Listed companies in Hong Kong SAR and mainland China are increasingly embracing environmental, social and governance (ESG) reporting but for very different reasons.
In Hong Kong, after years of build-up, financial market regulators have made ESG disclosures mandatory. In mainland China, meanwhile, official encouragement of voluntary disclosures and foreign participation has put pressure on more companies to improve their ESG reporting.
Raising the bar
Hong Kong Exchanges and Clearing (HKEX) first required listed companies to provide some disclosures of environmental and social activities in 2016 and expanded this to disclosures of environmental key performance indicators (KPIs) in 2017.
Since 1 July, companies have had to provide a board statement on ESG considerations and disclose significant climate-related issues and environmental KPIs.
‘The latest update raises the bar with an emphasis on board oversight, climate risk response, target setting and social factors,’ says Sammie Leung, climate and sustainability leader at PwC Mainland China and Hong Kong.
‘These will help address demand from international asset managers who are integrating ESG evaluation into their valuations and investment decisions while offering a growing variety of ESG-focused funds.’
With third-party service providers assigning ESG ratings, companies increasingly understand that they need to proactively tell their ESG story or else others will tell it for them
Companies listed in Hong Kong have made improvements in both materiality assessment practices and stakeholder engagement. Some even voluntarily disclose their performance in relation to social KPIs, says Ricky Cheng, director and head of risk advisory at BDO Financial Services in Hong Kong.
There are, says Cheng, a number of reasons for this.
‘Corporates are integrating material ESG elements into their business model to achieve sustainable long-term goals. Focusing on managing material ESG issues and mitigating related risks can address stakeholders’ concerns while creating corporate value.
‘They can also enhance corporate branding and reputation, as well as attract and retain talent.’
While mainland China has no comprehensive corporate social responsibility (CSR) or ESG disclosure regimes, authorities have been encouraging companies to publish CSR reports and increase ESG disclosures.
China’s Securities Regulatory Commission requires listed companies to disclose information on social responsibility. Local regulators in Shanghai and Shenzhen – home to stock markets – have issued guidance.
‘A growing number of A-share companies are doing this voluntarily, but many still view ESG reporting as a compliance exercise,’ Leung says.
A-share-listed companies with shares in domestic markets denominated in RMB are gradually acknowledging the importance of ESG reporting.
Research from Syntao Green Finance has revealed that more than 86% of companies on the CSI 300 index released ESG reports in 2020 compared with just 43% in 2009. The number of ESG reports issued by A-share listed companies almost tripled to 1,021 this year from 371 in 2009.
ESG reporting after Covid-19
The Covid-19 pandemic has shone a spotlight on environmental, social and governance (ESG) reporting.
‘Alongside traditional financial metrics, stakeholders will be interested to know how companies respond to the situation and what measures they have taken,’ says Ricky Cheng, director and head of risk advisory at BDO Financial Services in Hong Kong.
Factors include how companies create a safe and healthy workplace, uphold labour standards, innovate to ensure business sustainability and respond to changing customer preferences.
A recent study from Hong Kong Polytechnic University (PolyU) found that firms with higher ESG ratings experienced lower stock price declines and less volatility during the pandemic.
Louis Cheng, co-author of the study and director of the Center for Economic Sustainability and Entrepreneurial Finance at PolyU, says better governance that benefits employees, such as supporting them in working from home, will eventually be incorporated into ESG frameworks.
As more Chinese companies are included in global indexes, restrictions on foreign fund managers are relaxed and the volume of trading in programmes that connect markets in Hong Kong, Shanghai and Shenzhen grows, overseas investors and stakeholders are becoming more interested in the activities of A-share companies.
Leading overseas fund managers now integrate ESG into their valuations and investment decisions, and ESG-themed funds are seeing record inflows.
‘With third-party service providers assigning ESG ratings, companies increasingly understand that they need to proactively tell their ESG story or else others will tell it for them,’ says Leung.
The next step
As ESG reporting moves into the spotlight, companies will need to upskill their teams.
‘Boards should foresee a scenario under which ESG matters may affect business models and possible relevant regulatory changes that may influence the business environment,’ Cheng says.
‘They should also understand how climate change may affect the sustainability of the company’s supply chain and customer preferences, and how it may lead to new energy-saving technology in the industry.’
In addition, companies may need to bring ESG expertise on board to help steer the business to achieve sustainable long-term goals. These experts should understand ESG-related megatrends, current initiatives to mitigate risks or capture value and opportunity, and have a solid technical understanding of risks.
Accountants also have a role to play.
The International Federation of Accountants (IFAC) says the profession must remain engaged in the conversation, and effective corporate reporting must include not just financials but also measure value creation, sustainability and ESG factors.
‘The profession is critical to evidence-based decision-making, reliable information gathering, and consistent, comparable corporate reporting – be it ESG-focused or otherwise,’ says IFAC.