With tougher environmental, social and governance (ESG) disclosure requirements on the way for listed companies in Hong Kong, a new joint report by KPMG China, CLP Holdings Ltd (CLP) and The Hong Kong Institute of Chartered Secretaries (the Institute) provides guidance to the market on how to integrate ESG performance into governance structures and business strategies.

Pressure from the investment community and regulators is driving ESG higher up board agendas globally and Hong Kong is no exception. Hong Kong Exchanges and Clearing Ltd (HKEX) has just brought in a new ESG regulatory regime that will be effective for listed issuers for financial years commencing on or after 1 July 2020.

This makes very timely the publication of a new guide on ESG – ‘Integrating ESG into your business: A step-by-step ESG guide for Hong Kong-listed issuers’ – by KPMG China, CLP and the Institute. The guide has a very practical focus. As the title suggests, it provides step-by-step guidance on bringing ESG from the periphery to the core of the board’s agenda. The guide includes recommendations and insights from leading practitioners. It also brings together in one publication a wealth of reference information relating to ESG performance and reporting. This includes:

• a summary of the new requirements on ESG for listed issuers in Hong Kong following revisions to the HKEX ‘ESG Reporting Guide’
• a brief introduction to the most commonly used international reporting standards and frameworks for ESG or sustainability reports, such as the Global Reporting Initiative (GRI) Standards, the Sustainability Accounting Standards Board (SASB) standards and the United Nations Sustainable Development Goals
• the enterprise risk management framework for ESG-related risks developed by the Committee of Sponsoring Organizations of the Treadway Commission and the World Business Council for Sustainable Development (WBCSD), and
• the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

Each section of the guide ends with a selection of ‘checklist questions’ which will be useful for boards, as well as for governance professionals advising them, in keeping track of where they are in their implementation of effective ESG governance.

Mission critical

Speakers at a seminar held on 14 January 2020 after the launch of the new guide (see ‘Credits’), chaired by Edith Shih FCIS FCS(PE), International President, The Chartered Governance Institute, and Institute Past President, and Executive Director and Company Secretary, CK Hutchison Holdings Ltd, were in agreement about the seriousness of the ESG risks, in particular the environmental risks, that organisations globally are facing. These risks, such as the risks from extreme weather events, failure of climate change mitigation and adaptation, natural disasters, biodiversity loss and ecosystem collapse, were graphically illustrated in the presentation by Dr Niven Huang, Regional Leader, KPMG Sustainability Services Asia Pacific, KPMG, but a central issue discussed in the seminar was how far this message is getting through to boards.

Katherine Ng, Managing Director, Head of Policy and Secretariat Services, Listing Department, HKEX, pointed to the way environmental concerns have been climbing the rankings of global risks as published in the annual World Economic Forum (WEF) ‘Global Risks Report’ as a clear indicator of the increasing awareness and concern in wider society. The WEF ‘Global Risks Perception Survey’ questions over 1,000 global experts and decision-makers on their biggest concerns, in terms of likelihood and impact, over the next 10 years. In the 2020 report, in terms of likelihood, all of the top five global risks are environmental and, in terms of ‘severity of impact’, three of the top five risks are environmental. This is unprecedented in the survey’s 10-year history. A slide in Ms Ng’s presentation showed that, as recently as 2009, environmental concerns were completely absent from the top five.

Pat Nie Woo, Partner, Head of Sustainable Finance, Hong Kong, KPMG China, cited further evidence of the growing awareness of the seriousness of environmental risks. His presentation cited the latest KPMG Global CEO Outlook survey which shows that climate change now tops the risk agenda – in 2018 it was positioned fourth. He pointed out that the drivers of this are not limited to pressure from investors and regulators – employees, consumers and the growing body of environmental science are also playing a part.

He welcomed the fact that ESG is now getting the attention it deserves, but added that Hong Kong companies still lag behind when it comes to getting effective board oversight of ESG. KPMG data suggests that 63% of business leaders have not integrated ESG issues into their strategic planning. He hopes that the new guide by KPMG, CLP and the Institute will help companies move on from their current ‘skin deep’ approach to ESG. ‘The box ticking, skin-deep approach has got to become obsolete,’ he said. He added that the coming decade is going to be ‘mission critical’ in terms of determining whether we succeed in averting the worst case scenarios regarding climate change, biodiversity loss and other environmental threats.

Amar Gill, Managing Director and APAC Head of Investment Stewardship, BlackRock, pointed out that ESG disclosure standards still lag behind investor expectations. Asset owners have an investment horizon of as much as 50 years, so sustainability and ESG issues are critical to them. ‘The majority of ESG reports still tend to be formulaic,’ he said.

David Simmonds FCIS FCS, Institute Vice-President, Group General Counsel, Chief Administrative Officer & Company Secretary, CLP, addressed the physical impacts and transitional risks associated with the environment that businesses need to be aware of. The physical risks associated with climate change, he pointed out, are highly evident in the current catastrophic fire season in Australia. One of the bush fires threatened a power station run by CLP. The transitional risks could be even more devastating for businesses, he added – the shift to a low-carbon economy is already impacting companies in the power sector. As a result, and to shoulder its share of the responsibility to mitigate climate change, CLP has committed to: progressively phasing out coal-based assets by 2050; refraining from further investment in additional coal-fired generation assets; increasing renewable energy capacity; and focusing on opportunities in transmission and decentralised smart energy solutions.

While CLP has won recognition for its decarbonisation and clean energy targets, Mr Simmons pointed out that it was an appreciation of the seriousness of the risks that got the company started on its sustainability journey. ‘We didn’t set out to be a leader,’ he said, ‘but we knew we had to address the risks.’

Getting the board involved

Despite the rising awareness of the importance of ESG performance and reporting, one of the key elements still missing in the approach to this issue is board oversight. Ms Ng pointed out that many ESG reports included in the HKEX ‘Analysis of Environment, Social and Governance Practice Disclosure 2018’, contained little or no description of board involvement. The HKEX consultation proposals made in May 2019 therefore focused on ensuring that ESG risks and opportunities are properly considered by the board.

Hong Kong’s new ESG regime, announced in December 2019 and to be implemented for financial years commencing 1 July 2020, emphasises, among other things, the board’s leadership role and accountability in ESG. It mandates, for example, the disclosure of a statement from the board setting out the board’s consideration of ESG issues. These board statements should include details of the board’s oversight; the process used to identify, evaluate and manage ESG issues; and the board’s review of progress.

The new regime also introduces a new ‘aspect’ relating to climate change (subject to comply or explain). Listed issuers will need to disclose their policies on identification and mitigation of significant climate-related issues that have impacted and may impact them, and key performance indicators (KPIs) related to significant climate-related issues that have impacted and may impact them, and the actions taken to manage them.

These new requirements are consistent with international best practice. They were formed by the approach pioneered by the TCFD. In 2017, the TCFD recommended that organisations adopt a framework for board evaluation of the risks and opportunities posed by climate change. It emphasises the need to disclose:

• the processes and frequency by which the board and/or board committees are informed about climate-related issues
• whether the board and/or board committees consider climate-related issues when reviewing business strategy and policies, and
• how the board monitors and oversees progress against goals and targets for addressing climate-related issues.

Raising your ESG game

The new ESG guide by KPMG/CLP and the Institute provides practical and accessible guidance that will help companies adapt to Hong Kong’s new ESG regulatory regime and, going beyond the compliance imperative, raise their ESG game. It is structured in three parts.

1. Getting the basics right

The guide points out that the first step in integrating ESG into a business is to set a common ground where the company and its key stakeholders can agree on the definition of ESG and its importance to the company. This exercise should start with the board and senior management understanding the values and relevance of ESG to their business. This should then be communicated across the company.

Apart from getting senior management and the board’s buy-in for ESG, stakeholder support and engagement are also essential in making ESG integration possible. Discussions with key stakeholders are essential to gain a wider perspective about the ESG issues that are of concern and have an impact on business. Typically, stakeholder engagement will be part of the materiality assessment exercise. This will involve defining the purpose and scope of the exercise, identifying potential topics and collecting views from key stakeholders, internal and external to the business, about the impact and importance of topics through a variety of ways such as focus groups, interviews and surveys.

The guide provides a sample of the typical ‘materiality matrix’ used by businesses to represent the most material ESG issues that the company should focus on so as to optimise the use of resources.

2. Strengthening the core

The guide makes a number of recommendations related to strengthening the board and senior executives’ capacity for oversight of ESG. In particular, this will require ensuring that the board recruits directors with relevant ESG expertise and experience. The guide recommends therefore that ESG competencies be included in the criteria for selecting future candidates for the board.

In addition, some thought should be given to which activities should have the full board involved, and which should be delegated to a specific committee. The guide recommends that the ‘level setting’ stage (see ‘Getting the basics right’ above) is best done by the full board, while the assessment of specific ESG risks may be best addressed and dealt with by a committee. The guide stresses, however, that organisations need to set clear roles and responsibilities of board members, as well as committees, to clarify accountability and facilitate the overall development of ESG.

Clear guidance also needs to be given to management and business functions in effectively implementing ESG strategies. The board needs to work closely with senior management to decide on what types of information need to be reported to the board, such as KPIs, progress updates of certain ESG initiatives and how often the reporting cycle should be.

3. Communicating the efforts

Effective, open and regular channels of communication should be established to reach out to both internal and external stakeholders and keep them informed of all the organisation’s sustainability visions, direction and progress. The guide highlights the new HKEX requirements relating to ESG disclosure described above, but makes the case for going beyond regulatory compliance. It gives a brief introduction to the most commonly used international reporting standards and frameworks for ESG or sustainability reports  – such as the GRI Standards, the SASB standards and the United Nations Sustainable Development Goals. These enable organisations to align their standards with international best practice.

It also gives guidance on the issue of assurance. The guide recommends engaging a third party to perform independent assurance on ESG reports or ESG data, as this will give greater confidence to stakeholders on the credibility of the report and data.

The seminar reviewed in this article was held on 14 January 2020 at the KPMG office in Central. The new ESG guide is available on the Institute’s website: www.hkics.org.hk. Further guidance on ESG reporting is available on the HKEX website: www.hkex.com.hk.

 

SIDEBAR: Credits

The Instititue would like to thank everyone involved in the publication of the new guide – ‘Integrating ESG into your business: A step-by-step ESG guide for Hong Kong-listed issuers’ – by KPMG China, CLP Holdings Ltd (CLP) and The Hong Kong Institute of Chartered Secretaries (the Institute). The guide was launched at a press conference on 14 January 2020. This was followed by the seminar attended by the speakers listed below.

Katherine Ng, Managing Director, Head of Policy and Secretariat Services, Listing Department, Hong Kong Exchanges and Clearing Ltd

• Dr Niven Huang, Regional Leader, KPMG Sustainability Services Asia Pacific, KPMG
• Pat Nie Woo, Partner, Head of Sustainable Finance, KPMG China
• David Simmonds FCIS FCS, Institute Vice-President, Group General Counsel, Chief Administrative Officer and Company Secretary, CLP Holdings Ltd, and
• Amar Gill, Managing Director and APAC Head of Investment Stewardship, BlackRock.

Thanks are also due to Edith Shih FCIS FCS(PE), International President, The Chartered Governance Institute and Institute Past President, and Executive Director and Company Secretary, CK Hutchison Holdings Ltd;  April Chan FCIS FCS, Chair of the Institute’s Technical Consultation Panel; Gillian Meller FCIS FCS, Institute President; David Fu FCIS FCS(PE), Institute Past President; Eric Mok FCIS FCS, Company Secretary; and Samantha Suen FCIS FCS(PE), Institute Chief Executive