companies are enhancing their third-party risk management system, [through which] SMEs will be required to submit ESG data,” Choi said. “Some of them will be required to go through supplier due-diligence processes.”

Exchange Square in Central, home of Hong Kong Exchanges and Clearing (HKEX), pictured on October 19, 2022. Photo: May Tse
All of the around 2,500 Hong Kong-listed companies are required to publish annual sustainability reports on their ESG performance alongside mandatory periodic financial reports.
In 2020, Hong Kong Exchanges and Clearing (HKEX), the bourse operator, included core elements of the internationally adopted Task Force on Climate-Related Financial Disclosures (TCFD) reporting framework as part of mandatory requirements in Hong Kong. These include scope 1 and 2 emissions, which are generated directly by companies’ own facilities, or indirectly through externally bought energy, respectively.

Now however, firms on the mainland and around the world are raising their expectations around ESG reporting, said Kwok Chi-wah, president of the Hong Kong Small and Medium Enterprises Association (HKSME).

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As larger firms begin reporting on their scope 3 emissions – a category that includes activities throughout their supply chains – SMEs must align with ESG policy guidelines if they want to do business with those big corporations.

“ESG is set to become a key factor for [SMEs] to increase their advantage, raise their reputation and attract investors,” Kwok said at the association’s SME Transformation ESG seminar on Tuesday.

Small firms that improve their ESG reporting could attract business opportunities from larger companies, which would stimulate “internal circulation” and bolster the city’s economy, Kwok said.

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There are over 350,000 SMEs in Hong Kong, accounting for around 98 per cent of businesses in the city and employing about 45 per cent of the workforce in the private sector, according to the government’s Trade and Industry Department website.

The association launched a charter scheme on Tuesday for SMEs to improve their ESG reporting and raise the standards of disclosures among smaller firms.

Those SMEs that sign on to the association’s register will need to satisfy a checklist, comprising most of the requirements set out in HKEX’s ESG disclosure guidance for listed firms.

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“ESG data will need to be as good as financial data in the future,” said KPMG’s Choi.

“The most common pain point for SMEs is the lack of standardised framework for ESG reporting, especially when different stakeholders are asking for data based on different frameworks.”

The world has at least 200 sets of standards for reporting and assessing climate and sustainability risks, most of them created in recent years without coordination between regulators, industry guilds, companies or financial institutions across different jurisdictions.

A lack of IT and technological skills often makes ESG disclosures challenging for SMEs, according to Fred Sheu, national technology officer at Microsoft Hong Kong.

In June, Microsoft launched the Cloud for Sustainability platform in Hong Kong to help organisations as well as their suppliers record ESG data in line with regional and international standards. The software maker has partnered with consultancies, including KPMG, which provides advisory services based on local regulatory requirements in different countries.