CGj reviews a new certification course run by the Institute designed to upskill governance professionals in the fast-evolving ESG and sustainability areas of practice.
The stark headline in the 26 January 2023 edition of the South China Morning Post was self-explanatory– ‘Climate Change: Hong Kong to pay 30 per cent more for ESG jobs as companies fight for talent to meet sustainability targets’. The article is a clear indication of a trend that has become increasingly noticeable in Hong Kong – the dearth of in-house expertise relating to ESG and sustainability.
‘ESG talent is scarce,’ said Ellie Pang FCG HKFCG(PE), Institute Chief Executive, in interview with CGj. She emphasised that many of the benefits of a good ESG reporting programme are lost where the management of these areas is outsourced. ‘The process drives performance and you are more likely to get stakeholders to buy into ESG if the process is handled internally,’ she said.
Recognising that governance professionals can play a crucial role in helping companies upgrade their ESG reporting programmes, the Institute launched its ESG Reporting Certification Course (the Course) in February this year. The aim of the Course is capacity building. It will make tackling ESG and sustainability issues more accessible to governance professionals, and will address the plethora of standards and increasingly complex regulations relating to this area of practice. The Course comprises seven sessions and will run two intakes in 2023. The first is already underway and concludes in April. The second will start in July 2023.
The business case for ESG
The first two sessions of the Course, held in February this year, made it clear that expectations relating to ESG and sustainability have risen rapidly.
Governments and regulators – Hong Kong’s ESG regulatory regime has been evolving at an impressive pace in recent years. Moreover, higher international standards are expected to be brought into the local regime from as early as next year (see ‘Evolution of regulatory requirements’ below). Meanwhile, the goal of the Hong Kong government is to halve carbon emissions by 2035 and be carbon neutral by 2050. This will require organisations and their suppliers to have a viable transition plan to net carbon zero.
Investors – In her Course presentation, Pat Dwyer, Founder and Director of the Purpose Business, emphasised that companies without good ESG credentials will find it more difficult to draw investors in and raise capital. Global sustainability funds are growing and are estimated to have surpassed US$1.5 trillion in 2022. ‘Investors look to where ESG data is aggregated in surveys, rankings etc, because traditional core roles of finance are changing and determining the true value of ESG is at the heart of business strategy,’ she said.
Employees – Rebecca Donnellan, Group Senior Sustainability Manager, CK Hutchison Group, another Course presenter, pointed out that various studies show that the companies with a greater focus on sustainability can oftentimes have better morale and productivity and low turnover. Ms Donnellan pointed out that the society of today expects the companies people work for, buy products and services from, and invest in, to care about ESG.
Consumers – a recent Edelman barometer indicates that 63% of consumers will only advocate for, or buy from, brands based on their beliefs and values.
In addition to the above, ESG has become an integral part of risk management. ESG risks are among the most serious facing businesses today and can have a long-term impact on the profitability of companies. Take for example, Volkswagen’s emissions scandal, which cost the company €31.3 billion in its product recall alone.
Ms Donnellan emphasised that in the world of today, sustainability is a significant business opportunity and source of value creation. Sustainability can be used as a lens for new product development and innovation (citing Tesla and Nike’s flyknit as examples).
Ultimately, as Course presenter Gillian Meller FCG HKFCG(PE), Institute Past President, and Legal and Governance Director, MTR Corporation Ltd, pointed out, ‘It isn’t just because of the pressure, or that it is the right thing to do, but it is also because it makes good business sense.’
Evolution of regulatory requirements
ESG reporting has been required in Hong Kong since 2016. Under Appendix 27 of the Listing Rules for the Main Board, a company is required to report, among other things, on the board’s overall responsibility for ESG strategy and reporting. The Appendix 27 requirements include elements of the Task Force on Climate-related Financial Disclosure (TCFD) approach, which was intended to help investors appropriately assess climate-related risks and opportunities. Mandatory disclosure requirements are set out in Clause 13 of Appendix 27 and include a disclosure of the board’s oversight of ESG issues, the board’s ESG management approach and strategy, and how the board reviews progress made against ESG-related goals and targets with an explanation of how they relate to the issuer’s businesses.
Last year, the International Sustainability Standards Board (ISSB), released draft sustainability standards that, if adopted in Hong Kong, would significantly raise expectations – particularly in areas such as reporting on Scope 3 greenhouse gas (GHG) emissions and the use of scenario analysis. When ISSB launches its finalised standards (expected at the end of Q2 this year), Hong Kong Exchanges and Clearing Ltd will launch a consultation in Hong Kong on how to implement these standards.
Ms Meller, in her Course presentation, addressed the key areas where Hong Kong companies will need to raise their game in preparation for Hong Kong’s upgraded ESG regulatory regime. The ISSB approach is focused on the implications of climate change on enterprise value and putting dollars against these impacts, she pointed out, could be a challenge for many companies.
Perhaps the toughest technical challenge, however, will be getting the data relevant to assessing Scope 3 emissions. Companies will need to start quantifying not only their own direct GHG (Scope 1 and 2) emissions, but those of their customers and suppliers.
‘Supply chains are intricate webs’, said Course presenter Sebastien Pivet, Chief Sustainability Officer and QA Director of AS Watson Group. ‘The further down the value chain we go, the lower our influence as a retailer.’
He pointed out the inherent complications involved in monitoring supply chains – companies often do not deal directly with the suppliers of the raw materials used by the manufacturers the company contracts with. It is important, nevertheless, to understand the sustainability maturity level of such suppliers. Mr Pivet recommended putting together an appropriate action plan to address each level of maturity, ranging from simple data collection to education or training for the those falling behind, perhaps with the assistance of external experts.
The governance challenge
It will be clear from the foregoing that the bar for ESG reporting has, and will, get much higher. Many Course presenters emphasised that becoming a sustainable organisation will require going back to your governance structures. ‘When you try to understand ESG and what it means for your company, you have to start with governance,’ Ms Meller said.
Often, pointed out Ms Donnellan, there are a lack of internal processes or metrics, as well as limited board diversity or knowledge on ESG matters. Inflexible organisational structures with executive compensation tied to short-term performance could also be stumbling blocks. Ms Dwyer added that though boards are now asking more questions about fair compensation and representation of women at executive and board levels, ‘they should also be asking about diversity in board backgrounds and board insights on ESG, among other issues’.
Boards and management need to be made aware that compliance and regulations aside, it makes good business sense to take into account ESG considerations in evaluating long-term strategy. However transforming the governance structure of a company will require tact and diplomacy. A lack of commitment by the board can be a challenging barrier.
It is crucial that a sustainability governance structure starts at the top and filters down across the business. At CK Hutchison Holding Ltd, Edith Shih FCG(CS, CGP) HKFCG(CS, CGP)(PE), Executive Director and Company Secretary, emphasises that all listed group companies have board level sustainability committees, which are supported by sustainability working groups, chaired by C-suite management. It is also as important, she says, to resource these working groups with sustainability professionals, to drive the programmes.
The role of governance professionals
The governance professional will have a significant role to play integrating ESG into key governance processes and enhancing oversight. Governance professionals already have a role in preparing sustainability reports, and the story around the data, but their role can and needs to extend beyond this. They are best placed to play a crucial role in challenging the company’s governance framework, and to advise the board not only what the regulations are but to get them to question whether their governance framework is appropriate in a world where companies have to take into account environmental and social impacts.
The Course offers governance professionals a roadmap to go beyond their traditional focus areas and advise the board on fast-evolving ESG issues. The underlying theme is that governance professionals need to have a good understanding and awareness of ESG issues in their board advisory role. They are excellently placed at the heart of the board to make the case that organisations need to get beyond compliance and fully integrate ESG in their strategy and operations.
‘Boards are not there just to ensure compliance’, said Ms Dwyer. ‘They set the tone on governance and in doing so provide direction, oversight and accountability. They are custodians of the company’s vision and should be asking about ESG relevant to long-term risks and opportunities that the company is facing, the way they are managed and how the company is preparing for them.’
ESG and sustainability regulations will continue to evolve in the years ahead. The Course reviewed in this article brings governance professionals to the current state of play. It also highlights the need to expand and evolve their roles, particularly in advising the board. This advice should go beyond compliance, Course presenters emphasised, getting directors to question the company’s governance framework in this fast-evolving space, and thereby acting as the company’s conscience and a catalyst for change.
Anchoring ESG in the purpose of the company
A major theme to emerge from the Course is that getting ESG and sustainability right is never going to be just about changing some corporate practices here and there. In her Course presentation, for example, Ms Dwyer illustrated the need to shift from a short- to a long-term focus and to transition to a more purpose-driven business model. ‘To be a purpose-driven organisation is to reflect on how your organisation’s purpose not only delivers profit, but more importantly, does so in a manner that contributes to the well-being of people and planet,’ she said
Course presenters from CK Hutchison Holdings also highlighted the need to listen to younger members of the organisation in this discussion. Apart from anything else, the company is aware that ESG is very important to its younger customers and that it is increasingly being factored into their buying decision process.
CK Hutchison’s Next Gen Committee was set up to involve the younger generations in the company’s sustainability structure. The committee has helped the company access a wider diversity of perspectives in formulating materiality assessments. ‘It strengthens our engagement in reducing our business environmental impact and support communities at large,’ Mr Pivet said.
In addition to addressing the strategic aspects of ESG and sustainability, the Course also provides advice on the key technical issues involved.
When it comes to ESG reporting, one of the toughest technical issues to grapple with is how to determine which environmental and social issues are material to stakeholders. The Course addressed the much-discussed issue of whether companies should take a single or double materiality approach to climate change. While the single materiality approach focuses on the impacts of climate change on companies, the double materiality approach requires companies to also disclose their impacts on climate change (and the environment more generally).
These two things are intertwined, however, as a company’s impacts on climate change and the environment will generally impact its own enterprise value. ‘If a company understands its most material ESG issues and its negative impacts on natural and human resources, it is expected that this company would not only seek to mitigate the impacts but aim to reduce if not eliminate them, as they are a threat to business growth, resilience and performance,’ Ms Dwyer said.
The role of internal audit in ESG monitoring
Another technical aspect of ESG relates to the role of the ESG audit. Course presenter James Lai, General Manager, Group Management Services of CK Hutchison Holdings, elaborated on the assurance role of internal audit in the sustainability journey. ‘Sustainability is a journey with lots of moving parts; while the board has the oversight role on sustainability governance and management, sets strategy and designs a roadmap to achieve the targets, it is internal audit’s independent assurance role to make it robust,’ he said.
In this regard, internal audit would need to support sustainability integration in the company’s overall enterprise risk management (ERM) framework, to sense-check ESG data for the annual sustainability reporting, and to provide audit assurance on sustainability reporting and other sustainability-related controls. Notwithstanding these, internal audit should also make recommendations for improvement and help ensure that policies and procedures are aligned with prevailing and new regulatory requirements.
In conclusion – telling your story
It will be clear from the above that ESG reporting is not something that organisations can afford to neglect. Indeed, Ms Dwyer made the point that, in addition to the benefits of addressing various tactical and risk management issues – including, crucially, meeting the increasing threshold of the reporting standards – good ESG and sustainability reporting allows organisations to frame their own narrative.
‘If you do not tell your own story, someone else will,’ she pointed out. ‘Staying silent ultimately penalises the company. If investors cannot find anything publicly available about your management, an uninformed audience may end up making sweeping generalisations.’
Associate Editor, CGj
More details relating to the Course reviewed in this article are available on the Institute’s website: www.hkcgi.org.hk. The second intake of the Course starts in July this year.