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Monday, September 5, 2016, 23:01

ESG reporting standards — HK ‘has plenty to catch up’ in compliance

By Oswald Chan
ESG reporting standards — HK ‘has plenty to catch up’ in compliance
Experts say Hong Kong and Asian enterprises lag behind their European counterparts in current ESG (environmental, social and governance) reporting standards. (Asia news photo)

Hong Kong Exchanges and Clearing Ltd (HKEx) introduced mandatory environmental, social and governance (ESG) reporting in December last year as the local bourse aims to catch up with its peers in developed countries.

But, many of the locally-listed enterprises are still deficient in their ESG compliance due to insufficient knowledge and expertise in this area, experts say.

By upgrading the current voluntary level to “comply or explain”, HKEx said all companies listed on the Stock Exchange of Hong Kong will be required either to comply with the ESG reporting guide or publicly justify why they do not — starting from Jan 1 this year — to better serve investors and stakeholders.

The new reporting standard is in tandem with the new Companies Ordinance implemented in March 2014 that requires all Hong Kong-listed firms to discuss their environmental policies and performance, and account for their key relationships with stakeholders, such as employees, customers and suppliers.

ESG reporting is to measure corporate performance not only in terms of financial gain. It’s also based on shared values, management structure, workplace quality, environmental protection, community involvement and social impacts.

“Companies starting to report on their ESG performance may reap the benefits of better risk management, improved access to capital, greater capacity to meet supply chain demands and lower operational costs, to name but a few of the advantages that ESG reporting could bring to enterprises’ businesses,” David Graham, HKEx’s chief regulatory officer and head of listing, said in December last year.

Richard Welford, chairman of CSR Asia — a business consultancy firm on advising ESG reporting compliance — says Hong Kong’s corporate performance in this area is mixed.

“The pressure from stakeholders and consumers to comply with ESG standards is much stronger for Europe-listed companies than their Asian peers, whereas most of them are still family-owned businesses,” Welford told China Daily in an interview.

“Most of the Asian companies still lack an ESG reporting concept and are not accustomed to be transparent. The current ESG reporting standard for Asian enterprises has been lagging behind that of their European counterparts for at least 10 years,” he says.

Currently, CSR Asia advises 20 constituent companies of the Hang Seng Index on how to improve their ESG compliance. Welford admits there’s room for improving ESG reporting in Hong Kong.

ESG reporting standards — HK ‘has plenty to catch up’ in compliance
The new mandatory standards of ESG (environmental, social and governance) reporting came into effect on Jan 1 this year. Hong Kong-listed companies are required to consult with stakeholders as part of the ESG reporting process. (Edmond Tang / China Daily)
“The concept of materiality is the issue at stake here. Companies must learn how to furnish meaningful data and information to measure ESG performance. You have to prepare the crucial story you want to tell to your stakeholders,” he says.

The Hong Kong Business Sustainability Index, launched late last year by Hong Kong Polytechnic University, showed that the 50 Hang Seng Index constituent companies scored an average of 41.7 points.

The top 20 companies’ mean score was 57.25 points — a level categorized as the learner stage in ESG reporting. These top 20 companies included Bank of China (Hong Kong), Cathay Pacific Airways, China Mobile Hong Kong, HSBC, CLP Holdings, HKEx, MTR Corporation and Link Real Estate Investment Trust.

A Bloomberg survey conducted in April last year revealed that Hong Kong’s level of ESG reporting varies according to market capitalization — with a lower uptake rate among small capitalization enterprises and a higher uptake among large capitalization companies.

Welford reiterates that adherence to good ESG reporting practices is paramount in maintaining the SAR’s status as an international finance center.

“Be more stringent in ESG reporting standards and Hong Kong will stay ahead in the game. However, we should be aware that if we do not remain at the top, Hong Kong’s role can be easily lost and be leapfrogged by other finance centers,” he warns.

In its 19th annual global CEO survey, global auditing advisory firm PricewaterhouseCoopers (PwC) identified a small group of chief executive officers who recognize the importance of upholding stakeholder values.

While the polls identified investors and other capital providers as important stakeholders, regulators and communities are increasingly being regarded as legitimate claims to a CEO’s attention.

“The small group of CEOs are more likely to be changing how they measure total success by reporting more non-financial measures and engaging with stakeholders to increase the relevance of, and trust in, their company,” said Jim Woods, PwC’s risk and regulatory services practice leader in Asia Pacific.

“They’re taking a systemic approach to understanding what is important to each stakeholder’s group, and developing measures and reports that are very specific to those groups,” Woods noted.

Despite the current shortcomings, Welford is optimistic about Hong Kong’s ESG reporting prospects.

“Companies should leverage their assets and expertise to make strategic links with your social goals. Use what you are good at and what you know the best to serve social needs. Just giving money like charity donors is not the strategy that adds value,” he advised.
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