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Financial regulation

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

Only 38pc of 400 listed firms randomly sampled complied on all 11 ESG aspects in their first report after the requirements took effect, according to a compliance review report issued by HKEX in May

PUBLISHED : Monday, 13 August, 2018, 8:32am
UPDATED : Monday, 13 August, 2018, 8:45am

Listed firms should see value in the Hong Kong stock exchange’s mandatory disclosure on environment, social and governance (ESG) issues and stop treating it as a “box-ticking” exercise, according to KPMG which verifies and advises on such reports.

Many only disclose historical figures and do not provide targets on key performance indicators such as carbon emission reduction, as well as an analysis on what the numbers mean for their operational risks, cost savings and business opportunities.

“Like financial statements, if you only give the numbers without explaining the details, the readers cannot appreciate the substance of the performance,” said Patrick Chu Man-wai, a partner at accountancy and consultancy KPMG responsible for business reporting and sustainability, in an interview.

“Although there are plenty of examples of good ESG disclosures out there, some companies do not see the value of ESG reporting but rather treat it as a box-ticking exercise with less than ideal quality and substance.”

He noted that some Hong Kong-listed mainland firms do not have designated ESG teams to coordinate and supervise the ESG reporting, which typically was completed by pooling data from different departments with no or little discussion at the board level of the findings.

Although there are plenty of examples of good ESG disclosures out there, some companies do not see the value of ESG reporting but rather treat it as a box-ticking exercise with less than ideal quality and substance
Patrick Chu Man-wai, partner, KPMG

While all listed firms have published ESG reports as required after they became mandatory in 2016, many failed to give adequate explanation where they did not meet requirements.

Only 38 per cent of 400 listed firms randomly sampled complied on all 11 ESG aspects in their first report after the requirements took effect, according to a compliance review report issued by Hong Kong Exchanges and Clearing (HKEX) in May this year.

HKEX in 2016 upgraded its then three-year-old ESG disclosure guidance from “recommended and voluntary” to “comply or explain”, so that firms make general disclosures on their ESG policies and explain how they intend to deal with operational risks that have far-reaching implications for the environment and society.

Since last year firms had to make further disclosures on measurable key performance indicators such as achievements and targets. Explanation is required for those that fail to do so.

Ellie Pang King-ling, HKEX vice-president, said some smaller companies’ directors do not believe their ESG reporting is important because they do not think investors would be interested to read it.

Asked if the HKEX will revise its disclosure requirements, she said it has to take into account a number of factors before undertaking any future rules review.

They include the emergence of new ESG issues, rules and guidance issued by other exchanges internationally, and investors and stakeholders’ expectations.

“It is an evolutionary process and we cannot stand still,” she said.

KPMG’s Chu said it may not be appropriate to put the onus on regulators to come up with tougher rules and punishment, since companies that do not take ESG reporting seriously may still look for loopholes and short-cuts, adding that educating companies on its merits was probably more beneficial.

Janice Lao, director of corporate responsibility and sustainability at The Hongkong and Shanghai Hotels, operator of the Peninsula brand of luxury hotels, said ESG reporting allows it to “tell a more cohesive story about our overall performance” beyond the financials.

“In traditional financial reports, it seems as if businesses only live in a financial environment, but we exist in a city and we work with people and communities.

“If you don’t treat your employees or communities right, they may leave or the company ends up with reputational issues … these are risks you don’t read about in traditional financial reports.”

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