By Wenqing (Tom) Liu
[TL;DR] ESG investing is growing at a staggering rate around the world. Until now, the main objective of ESG reporting has been to provide a framework for corporations to share their values, measure their impacts and demonstrate their compliance with relevant ESG regulations. Though, in order to better align with the expectations of investors, I believe that good ESG reporting should move beyond the confines of compliance driven reporting and instead, be designed to genuinely inform investors about the steps the organisation has taken to achieve their sustainability goals and their commitments to a broader range of sustainable development topics. Granted, the current ESG reporting systems have been running well under the guidance of different institutions. This has spurred companies to not only record and measure but also to understand and disclose their ESG performance through various approaches. Notwithstanding, a more detailed, systematic and SDGs (Sustainable Development Goals) oriented ESG report can better function as a platform where all stakeholders are able to communicate effectively. This article briefly introduces the ESG reporting system in Hong Kong and aims to sketch the contours of what a practical and mature ESG reporting system would look like in the near future based on my experience and understanding in the ESG industry.
Environmental, social and governance (ESG) investment has reached a stage of maturity in western societies and has played a part in the development of innovative ideas such as the Circular Economy, Life Cycle Carbon Emissions Assessment and Green Finance. At the core of ESG investment is ESG reporting as it provides investors with more accurate, comprehensive and clearer non-financial assessments for ESG investment decision making.
Since the beginning of 2016, the Hong Kong Exchanges and Clearing Limited requires all listed companies in Hong Kong to publish an ESG report alongside their annual report. Moving towards 2019, implementing a more comprehensive and high-quality ESG reporting system is an inexorable trend across all industries in Hong Kong as firms demand improvements in various ESG reporting aspects. For instance, instead of pure regulation compliance, a report that covers the benchmarking process and sound presentation is favoured by listed companies based on the engagement with their CFOs and board members. In my opinion, this is due to the combination of the increasing cognition towards ESG investment and the enhancing recognition of the positive correlation between corporate ESG and their financial performance.
To meet the expectations of listed companies which are in pursuit of ‘quality’ ESG reports, I recommend the incorporation of the following 6 principles in our future ESG reporting system, which I believe are significant to the building of the robust and resilient ESG industry in Hong Kong:
1. Companies to undertake a materiality assessment which prioritises certain ESG topics for them
2. Quantitative benchmarking of key performance indicators (KPIs) among companies;
3. Accuracy and reliability of corporate performance data;
4. Balanced information from both positive and negative side;
5. Consistent methodology on calculation and information disclosure;
6. Clear, straightforward and engaging report layout
I believe the above six principles can be considered as the foundation and catalyst for the enhancement of ESG reporting system in Hong Kong, and should be undoubtedly elaborated in many directions. Below I provide three examples on how to lift the current sustainability reporting system to a higher level with the above principles.
1. A set of standardised ESG assessment methods. For example, if the emission factors have been derived from different sources without any correlation, how can we assure the validity and comparability of corporate KPIs in different years? Therefore, I highly suggest that issuers intellectualise their ESG reporting system with fixed evaluation methods and quantify corporate ESG performance with a consolidated index to avoid any mismatch in assessments. This is being implemented to a certain extent in Hong Kong with the requirement for a consistent calculation and evaluation methodology for some environmental topics such as emissions and use of resources.
2. Benchmarking. An effective benchmarking process not only assists investors to better identify ESG risks and opportunities within their portfolio, but also gives the company a full picture of the missing and leading ESG components compared with its peers in various scales. Many third-party organisations such as Bloomberg, ISS and MSCI have developed their various ESG indexes and methodologies for benchmarking and rating, which I think is a good start for the development of another ESG branch. However, with more entities delving into this area, a question that needs to be answered is how to harmonise the different rating methodologies. Nowadays, institutional investors are not as convinced by the benchmarking results as before because of the ‘messy’ rating outcome. It is quite common to see a firm ranked high in one rating system and low in another one. Prior to the formal harmonisation, I believe what is more important is reinforcing the scientific evidence to support the building of such benchmarking metrics.
3. The integration of SDGs into the sustainability reporting system. For an improved layout of ESG report, I believe linking the ESG performance to global sustainability values matters significantly. It could bring benefits such as solidifying a common language to streamline the reporting burden on sustainability issues and sparking collaboration along the investment chain, thereby incentivizing businesses to align core business operations with the SDGs.
I always consider the ESG reporting as a ‘Window Shutter’ between the company and a responsible investor.
Due to the current lack of transparency, ESG reporting may be interpreted differently from person to person and continues to require adjustments and upgrades based on the increasing ESG recognition by listed companies, particularly in Hong Kong. From my perspective, ESG reporting can and should improve. By embedding the six principles mentioned in this article, I believe more exciting ideas for ‘quality’ ESG reporting will sprout.