Tony Wong, Founder, and Regina Tai, Consultant, Alaya Consulting, present the results of their latest annual research report on the ESG disclosure practices of Hong Kong listed companies.

Fund investments in companies with improving performance on environmental, social and governance (ESG) issues have been getting bigger and bigger, triggering increased demand for quality ESG data. Leading indexes provider MSCI, as well as other ESG rating institutions, have been churning out reports on ESG ratings of listed companies. So, in addition to the ‘buy’, ‘sell’ or ‘hold’ signals published by analysts, listed companies and their investor relations experts have one more thing to worry about these days – their ESG ratings.

Alaya’s annual survey of ESG reports in Hong Kong examines ESG disclosure levels and, more importantly, ESG performance of the top 200 companies (T200, by market capitalisation) listed in Hong Kong. Our objective is to identify the prevailing trend of disclosure and the gaps for continued improvement. The escalating appetite of institutional investors for ESG information is certainly one of our motivations to keep undertaking this annual survey.

This is the third year that Alaya Consulting has tracked ESG performance of the T200 companies. With listed companies getting more comfortable about reporting their policies and compliance status, we have taken a further step this year. More emphasis has been placed on industry-specific analysis, especially the trend of disclosing certain KPIs in particular industry segments. The rationale is that we believe most T200 firms are striving to meet at least the minimum levels of compliance to avoid breaching the listing rules. Exploring why listcos disclose or do not disclose certain KPIs is therefore critical for promoting industry best practice.

Reporting practices are improving, albeit gradually

As most listed companies have reported ESG performance for at least two years, some of them are ready to showcase their efforts on sustainability and raise the disclosure level beyond the minimum requirements set by the Stock Exchange of Hong Kong (the Exchange). 44% of the companies have gone beyond meeting reporting standards stipulated in Appendix 27 (the Environmental, Social and Governance Reporting Guide of Hong Kong’s listing rules). 29% of the companies have adopted the Global Reporting Initiative (GRI) Sustainability Reporting Standard, a 6% increase over last year. Other sustainability frameworks followed include ISO26000 (17%), the UN Global Compact (8%) and CDP (3.5%).

Whether it is worth obtaining reporting assurance is one of the questions frequently asked by listed companies. Nevertheless, we did not see much action in this area in this year’s survey. Only 23.5% (2017: 23%) of the reports are externally assured and only six of them have had the entire report assured. Unfortunately, 36% of the assured reports do not report the scope of the assurance and 20% do not even state the assurance standard adhered to. The results reflect that the best practice on assurance is yet to be fully implemented.

In addition to the increasing investor focus on ESG performance, regulators too are getting more serious about scrutinising ESG disclosures and we believe the question of getting assurance is not if but when. Alaya shall continue to monitor this figure in the coming years and we would certainly like to see assurance practices become more well-developed and established.

One point to note before getting external assurance is that a company should be tidying its own house, for example, by making an internal overhaul of data definitions, sources, measurement, management and control. This ‘pre-assurance’ process is usually more effective for identifying the ESG risks and opportunities.

The importance of board leadership

Though more companies have established an ESG governance body, only 35% of the T200 have board involvement in ESG. Leadership by the board is the crux of ESG risk management and this is something we have been promoting since our last survey. This has also been advocated by Hong Kong Exchanges and Clearing Ltd in their Analysis of Environment, Social and Governance Practice Disclosure in 2016/2017 (HKEX Analysis Report). Having a systematic approach toward ESG management is necessary for an effective reporting process, as well as taking up related opportunities. Establishing a board-level ESG governance body is not a mandatory initiative and it is often easier said than done. But for companies who are serious about a long-term sustainability vision and integrating sustainability into
daily business operations, we believe if there is a lack of board involvement, ESG reporting might be just another PR blitz.

Stakeholder engagement helps identify ESG risks

Most of the T200 companies recognise that materiality and stakeholder engagement are core to ESG reporting. Echoing what has been said by the HKEX Analysis Report, 62% of the companies have reported on materiality assessment, but only half of them disclosed the process of the assessment. 30% of the companies reported on stakeholder engagement without showing how stakeholders’ concerns are addressed.

Companies are required to engage with shareholders at annual general meetings but there is no similar requirement for engagement with stakeholders on ESG matters. However, we believe this is absolutely necessary if a company is serious about getting to know the risks it faces on the ESG front. Focusing on what matters and where it matters, and responding to concerns of key stakeholder groups regularly, are the keys to identifying ESG risks and the ways to address them.

Environmental disclosure stops short of results achieved

General disclosures and KPIs regarding companies’ environmental impacts are required on a comply-or-explain basis. As our last year’s research suggested, levels of compliance on general disclosure are already high (99%). Therefore, this year we have focused on studying the KPIs. The narrative KPIs, including description of resources conservation and emissions reduction measures, demonstrate a high level of disclosure (over 90%). However, companies need to be aware that they are required to disclose both the measures and the results achieved. While it seems it is relatively easy to measure the results of energy use efficiency measures (A2.3), over 40% of the companies have failed to disclose results for emissions control (A1.5), waste reduction (A1.6) and water use (A2.4).

For quantitative KPIs, T200 were found to be more ready to disclose carbon emissions and energy and water consumption than waste and air emissions. Disclosure on packaging materials consumption performed the worst with 75% of the T200 failing to report the figures.


Absence of an explanation is a breach of listing rule

The essence of comply or explain is that listed companies can make their own judgement about which disclosures are necessary based on the nature of the business. If the operations do not involve use of any packaging materials, companies, instead of choosing to comply, can explain the reasons why they did not report the relevant KPIs. However, 57% of companies that did not provide any environmental KPIs have remained silent about the reasons for their non-disclosure.

HKEX has made it clear that the absence of a proper explanation amounts to a breach of the listing rules. A survey of explanations provided by companies revealed that, generally, explanations refer to how the topic was not material to their business nature, or that monitoring systems were still under development. We advise T200 companies that they should elaborate further why the topic is not material and follow up on monitoring systems in the next reporting cycle.

Ways to ensure compliance tend to be overlooked in social aspects

There were no significant changes in the disclosure level of social KPIs as they remain recommended disclosures in Appendix 27. In general, community involvement and anti-corruption are the most disclosed KPIs, while labour practices and product responsibility are the least disclosed KPIs. In terms of narrative disclosures, the situation is similar to the environmental disclosures discussed above – companies only disclosed policies and measures on aspects such as health and safety, data protection and whistle-blowing, etc, without telling stakeholders how they are monitored or evaluated.

Though companies may choose not to report on social KPIs, General Disclosures are subject to comply or explain, so companies must disclose how relevant social issues affect the business and how they ensure compliance in those aspects. This is not only a requirement to be fulfilled but it also allows stakeholders to make sense of the impact, potential risks and opportunities under the specific business contexts in which the companies operate.

Human rights and conflict minerals are largely overlooked in some industries. 12% of the T200 companies recognised human rights as a potential material aspect in the materiality assessment. 4.5% disclosed measures taken for preventing the use of conflict minerals for production. Companies producing IT hardware, materials and other related consumer goods should fully explain whether and why the topics are material or not material to their operations. Assessing the company’s performance in, and social impact on, human rights and use of conflict minerals should be extended to the entire value chain to enable better control and response to such risks and crises.

The top three charitable areas

Almost all T200 companies have disclosed that their particular area of focus is community investment, with the top three focus areas being education (85%), poverty relief (69%) and environmental actions (57%). Little focus, however, has been placed on their own industry development (26%) or technological innovation (14%). While 88.5% of the T200 reported on financial resources invested, only 35% provided the number of voluntary hours dedicated to the betterment of the community. Though more companies are engaging in CSR initiatives, they are recommended to go beyond making donations and participating in charity work. Proactively seeking collaboration opportunities to tackle social challenges through making use of their own expertise and innovations can create more value for both the company and its stakeholders.

Increasing alignment with the UN SDGs

It is encouraging to see an uptick in the number of companies aligning with the UN Sustainable Development Goals (SDGs). However, only a few companies were able to show substantial initiatives and set quantifiable targets for achieving the goals, while others simply took the first step by matching the SDGs with their existing ESG policies and measures. To ensure SDG-alignment becomes truly relevant to the business and does not remain empty talk, target-setting and monitoring are crucial. For institutional investors who are looking to make a positive impact through their investments, obtaining SDG-related insights about a company’s environmental and social impact is helpful in making informed decisions.

Board independence and performance evaluation

On the corporate governance front, the listing rules require at least one-third of board members in a listed company to be independent directors. HKEX is seeking to strengthen the transparency and accountability of board committees via greater participation of independent non-executive directors (INEDs). 57% of T200 appoint only INEDs to their audit committees. When it comes to other board committees, research shows only 5.5% of T200 have all three board committees made up of only INEDs. Moreover, 22% of T200 boards have family relationships between directors.

Hong Kong’s Corporate Governance Code (Appendix 14 of the listing rules) identifies performance evaluation of the board as a recommended best practice. Less than a half (46%) of T200 companies have mentioned performance evaluation of the board in their corporate governance reports. Among those, only 53% have described the process used and the assessment outcome.


More work is needed by Hong Kong listed companies in ESG management and disclosure. Proper compliance with the HKEX requirements and pushing ESG governance on material aspects could be the starting point. Ultimately, only reports which give out reliable data and a detailed narrative on the results achieved will help in building trust with stakeholders. Although this comes with a cost in the short term, the resources put into boosting the value of ESG reports not only strengthen the information provided to investors but also facilitate internal change towards better risk management and governance.
Providing financial information alone is insufficient for investors and stakeholders to make a reliable assessment of a company – ESG information helps capture the company’s value and impact in broader aspects. We are likely to see stakeholders, including investors, casting aside companies that are not committed to making ongoing improvement in ESG.

Tony Wong, Founder, and Regina Tai, Consultant, Alaya Consulting
The ‘Analysis of Environment, Social and Governance Practice Disclosure in 2016/2017’, published by Hong Kong Exchanges and Clearing (HKEX), is available on the HKEX website: