ESG Reporting

ESG Reporting

22 November, 2012
Corporate sustainability
Hong Kong Exchange guides companies to deliver environmental, social and governance details to investors
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Public companies in Hong Kong are under greater scrutiny to tell how their operations affect the environment thanks to new reporting guidelines created by Hong Kong Exchanges and Clearing Limited.
 
The guidelines, however, are recommendations, not requirements, so it may take some time before the public sees real change in how companies handle environmental issues such as waste disposal and carbon emissions or in how they treat natural resources, as well as social and governance issues.
 
The exchange developed the Environmental, Social and Governance (ESG) Reporting Guide late last summer after months of public comments, to get companies comfortable with reporting regularly on a range of non-financial issues.
 
The reason for the guidelines is many main stream investors increasingly view non-financial issues, such as how a company manages water resources or how efficiently it uses energy, as being as critical to the operational success of a company as its profit-and-loss statement.
 
In Asia generally, many of the social and environmental contexts in which businesses operate are changing at a much faster rate than in more developed markets, according to Jaideep Panwar, manager, research products, Sustainalytics, in Singapore, a firm that provides ESG research and analysis to institutional investors. 
 
Improving per capital income levels in several Asian markets, for instance, are boosting consumption in these countries.
 
“The rate of change of consumption levels in emerging Asia is higher than in developed markets,”  Panwar says. This is placing greater demands on resources, like energy, food and water.
 
While investors recognize some Hong Kong companies like CLP Holdings and Swire Pacific for their quality ESG reporting, most Hong Kong companies haven’t thought of these issues at all, according to Mark Dickens, Head of Listings Division at HKEx, who spoke this fall before the Hong Kong Institute of Certified Public Accountants.
 
The guide is designed for these companies that need to “walk before they can run,” Dickens told the HKICPA.
 
“Companies will be sticking their toe in the water for the first time in the next year or two, and we can’t demand the Rolls Royce standard as the first thing that happens, particularly when no other developed market has done so,” he said.
 
To begin, companies are encouraged to report data on so-called “key performance indicators” – KPIs in accountant lingo – in four broad categories: workplace quality, environmental protection, operating practices, and community involvement. The guide applies to companies with financial years ending after 31 December, 2012, which is about 70 percent of the exchange’s listed companies, according to a HKEx spokesman,
 
Ideally, companies can begin to report on their ESG performance by chipping away at the indicators in each category, one-by-one. Environmental indicators look at emissions and use of resources, for instance.
 
While listed Hong Kong companies don’t have to do anything in response to the guide, Dickens doesn’t consider the approach to be “wishy, washy.”
 
That’s because in three years, depending on “market readiness,” companies may have to comply with the reporting standards or “explain” why they aren’t complying, according to the exchange. That means companies that haven’t reported on ESG issues in the past will have to start taking a look now at what they can report, Dickens says.
 
“If companies don’t start to get ready over the next two years, then they won’t be in a position to comply, and they’ll have to explain that they sat on their hands,” he told the HKICPA.
 
Ideally, companies will find the process of looking at environmental, social and governance indicators in addition to financial ones makes their business stronger, says David Doré, research manager, Association for Sustainable and Responsible Investment in Asia.
 
They may find opportunities to reduce costs through energy efficiency or to increase revenues by developing a new product or service, he says.
 
“I think the idea is not to make it just a reporting exercise, but to actually find value in the process,” Doré says. Investors, he adds, will want to see how a company’s ESG reporting and performance is linked to its financial performance. In its submitted comments on the guide, the association urged the exchange to encourage ESG data to be “an integral part of statutory and legally required financial reporting.”
 
The HKEx isn’t alone in wanting to see companies disclose ESG performance as well as financial performance. Several international guidelines exist and have for some time. But there’s no one set of universally accepted guidelines for companies or exchanges, a fact ASrIA says shouldn’t stop companies from doing whatever ESG reporting they can.
 
One of the most well known international guidelines was created by the Global Reporting Initiative, a nonprofit organization that has been working at standardizing sustainability reporting since the first version of its guidelines were published in 2000. In 2011, more than 2,300 companies worldwide used GRI’s Sustainability Reporting Guide to report on ESG issues to their shareholders.
 
GRI reporting is used by many Hong Kong companies, but the HKEx didn’t want to make those guidelines the standard, noting in its concluding report that GRI’s requirements could be “daunting” for companies just beginning to report on ESG.
 
The HKEx’s creation of the reporting guide through extensive consultations with a range of stakeholders, including  member companies, institutional investors, nongovernmental organizations and research and analysis firms “clearly signals a positive direction,” says Panwar of Sustainalytics.
 
The limited scope of the performance indicators in each category, however, may be a problem if companies don’t feel they need to go beyond the starter-kit laid out by the guide, he cautions.
 
“If the guide itself does not evolve further in a few years, reporting could get stunted, as companies may not look beyond the set of indicators that the Hong Kong Exchange has provided,” Panwar says.
 
A separate concern is that the exchange doesn’t require companies to get their ESG reports verified by a third party, like an accounting firm verifies financial results, says Doré of ASrIA.
 
“If I’m an investor, and I don’t see a third party name, it doesn’t provide any level of confidence,” Doré says.
 
In response to this concern, the HKEx said it would recommend companies get so-called “assurance” of their reports, but would not require it.
 
 

By: Abby Schultz
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