Lack of ESG expertise remains a key challenge in Hong Kong

13 Feb, 2020 06:18
source: Singularity Financial

Hong Kong’s listed companies have now been put on notice, and the race against the clock has started as The Stock Exchange of Hong Kong Limited (HKEX) moved into the next stage of disclosure obligations on ESG reporting, which is going to take effect from July 2020.

A recent article titled “In Asia, finance may be the most effective weapon” by Dr. Ma Jun, chairman and president of the Hong Kong Green Finance Association (HKGFA) and chairman of the China Green Finance Committee, pointed out, “Investors around the world have been voicing their need for quality data on environmental, social and governance (ESG). But the data may be inaccurate or missing altogether in Asian companies. Regrettably, years of voluntary disclosure requirements haven’t moved the needle.”

Senior reporter Eric Ng from South China Morning Post, also raised his voice, Hong Kong listed firms get ‘F’ on ESG report card in 2019, only 39 per cent of 500 randomly-chosen ESG reports on or before June 30 fully disclosed their environmental performance indicators.

You will find similar situation in its neighboring stock exchange. Jason Tu, CEO of a local ESG big data firm MioTech, revealed to Singularity Financial, out of the 3,700 listing companies in Chinese A shares, only about 1,000 large companies disclosed CSR reports. Among them, maybe 200-300 ESG reports are properly written, and the rest are coming in all forms. There is no industry standard, therefore, no good ESG data.

According to a joint publication by KPMG, CLP Holdings Limited (CLP) and The Hong Kong Institute of Chartered Secretaries (HKICS), a majority of Hong Kong-listed companies have yet to integrate environmental, social and governance (ESG) into their business models and many of them lack the expertise to address the issue. This is despite increased expectations on ESG issues from regulators and the investment community.

Year 2020 is going to be a make or break year for climate policies, with countries coming back to reassess their national determined contributions under the Paris accord. Bain & Company estimates that 90 per cent of Asian investors have accelerated their effort to invest sustainably over the past three to five years. “While Asia is too big and too complicated to be generalised, we think the evolution of sustainable finance across the region has a common success factor – regulation,” said Dr. Ma Jun.

Over the last two years, exchanges across Asia have made substantial effort to make ESG disclosures mandatory for listed companies. The recent amendments to the existing ESG Reporting Guide published by HKEX represents a critical step to bringing this matter to “management” routinely, with an emphasis on the board’s role in the governance structure for ESG matters.

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.

It’s time for boards to take ESG standards and practice to new levels because they have the deepest understanding of the goals and motivations of their businesses, the cultures and nuisances of their operating markets, as well as a vested interest in the long-term success of their organizations.

However, there is no one-size-fits-all solution; an ESG ecosystem or model that works well in one jurisdiction may not have the same impact in another region. It is, therefore, important for each key stakeholder – companies, investors and policymakers – to identify their own goals and motivations in order to work out the best integration approach to create long-term impact in their respective local market.