By Dr. Karen Lee, Senior Project Manager, Civic Exchange
The concept of environmental, social and governance (ESG) was first proposed by the UN Global Compact to mainstream investors and financial analysts in 2004. The term ESG is often used interchangeably with sustainability. ESG has become important to financiers and investors mainly because environmental and social issues are increasingly posing risks to economic growth and social stability.
Stock exchanges around the world have introduced environmental, social and governance (ESG) reporting guidelines worldwide. It is because integrating ESG performance into investment analysis, risk management and decision making has become an important component to attract investors and ensure sustainable growth of the business. Global banks and institutional investors are looking at their investment decision-making process with ESG data to help to mitigate the risks and strengthen their investments.
A number of sustainability indices, including the Dow Jones Sustainability Indices and Global Compact 100 Index are being used to benchmark sustainability investment and are used as a means to identify companies with sustainable business models.
Hong Kong Exchange and Clearing Ltd. (HKEx) has consulted the issuers and other key stakeholders to disclose ESG data. The first consultation document “Consultation Paper on Environmental, Social and Governance Reporting Guide” was launched in December 2011. After that, HKEx launched ESG reporting guidelines in 2012. In Hong Kong, these guidelines are currently voluntary, while other stock exchanges in the region, such as Singapore and Shanghai have already implemented the ESG reporting guide. The HKEx’s ESG reporting guidelines aim to raise the ESG awareness of the listed companies in the local market and encourage the listed companies to disclose ESG data to the investors.
The current ESG reporting guide aims to provide a basic framework for the listed companies to use if they wish to. The listed companies are also not required to provide a definition for each KPI. Standard of reporting in the proposed ESG reporting guide is much lower than other international reporting standards. For example, the number of key performance indicators (KPIs) and coverage of those KPIs of the ESG reporting guide of HKEx are relatively low compared to other international reporting guides. Examples of reporting guides that place more onerous burdens on listed companies include the Global Reporting International (GRI) G4 and International Organization for Standardisation (ISO) 26000.
According to a study conducted by Bloomberg for the HKEx, about 46 percent of the randomly selected 330 listed companies had disclosed ESG data. Among those listed companies, about 80 percent of the very large market cap listed companies (>HK$10,000 million) had reported on ESG issues. A pattern in which the larger the size of market capitalization of the listed companies, the more resources that those listed companies would spend on reporting ESG performance is shown in the local market.
In view of the greater demand and expectation for both financial and non-financial information from the investors and other key stakeholders, HKEx has proposed to upgrade some of the recommended disclosures to “comply or explain”.
After almost three years of adaptation period, HKEx has finally launched a public consultation document on Review of ESG Reporting Guide in July 2015. The consultation paper aims to urge the listed companies in Hong Kong to disclose environmental, social and governance (ESG) information and encourage a more standardised format of ESG disclosure. The ESG reports submitted by the listed companies should be examined or assessed. Otherwise, the ESG reporting guide will become a “box-ticking” exercise for the listed companies in Hong Kong.