Authors from City University of Hong Kong highlight the advantages of developing industry-specific reporting guidance to improve the quality of environmental, social and governance (ESG) reporting in Hong Kong.

With the deepening of various global crises – climate change, pollution, poverty and the latest Covid-19 pandemic, to name a few – the centrality of sustainability as a value and goal has become increasingly evident in public policy. Against this background, ESG standards have been incorporated into the corporate governance and regulatory regimes of many economies, and have impacted the investment strategy and portfolio decisions of many institutional investors.  

As an international financial centre with a stock exchange with a market capitalisation of US$6,805.8 billion (ranking fifth in the world), Hong Kong has enacted and implemented requirements in its Listing Rules and ESG Reporting Guide (the Reporting Guide) for all listed companies to disclose ESG information annually. Those requirements have been in place since 2016, but compliance has been lacklustre and studies have revealed gaps in Hong Kong’s ESG disclosure performance when compared with other major stock exchanges. 

In July 2020, Hong Kong Exchanges and Clearing Ltd (HKEX) issued a revised version – the latest to date – of the Reporting Guide which stresses the role of the board of directors in the process of ESG reporting, including the board’s approach to overseeing and assessing ESG matters and risks. Mandatory reporting on climate-change related information was also added to address global concerns over climate change. Under the ‘comply or explain’ principle, any refusal to disclose requires listed companies to give an explanation. These new ESG reporting requirements are intended to strengthen Hong Kong’s position in the global financial market. 

Room for improvement?

HKEX has adopted a hybrid model of ESG reporting regulation, standardising the key performance indicators (KPIs) to be disclosed but retaining some flexibility in the reporting framework. This means that companies are required to use standardised metrics when disclosing relevant information relating to their environmental and social impacts and performance, but they are free to determine which areas or aspects are most material to their businesses for inclusion in their ESG reports. Nevertheless, where any aspects are considered immaterial and have therefore been omitted, companies are obliged under the ‘comply or explain’ principle to explain the reasons for that decision. 

Most listed companies in Hong Kong opt to address all of the aspects included in the Reporting Guide, raising concerns that they are taking a box-ticking approach. A KPMG survey of Hong Kong listed issuers published in 2017 (The ESG Journey Begins) found that some companies do not define the reporting boundaries they have used or assess the materiality of the risks addressed in their reports. Similarly, after reviewing a sample of 400 ESG reports issued between December 2016 and June 2017, HKEX found that some reports only have short and simple statements that do not go into any detail on stakeholder engagement and materiality assessment. The HKEX review (Analysis of Environment, Social and Governance Practice Disclosure in 2016/2017) expressed concern that some companies were only interested in meeting the minimum compliance requirements, an approach that would deprive the company and its stakeholders of the benefits of ESG reporting. 

In its second review of ESG reporting practices (Analysis of Environment, Social and Governance Practice Disclosure in 2018), published in December 2019, HKEX observed that less than one-third of the reports described the board’s oversight of ESG matters and only 5% contained information relating to the board’s review of the progress of ESG goals and targets.  

In May 2019, HKEX issued a consultation paper proposing changes to the Reporting Guide designed to tackle the problems of limited board-level engagement with ESG issues and insufficient disclosures relating to materiality assessments. In the consultation conclusions, HKEX announced several key changes to the Reporting Guide (see ‘Key changes to Hong Kong’s ESG Reporting Guide’).  

HKEX also subsequently published guidance on the board’s duties in ESG reporting. Leadership Role and Accountability in ESG: Guide for Board and Directors, published in March 2020, emphasised that these duties include: 

  • overseeing the assessment of the company’s environmental and social impacts 
  • carrying out materiality assessment and reporting processes to ensure actions are well followed through and implemented, and 
  • promoting a culture that considers ESG elements in business operation.

The board, as the highest level of authority in a company, is made accountable for the process and performance of ESG reporting. For example, it is explicitly stated that, while materiality assessments may be conducted by other staff members, the board remains ultimately responsible for the process and outcomes of the materiality assessment.

How effective are the current regulatory measures?

HKEX has sought to raise the level of board involvement in ESG reporting, and to hold directors accountable for ESG reports, but the question remains whether an explicit statement of accountability in the revised Reporting Guide will achieve that purpose. While time will tell, the task is likely to be complicated. First, those failing to address ESG more strategically have been found to suffer a deficit in ESG expertise, and they often do not have sufficient resources to enable them to bridge the deficits. KPMG’s 2017 survey quoted above (The ESG Journey Begins) found that 58% of companies with a market capitalisation of HK$10 billion or above had addressed their materiality assessment processes in their ESG reports. Far fewer of those with a market capitalisation of less than HK$10 billion made similar disclosures.

Similar observations are found in BDO’s latest survey of ESG reporting performance in 2020 (Fourth-Year ESG Reporting Performance Survey, published 2021). Most of the 40% of companies that did not provide information on materiality assessment are smaller listed companies. One possible interpretation is that smaller companies do not  have sufficient resources to spend on materiality assessments and therefore tend to adopt the box-ticking approach to report on all of the ESG aspects in the Reporting Guide, without determining their relevance to their business.  

As the nature of businesses across different industries varies, their material ESG issues should also be different. Environmental ESG aspects and KPIs, such as greenhouse gas emissions, energy consumption, impacts on the environment and natural resources, will be highly relevant to companies involved in transportation and manufacturing, for example, but less material to companies in the financial and banking sector. 

Companies in the same industry are likely to share similar risks. The Sustainability Accounting Standard Board (SASB), points out that there are specific issues that are common concerns of companies and their stakeholders in the same industry. For instance, the safety of clinical trial participants, affordability and pricing, and drug safety will be highly relevant to companies and stakeholders in the biotechnology and pharmaceuticals sectors, but Hong Kong listed companies in this industry do not have to disclose information relevant to these issues since none of these issues are included in the current Reporting Guide. From a local pharmaceutical company’s 2019 ESG report, we find that the company’s materiality assessment identified more than 27 material topics that are almost identical to those listed in the Reporting Guide, but none of the aforementioned industry-specific issues are included. 

HKEX has stressed that listed companies should identify their own material ESG issues, as a ‘one-size-fit-all’ ESG reporting framework does not exist. Allowing companies to choose international reporting standards or frameworks avoids the inflexibility that is commonly found in rules-based approaches. At the same time, we should not ignore the challenges encountered by companies in preparing ESG reports under the present framework, including difficulties in understanding which reporting standards should be adopted, determining the breadth and depth of the ESG issues that should be reported on, and how social issues (which are always context-dependent and vary between industries) should be identified. 

In one of our interviews conducted in June 2021, a stakeholder from the financial sector observed that, even after the latest Reporting Guide had been implemented, the board and management of some companies remain incapable of carrying out materiality assessments to determine which issues should be considered material. Smaller companies are also failing to increase the efficiency of their reporting practices. 

Without properly addressing these complexities, companies may have limited eagerness to disclose their ESG information. This will not only affect the overall quality of ESG reports in Hong Kong, but also limit the usefulness of ESG data for financial markets. The lack of comparability between companies and the absence of appropriate quantitative information are two factors that most limit investors’ ability to make decisions based on non-financial information, according to the ESG Survey, published by the CFA Institute in 2017. This means that not only will companies have great difficulty benchmarking themselves against their peers, but regulatory bodies and the general public will also encounter the same problem in understanding the ESG performance of listed companies. 

Thoughts on further improving ESG reporting

The above discussion identifies challenges in the ESG reporting performance in the context of the latest Reporting Guide issued by HKEX. Board-level engagement and enhanced accountability of boards feature highly in the revised Reporting Guide as a means to improve the quality of ESG reporting, but many smaller-sized companies are struggling to make substantial improvements. 

In the preceding consultation on the Reporting Guide in 2019, stakeholders suggested that HKEX should make reference to SASB’s Materiality Map to identify material issues for companies in different industries or sectors. This might be a challenging objective, but developing industry-specific reporting guidance carries its merits. One advantage is that, as the major ESG issues for specific industries will be identified, the process of materiality assessment can be simplified. This will considerably relieve the burden on smaller companies and thus improve the overall quality of ESG reports. Another related advantage is that an industry-specific reporting guidance will carry a higher chance of quality compliance, as the key ESG issues contained therein are identified through the participation of, and dialogue with, major industry stakeholders. This not only helps companies, especially those that have difficulty in carrying out materiality assessments, to improve the quality of their ESG reports, but also builds a foundation of comparable ESG information for other stakeholders.  

To enhance the comparability of ESG information, HKEX should consider establishing a set of clearly defined and standardised KPIs for industry-specific reporting, which can avoid the complexities of interpreting and choosing among different metrics or measurements. Investors and other stakeholders will then understand better how to differentiate the performances of companies in the same industry.   


There is no doubt that ESG reporting and relevant issues are essential to future economic development. In July 2021, the European Commission (EU) released its latest sustainable finance strategy. To improve the financial sector’s contribution to sustainable development, actions will be taken to improve the reliability, comparability and transparency of ESG research and ratings (see Strategy for Financing the Transition to a Sustainable Economy, published by the EU in 2021). At the same time, the International Organisation of Securities Commissions (IOSCO) also published a consultation report on improving ESG and sustainability-related rating. The message is clear: to ensure the healthy development of a sustainable economy, we need a more reliable, transparent and comprehensive ESG rating system to facilitate investors and other stakeholders’ understanding of the relevant information. 

Against this background, we believe that it is important to develop industry-specific ESG reporting frameworks to guide companies to provide more relevant ESG information to stakeholders and also to increase the comparability of ESG performance. Moreover, industry-specific rating systems based on a common reporting ground can better score the ESG performance of companies in a specific industry. More research on these areas will be highly desirable to raise the quality of ESG reporting and enhance the development of a green finance hub for sustainable investment in Hong Kong. 

Phyllis Mo, Professor of the Department of Accountancy and Associate Director of the Research Centre for Sustainable Hong Kong (CSHK); Linda Chelan Li, Professor of the Department of Public Policy and Director of CSHK; William Chung, Associate Professor of the Department of Management Sciences and member of CSHK; Ho Mun Chan, Associate Professor of the Department of Public Policy and member of CSHK; Chun Kit Chui, PhD Student Researcher, Department of Public Policy; and Kin-on Li, Research Assistant, CSHK

City University of Hong Kong