Hong Kong companies grappling with new ESG reporting rules
ESG now falls under the scope of the board of directors as it moves to a more central place in corporate strategy
As the Year of the Rat gets underway, many Hong Kong companies are grappling with the challenge of complying with new and stricter environmental, social, and governance (ESG) reporting rules that will be implemented by the Hong Kong Exchange in 2020.
The challenge comes from a change in focus. In simple terms, ESG compliance is no longer just an exercise in reporting what a company does in terms of ESG-related activities. Under the new rules, ESG compliance involves how corporates manage their overall ESG strategy in relation to their core businesses.
All listed companies are required to publish their ESG reports for financial years starting from July 1 2020 in accordance with the revised ESG Reporting Guide.
Before the new rules were announced in December 2019, for many corporates, ESG was just a peripheral activity handled by a small team led by a mid-level executive. But under the new rules, ESG has become the responsibility of the board of directors.
Also, before the new rules, ESG compliance was more or less an internal affair within the corporate with little, if any relevance, to external stakeholders particularly investors, banks, and financiers.
But under the new rules, the key impact on a corporate would be that it will be more difficult for them to raise needed financing unless they comply with globally accepted ESG standards, best practices, and key performance indicators (KPIs). This is because the investors, banks, and financiers are also under pressure from regulators and their own boards to ensure that the companies they put their money in meet the relevant ESG standards and KPIs.
But now that institutional investors are raising concerns about ESG standards, best practices and KPIs, it is also becoming a concern for the banks and the corporates that they finance.
Because of this, banks, insurance companies, financiers, and providers of capital are now asking more questions of the corporates with regards to their ESG best practices, standards and KPIs.
For the corporates, ESG compliance has become a financial concern, and therefore a key component of their core business, instead of just the peripheral matter that it used to be.
Therefore, it is now the responsibility of a company’s board to ensure that their company meets all KPIs and/or best practices in relation to ESG at both at the policy-making as well as the operational level. Unless the board takes on this responsibility, it will become more difficult for the company to convince its investors, banks, and financiers to provide the necessary funding the next time it is needed.
“The corporates need to be able to describe their ESG strategy in a robust manner, in an integrated manner. And that is not just sitting with a few people in a certain department writing a report because that is no longer fit for purpose,” says Pat Woo, partner, head of sustainable finance, Hong Kong, KPMG China.
According to the KPMG, CLP and the Hong Kong Institute of Chartered Secretaries (HKICS) Survey on Environmental, Social and Governance (ESG) issued on September 2018, only 37 percent of business leaders in Hong Kong have integrated ESG issues into their strategic planning, indicating that ESG is still a peripheral issue for some companies.
The majority of companies do not have the management of ESG concerns strategically integrated as part of their core business or central corporate thinking – on strategy, risk, reputation, operations and efficiency and long- term performance, according to the study.
For the HKEX, the focus of the new rules is to get enough board involvement and make the board responsible for coming up with the ESG strategy, materiality issues, and ESG direction of their listed companies. At present, many of the boards of Hong Kong-listed companies may not yet be in a position in terms of capability and motivation to take on this responsibility.
But according to David Simmonds, group general counsel, chief administrative officer and company secretary at CLP, “Sustainability has moved from the fringe to be a mainstream investor concern. This context demands greater board involvement and attention to the issue.”
A report issued by KPMG, CLP, and HKICS on January 14 indicates that it is crucial for boards of corporates to communicate ESG efforts with stakeholders regularly, including the publication of an annual sustainability report in line with local and international reporting standards.
“There are established standards, such as those developed by the Sustainability Accounting Standards Board (SASB) or the Task Force on Climate-related Financial Disclosures (TCFD), that businesses could follow to communicate sustainability information to their investors,” Simmonds says.
“A lot of boards are still grappling with the fact of why this is relevant to them. And as such it has for the past few years remained a box ticking exercise. But I think the landscape has really changed in the past year or so and [we] definitely see a sea change in the past half-year. In 2020, we’ve already had so many meetings and interviews on ESG (indicating the huge level of interest),” says Woo.
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