Hong Kong: ESG reporting legislation making the difference?

by Ellinor Häggebrink, Engagement Manager at GES

In May 2015, I wrote about a new initiative from the Hong Kong Stock Exchange[1] (HKSE), introducing an ESG reporting guide as a recommended practice. This guidance encourages all listed companies to start aligning their disclosure with 32 environmental and social KPIs, taking on a ‘comply or explain’ approach starting the financial year of 2016. Corporate governance issues are already highly regulated by the HKSE with around 75 KPIs in place, which is why there was no need to include the G aspects in the new reporting requirements.

According to GRI, stock exchanges act as gateways to capital markets and are therefore uniquely positioned to introduce informed sustainability reporting for listed companies that is beneficial for both markets, companies and ultimately for wider society by ensuring the transparency of corporate decisions[2]. This constitutes a good impetus and momentum for change, and revisiting the Asian financial hub a little more than a year after the guidance was launched I was keen to see the outcome. Last spring, the companies I engaged with seemed eager to learn how to better address ESG issues; most were in the process of collecting data and preparing themselves to comply with the new regulations (or explain why they were not), and very open to ESG input.

A year later, I have to say that disappointingly little progress could be seen on the company side, as most claimed to still be in the data collecting phase. That companies’ performance in this area leaves something to be desired is also confirmed by a recent study from Oxfam Hong Kong, based on a survey reviewing the 50 Hang Seng Index constituents’ ESG policies, practices and performance[3]. The survey found poor company performance in the areas of environmental impact and workplace practices, where almost 50 per cent lag behind and had not established environmental management systems in line with international standards, set emissions reduction targets and timelines, or enforced equal employment opportunity policies.

However, when I met with the HKSE I was told that there is a newly awakened interest in ESG issues from a majority of companies, while some seem to be merely pushed by the compliance mechanism. In general, larger companies have a more open approach and preparedness in this area, while smaller ones have expressed it as a bit of a challenge. A positive development since my last visit was that the HKSE has decided to strengthen the ESG guide further following a consultation exercise, and its plan to upgrade the disclosure obligation has been met with strong support from a broad range of respondents. This is now more in line with international standards, requiring companies to state in their annual reporting whether they have complied with the ‘comply or explain’ provisions set out in the ESG guide for the relevant financial year, and if not, to give a considered explanation. Nevertheless, for now the ‘comply or explain’ approach only applies to the environmental KPIs; companies are also required to share some general information with regard to the social KPIs, but formal reporting is still voluntary and to be made obligatory in the future without any specific timeline.

The HKSE holding this approach gives companies space to develop practices and decide on the scope of reporting, which makes sense for such a fairly new initiative. However, it does lag behind international benchmark and as the first step to improve ESG reporting is to enhance transparency and extend reporting obligations, I would like to see standards being raised to include general disclosure on all aspects. In order to make an actual change, I would also call for the HKSE to set a timeline for shifting the requirement from ‘comply or explain’ to mandatory.

There is a strong positive correlation between ESG performance and regulation, and without clear standards requiring companies to release KPIs, along with effective monitoring initiatives, not all companies may be motivated to implement and improve such. On the other hand, companies seeing the advantages of reporting transparently on ESG performance may reap the many benefits of improved ESG reporting such as better risk management, thereby minimising financial, as well as social and environmental, risks. Although some gaps in terms of disclosure obligations can be identified, I strongly believe the HKSE is on the right track of addressing the issue step by step through the ESG reporting guide.

[1] https://www.gesinternational.com/2015/05/22/business-as-usual-in-hong-kong-but-is-change-on-the-way/

[2] https://www.globalreporting.org/resourcelibrary/Paper-Market-Regulators-and-Operators.pdf

[3] http://www.oxfam.org.hk/en/news_4058.aspx

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