David Graham, Chief Regulatory Officer and Head of Listing at Hong Kong Exchanges and Clearing Ltd, and a speaker at the CGC 2016, offers some thoughts on what environmental, social and governance (ESG) reporting can bring to the table for the Stock Exchange of Hong Kong as a regulator, for listed issuers, for investors and for Hong Kong as an international financial centre.

The Stock Exchange of Hong Kong (the Exchange) has a statutory duty under the Securities and Futures Ordinance to ensure, so far as reasonably practicable, an orderly, informed and fair market. In this connection, the Exchange plays a central role in facilitating communication between listed issuers and their investors, with a view to ensuring that investors are given sufficient information to enable them to make properly informed investment decisions.

Increasingly, it is recognised across various sectors of the market that being ‘informed’ entails having access to both financial and non-financial information. Whilst financial statements are important, investors (as well as other stakeholders) are becoming more aware that they are not necessarily sufficient for a proper, comprehensive assessment of an issuer’s access to capital, cost of capital, ESG-related risks and opportunities, and ability to manage and capitalise on these risks and opportunities. Whilst the traditional approach to investment analysis and decision-making may have been largely based on an issuer’s track record, investors are increasingly interested in issuers’ ability to sustain their performance in the future. ESG reporting can provide investors with insight into the long-term sustainability of an issuer’s business.

Despite investors’ growing interest in ESG information, there are indications that issuers are not meeting investor expectations in this regard. A 2015 survey of institutional investors around the world conducted by Ernst & Young, found that investors are facing a deficit of the quality and type of ESG information that they want (Tomorrow’s Investment Rules 2.0: Emerging Risk and Stranded Assets Have Investors Looking For More From Non-Financial Reporting, October 2015). For example, nearly two-thirds of respondents to the survey said issuers do not adequately disclose ESG risks. The results of this survey suggest that there is a gap between the information that investors require to make informed decisions and the information that companies are currently providing. The Exchange has an important role to play in closing this gap.

Another important role of the Exchange is to promote good corporate governance amongst its listed issuers, as good governance is a key ingredient in the sustainability and long-term performance of companies’ businesses. In this regard, the Exchange considers that ESG reporting can help companies improve their corporate governance, particularly in relation to their ability to manage and control risks.

The Exchange also considers it important to continuously review and develop its regulatory framework with a view to aligning it with international best practice. In recent years, a notable global regulatory trend is that governments and regulators in many overseas jurisdictions – including Mainland China, the European Union, the UK, Australia, the US, South Africa and a number of other Asian countries – are increasingly taking steps to encourage, and even require, listed issuers to report ESG information. According to a 2016 research report (Carrots and Sticks: Global Trends in Sustainability Reporting Regulation and Policy, UN Environment Programme, GRI, KPMG and the Centre for Corporate Governance in Africa, May 2016), there are now 400 laws and regulatory standards in 64 countries calling for some aspect of corporate sustainability reporting (versus 180 laws and regulatory standards identified in 44 countries in 2013).

Against this background, the Exchange provides a framework to facilitate ESG reporting by listed issuers. This framework, set out in the ESG Reporting Guide (the Guide) under the listing rules, was initially introduced as a recommended (that is, voluntary) practice in 2012. In 2015, the Exchange introduced a revised Guide and related amendments to the listing rules to strengthen listed companies’ ESG disclosure obligations. This followed from the Exchange’s consultation on proposed changes to upgrade the disclosure obligations of the Guide, which met with strong support from a broad range of respondents. Consequently, listed companies are now required to publish ESG reports on an annual basis, in which they must report on the comply or explain provisions of the Guide, or provide considered reasons for not doing so (see ‘The Exchange’s revised ESG disclosure obligations’ below).

Listed issuers

ESG reporting can bring a wide range of benefits to listed issuers’ businesses. Numerous studies (see ‘Further reading’ below) have shown that ESG reporting can help companies:

• improve their corporate governance, and in particular, strengthen their risk management by prompting them to assess ESG-related risks to their businesses, thus preparing them to better manage these risks

• attract investors that incorporate ESG criteria into their decision-making

• enhance their share valuation and secure financing from lenders more easily, thus lowering their cost of capital

• enhance their reputation, in view of greater awareness of ESG issues amongst consumers and the rise of social media, which has brought business practices further into the public spotlight

• save costs by prompting them to review, identify and address any inefficiencies in their consumption of resources such as energy and water

• recognise and capitalise on new business opportunities, which can in turn drive innovation (for example through the development of greener, more resource-efficient products), and

• recruit and retain high-calibre employees, as a company’s ESG reputation has increasingly become an important factor in an employee’s choice of employer.

There is mounting evidence that indicates ESG reporting is linked to stronger corporate financial performance. For example, a study conducted by Deutsche Asset & Wealth Management and the University of Hamburg (ESG and Corporate Financial Performance: Mapping the Global Landscape, 2015) revealed an overall positive link between embedding ESG criteria into the investment process and improved corporate financial performance.

The positive correlation between ESG reporting and corporate financial performance may be due to numerous factors, but the underlying thread is that ESG reporting reflects management strength and, therefore, the long-term prospects of the company.

Greater transparency

Companies that disclose ESG information are likely to be more transparent in respect of their financial information as well. ESG performance serves as an important measure for the general openness of management towards investors.

Better responsiveness

Companies with comprehensive and timely data on the ESG-related aspects of their business are likely to have timely and detailed data on their financial and overall business performance as well. As a result, management is in a better position to make timely adjustments to its business planning to respond to any changes that may have an impact on the company.

Long-term performance

Companies that disclose ESG information are likely to have a better understanding of the long-term strategic issues that they face. Management is therefore better able to make the necessary decisions to ensure the success of the business over longer time periods.


As mentioned above, investors increasingly recognise that whilst financial statements are an important part of assessing a company, business accountability is not based entirely on the balance sheet. Investors, as well as other stakeholders, benefit from greater transparency around a company’s ESG practices because (amongst other reasons) they can provide an important window into the quality of a company’s management, and its ability to manage and capitalise on ESG-related risks and opportunities. Companies that are able to effectively manage their ESG issues tend to be better at managing all aspects of their business and this improves their long-term prospects.

Investors’ growing interest in ESG information is reflected in the results of the 2015 survey conducted by Ernst & Young referred to above (Tomorrow’s Investment Rules 2.0). The survey showed significant increases in the number of investors embedding ESG disclosures into their investment decision-making. For example, the percentage of investors who considered ESG reports ‘essential’ or ‘important’ when making investment decisions rose from 35% in 2014 to 59% in 2015.

Further evidence of the importance and relevance of ESG disclosure for investors is the significant growth of the responsible investment market in recent years. The Global Sustainable Investment Association found that the global sustainable investment market grew 61% from 2012 to 2014 (Global Sustainable Investment Review 2014, February 2015).

The growth of responsible investment is also reflected in the development of initiatives such as:

• the United Nations Principles for Responsible Investment, a global framework for investors to include ESG information into investment analysis and decisions, now has over 1,500 signatories representing US$60 trillion in assets

• CDP (formerly the Carbon Disclosure Project), which provides a platform for companies to measure and disclose their environmental information, is backed by more than 827 investors representing over US$100 trillion in assets, and

• Carbon Action, which calls on the world’s highest emitting companies to take specific actions in response to climate change, comprises 304 investors with US$22 trillion in assets.

Hong Kong as an International Financial Centre

Hong Kong’s position as a major international financial centre is widely recognised around the world, as is its highly competitive economy and business environment. Hong Kong has ranked first globally in funds raised from initial public offerings (IPOs) in four of the last seven years (from 2009 to 2011, and in 2015); and has been in the world’s top five in IPO fundraising every year since 2002 (HKEX Market Statistics 2009-2015). Also, Hong Kong’s asset management market is the largest in Asia, and it has the largest offshore liquidity pool of Renminbi in the world (Strengthening Hong Kong as a Leading Global International Financial Centre, Financial Services Development Council, November 2013). Moreover, Hong Kong topped the IMD World Competitiveness Scoreboard 2016 as the world’s most competitive economy.

In order for Hong Kong to maintain its competitiveness and consolidate its position as a leading international financial centre, it will be important to continue to draw high-quality companies and investors to Hong Kong. Developing a culture of ESG disclosure amongst Hong Kong listed issuers can benefit the market by potentially attracting listings by other like-minded companies, and capital from the growing pool of investors committed to responsible investment practices (discussed above).

Final thoughts

In its role as a regulator, the Exchange has sought to encourage ESG reporting through the introduction of listing rules and the Guide. However, the Exchange recognises that a rules-based approach will not, on its own, deliver high-quality ESG reporting amongst listed issuers. Equally important is the development of a corporate culture that recognises the value of ESG reporting.

With this in mind, the Exchange regularly speaks with listed issuers about the benefits of ESG reporting; and has conducted extensive training, and provided various training materials and resources on its website to help guide issuers through the reporting process. Over time, these efforts will hopefully lead to the development of a corporate culture in which ESG practices and reporting are fully integrated into daily business operations, leading to more resilient risk management processes and value creation over the long term.


David Graham

Chief Regulatory Officer and Head of Listing, Listing and Regulatory Affairs

Hong Kong Exchanges and Clearing Ltd 


Sidebar: The Exchange’s revised ESG disclosure obligations

The 2015 amendments to the Exchange’s ESG Reporting Guide and related listing rules are being implemented in two phases.

1. The listing rule amendments and upgrade of the ‘general disclosures’ in the Guide from recommended to comply or explain, as well as the revised recommended disclosures, have already come into effect for financial years commencing on or after 1 January 2016.

2. The upgrade of the ‘key performance indicators’ in the ‘environmental’ subject area of the Guide from recommended to comply or explain will come into effect for financial years commencing on or after 1 January 2017.


Sidebar: Further reading

• Corporate Social Responsibility: Beyond Financials, Grant Thornton, 2014

Value of Sustainability Reporting, Boston College Center for Corporate Citizenship and Ernst & Young, 2013

Finding the Value in Environmental, Social, and Governance Performance, Deloitte, 2013

Corporate Social Responsibility and Access to Finance, Cheng, Ioannou and Serafeim, 19 May 2011, and

Why Sustainability Is Now the Key Driver of Innovation, Harvard Business Review, 2009.