Hong Kong listed firms get ‘F’ on ESG report card, put on notice as rules become mandatory in 2021

Eric Ng

Hong Kong-listed companies are giving the city a bad name by failing to meet the “comply or explain” disclosure rules on environmental performance indicators. It will get tougher when requirements on climate-change and social issues also become mandatory from 2021, industry consultants said.

Only 39 per cent of 500 randomly-chosen environment, social and governance (ESG) reports on or before June 30 fully disclosed their environmental key performance indicators under current “comply or explain” regime, according to a study conducted by BDO. The rest either gave incomplete or no disclosure, and failed to give sufficient explanation for them, the accounting firm said.

Only 12 per cent of them spelt out plans to deal with climate-change issues. Only one in five among the 12 per cent have divulged information on actions taken, the study shows.

There is still a gap between existing practices in Hong Kong and standards in more established markets such as the UK and US,” BDO’s head of risk advisory Ricky Cheng said in an interview. The result was “far from satisfactory in terms of compliance and quality,” he added.

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ESG reporting enables companies to identify opportunities to reduce operating costs and grow revenues through sustainable development, better governance and risk mitigation, analysts said.

They are widely seen as a proxy for strong management quality and long term sustainability, the Securities and Futures Commission said in a report in last month. Such disclosure helps investors allocate capital more efficiently, it added.

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Hong Kong’s listed companies have now been put on notice, and the race against the clock has started as authorities moved into the next stage of disclosure obligations on ESG reporting.

Hong Kong Exchanges and Clearing, which operates the city’s stock market, on December 18 tightened the requirements to make disclosures on climate change and social issues mandatory from 2021. This will be a step up from 2017 when environmental disclosure became obligatory. Before 2016, ESG reporting was on voluntary basis.

The new requirements will be imposed on companies whose financial years begin on or after July 1, 2020, the HKEX said in its market consultation report.

No thanks to weak reporting, the local bourse ranked 32nd among 35 exchanges in 2018, in terms of ESG disclosures by its listed members, with a 12.2 per cent rate. In Asia Pacific, Thailand, Australia and Tokyo achieved more than 50 per cent, according to a ranking compiled by a United Nations programme called Sustainable Stock Exchanges Initiative.

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Most of the firms, especially small and mid-sized entities, will need to step up their efforts to meet more stringent requirements, said Pat-Nie Woo, a partner at KPMG China.

“If we call ourselves an international financial centre, on par with global financial centres like New York, London, Tokyo and the like, we need to keep up with them on corporate disclosure quality,” said Woo, who is responsible for Hong Kong business reporting and sustainability at KPMG.

As of June 2019, there were nearly 2,900 ESG-linked funds globally with about US$890 billion in assets under management, with the bulk of the funds domiciled in Europe, according to data compiled by Morningstar. China and Hong Kong had 29 funds combined with about US$4 billion in assets under management.

Some of the city’s powerful investors are giving the initiative a big push. The Hong Kong Monetary Authority, which manages HK$4.2 trillion of reserves, has included ESG factors in its risk analysis for bond investment, it said in May.

The de facto central bank has also required its external fund managers to engage their investment targets on ESG issues. Under the latest HKEX rules upgrade, listed firms’ boards will also be held responsible for deciding on the issues they consider as “material” – those most relevant to their stakeholders – on which they need to make ESG disclosures.

“It is important for company boards to work closely with senior management in understanding how sustainability is tied to business strategy, beyond mere disclosure,” said Ronie Mak, the managing director of family office RS Group.

“Institutional and private investors are increasingly demanding quality ESG integration and disclosure, if Hong Kong does not keep up, capital will flow out of the city,” said Mak, who led the establishment of Sustainable Finance initiative, a non-profit network of over 30 private investors.

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