Laks Meyyappan, Chief Executive Officer for Australasia, and Savoy Lee, Director and Head of Corporate Advisory for Asia, Georgeson, offer insights into how to get the most out of cross-functional teams dedicated to environmental, social and governance (ESG) reporting.
During each proxy season, investor relations (IR) and governance teams develop an annual report and prepare for their annual general meeting (AGM). These tasks involve a range of both long-standing and newer challenges as investor expectations change and the regulatory landscape evolves.
Many companies increasingly see the value in having their governance, legal and company secretary teams working closely with their colleagues in IR. These groups collaborate to share expertise and different perspectives, and they can help develop and implement a more coherent and compelling narrative for the company. Communication is a crucial foundation to success.
Two sides to an annual report
Traditionally seen as a regulatory filing, the company secretary or general counsel usually takes the lead on crafting the annual report. However, given the report’s public position, it can also be an important marketing and communications tool.
The corporate IR team usually pays particular attention to the annual report as a shareholder engagement tool and collaborates with the company secretary and general counsel. Working together can become even more critical in complex situations such as acquisitions (whether friendly or hostile), Schemes of Arrangement, proxy fights and takeover defences.
Demand for ESG reporting and disclosures
One of the toughest emerging challenges faced by governance and IR teams can be deciding how to meet the growing demand for ESG reporting and disclosures. In Hong Kong, many listed companies already produce a separate, annual ESG report, but more specific regulations have been proposed for adoption in the near future.
Climate change is not a new issue to investors, but many around the world have declared it a key priority for 2021, including activists, institutional asset managers and pension funds. Their sense of urgency seems motivated by an increased conviction that climate change will have a tangible, systemic impact on both the environment and global financial markets.
Domestic regulation has helped drive momentum for corporate ESG reporting, especially on climate change and related areas. Since 1 July 2020, The Hong Kong Stock Exchange (the Exchange) has required companies to disclose how climate change is affecting their business and has held directors responsible for the outcome of their company’s sustainability efforts as part of the new ESG rules.
The Shanghai Stock Exchange followed suit as part of the Mainland’s ambition to achieve carbon neutrality by 2060, an aim shared with many other countries. The China Securities Regulatory Commission also proposed a revision to investor relations guidelines, adding ESG information to a list of issues on which listed companies should update shareholders.
Late in 2020, Hong Kong’s regulators set new climate disclosure rules, calling for financial institutions and listed companies on the Exchange to align with the ESG recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) by 2025. For some business sectors, disclosure may have an earlier mandatory date. As a result, companies must determine what information to report and how they should present it.
TCFD also has an established framework for board evaluation of the risks and opportunities posed by climate change. Within the TCFD framework, disclosure on how the board relates to climate-related issues includes the:
- process and frequency of news or updates about climate-related issues
- incorporation or consideration or climate-related issues when reviewing and setting corporate policy and strategy, and
- method of monitoring and managing progress against climate-related goals and targets.
Separate from TCFD alignment and reporting, Hong Kong regulators announced that they also support the sustainability standards by the accounting standards organisation, the International Financial Reporting Standards (IFRS).
Building cross-functional teams
The changing regulation relevant to ESG reporting and the necessity for shareholder engagement has led to a greater emphasis on building carefully coordinated, cross-functional teams. Businesses should give careful thought to finding the right way to get the most out of this collaboration. ESG is a multifaceted topic, tackled within the annual report and at the AGM through shareholder proposals. Similarly, each ESG activity may involve multiple issues, and each one may have a different project lead depending on the company and issue. Some potential scenarios are highlighted below.
- While legal may take the lead on developing the proxy statement, the sustainability team may take responsibility for ESG disclosures not included in the proxy statement. As a result, collaboration with other business areas, such as the enterprise risk management team, will likely be required.
- ESG reporting has traditionally been the domain of the general counsel. However, the report results are of particular interest to investors and, therefore, of interest to the IR team and increasingly to the company secretary and directors.
- The company secretary or general counsel may be the most suitable person to meet with stewardship teams, but the IR team’s involvement will likely be helpful. A company’s stewardship and its ESG alignment with a significant investor’s stewardship statement can impact shareholder engagement and communication.
Today, many companies face varied, complex issues that require diverse subject-matter expertise and insights to communicate a coherent and consistent narrative to shareholders and other stakeholders.
ESG working groups
Last year, the Exchange produced a step-by-step guide: How to Prepare an ESG Report. One of the first items was establishing an ESG working group by the issuer within the company. The working group reports directly to the board and should include ‘senior management and staff who have sufficient knowledge of current and emerging ESG matters, as well as the issuer’s operations,’ the guide states.
Oversight structures and disclosure are often best developed when companies allow all relevant subject matter experts across the organisation to be involved. While this may vary by company, participants typically include individuals from the company secretarial, legal, human resources, risk management, investor relations, finance, corporate communications and sustainability functions.
The Exchange’s guide sets out the key factors required for successful cross-functional ESG working groups, including having:
- support by the board
- the authority to carry out their tasks to meet their objective(s)
- a defined scope of work, such as conducting an ESG audit or preparing a TCFD-compliant report, and
- committed resources, including financial.
Once the ESG working group is in position, companies may want to invest time to understand their shareholders’ ESG investment requirements. The working group can develop investor-focused disclosure and appropriately embed oversight of ESG matters within the board and committee agendas.
Combining the ESG working group’s diverse expertise can counter potential internal knowledge gaps, especially in light of the Exchange’s new ESG disclosure obligations.
ESG after the AGM
Many investors have already come to expect far greater engagement with companies than has traditionally been the case. The pandemic has dramatically affected how AGMs have been held in Hong Kong and worldwide. As a result, engagement outside the regular AGM season, especially around ESG issues, is required, and some shareholders have begun to expect engagement to take place all year round.
Engagements involving ESG issues may include directors. Consequently, governance teams are increasingly part of engagement programmes that have in the past been part of the IR team’s duties. ESG is an evolving area and companies need different levels of resources. One such resource may be an external shareholder engagement and corporate governance advisory consultant. The ideal timing to bring on board this external counsel depends on the objective, but generally speaking, it is best to begin as soon as the objective is set.
As a result of the Exchange’s amendments to the Listing Rules, ESG will likely become a more routine board issue by emphasising the board’s role in ESG governance. As part of good corporate practices, the integration of ESG principles and frameworks is usually most effective when supported by senior management. Some companies take an ad hoc approach, while others adopt a more structured plan with assigned roles. Ultimately, IR and governance teams will usually benefit from keeping an open mind.
Laks Meyyappan, Chief Executive Officer for Australasia and Savoy Lee, Director and Head of Corporate Advisory for Asia