For its latest research report, the Institute teamed up with Hong Kong Metropolitan University to look at the way ESG ratings providers operate in Hong Kong. CGj highlights the findings of the report with a focus on the implications for corporates, investors and wider stakeholders.


  • the Institute’s latest research report provides insights into the way ESG ratings providers operate and the implications for companies in terms of how to adapt and improve their ESG disclosures
  • the report found that ESG ratings providers frequently place a great deal of weight on data that businesses themselves disclose – meaning that companies have an added incentive to ensure good transparency about their ESG practices
  • governance professionals need to understand how ratings providers operate and should consider facilitating interaction with these providers on their ESG practices

In theory, environmental, social and governance (ESG) ratings should be a valuable source of information on companies’ ESG track records. They are certainly extensively used by investors, companies and other stakeholders to evaluate and compare the key ESG practices of different organisations. But there has been an increasing acknowledgement around the world that ESG ratings need to come with several important caveats. In particular, the lack of standardisation and consistency of methodologies used by the providers of ESG ratings to gather and assess ESG data can result in a confusing picture of companies’ performance in these key areas.

A new research report, published by the Institute and the Lee Shau Kee School of Business and Administration of Hong Kong Metropolitan University, sheds more light on the way ESG ratings providers operate here in Hong Kong. The report – A Comparative Study on ESG Scores across Rating Agencies: Cases in Hong Kong (the Report) – published in November 2023, is based on a survey that examined the overall ESG performance of 689 sample companies. From those samples, it looked in detail at seven companies that received ESG evaluations from eight ratings providers to derive comparisons and insights.

The survey set out to assess why different ESG ratings providers give different evaluations of the same company. In fact, no two ESG rating agencies produced the same results for the companies included in the study, and the Report emphasises that this has important implications for corporates, investors and wider stakeholders.

The need for baseline standards 

The risks following on from the lack of standardisation among ESG ratings providers have been on the radar in Hong Kong for some time. In mid-2022, for example, the Securities and Futures Commission (SFC) started assessing the business models of ESG service providers and the market practice of local licensed asset managers in engaging with those ESG service providers. In 2023, the SFC carried out a survey looking at ESG scoring and screening service providers, and more broadly at the data products offered by a wide variety of different providers. 

The ‘Report on the fact-finding exercises on ESG ratings and data products providers’ (the SFC Report), published in October 2023, highlighted many of the issues that have been prompting jurisdictions internationally to consider regulation or voluntary codes for ESG ratings providers. The SFC Report found huge differences in the proprietary methodologies, the sources of raw data and the pricing frameworks used by these providers. It flagged up three key challenges to be addressed: 

  1. the insufficient data, or poor quality of data (particularly on private companies and emerging markets) 
  2. the lack of transparency, and
  3. the need for better conflicts of interest management among ESG ratings providers in Hong Kong. 

Regarding the first issue, the introduction of the International Sustainability Standards Board (ISSB) sustainability-related corporate disclosure standards, which establish a global baseline for sustainability-related information, should bring more consistency to the ESG data issued by companies themselves. Regarding the second and third issues above, the SFC Report recognised the need for some baseline standards for ESG service providers in Hong Kong to tackle these concerns.

Key findings of the Institute’s report 

The Institute’s latest research report makes the point at the outset that ESG ratings can play a positive role in encouraging more sustainable practices. Where the data provided is reliable, ESG ratings can help stakeholders assess companies’ ESG track records and help investors make informed investment decisions.

By providing a framework for assessing ESG performance, they can also help incentivise companies to improve their transparency in ESG matters. The Report points out that, while every listed company must produce an ESG report annually under the most recent Listing Rules in Hong Kong, many of the environmental and social components are subject to the ‘comply or explain’ principle. This means that businesses are free to choose whether to reveal their environmental and social impacts, but they must justify their choice if they decide not to do so. Moreover, the current ESG reporting rules only apply to publicly traded corporations, giving non-listed enterprises the freedom to choose whether or not to make their ESG reports available to the general public.

‘Companies should give their ESG disclosures top priority. This prioritisation will invariably also help businesses give importance to ESG best practices and business sustainability and resilience. In appropriate cases, it might also align with rating agencies’ preferences and evaluation priorities to attract capital,’ the Report states.

The Report also points out that ESG ratings providers generally base their ESG performance ratings on publicly available information – in other words, they place a great deal of weight on data that businesses themselves disclose. This suggests that companies have an incentive to ensure good transparency about their ESG practices, and adds to the importance of ensuring precision and dependability in their disclosures. Above all, companies should not distort such disclosures in an attempt to obtain a better rating.

‘Companies should be mindful not to engage in greenwashing or green-hushing to obtain better ESG ratings,’ the Report says.

The implications for governance professionals 

As you would expect, the Institute’s latest research report also addresses the implications of its findings for governance professionals. A key message here is that governance professionals need to be aware of the significant differences in the way various providers go about gathering their primary data and presenting their ratings. 

‘It is necessary to remember that ESG rating agencies use proprietary methods and, in most cases, these are not readily apparent,’ the Report explains. 

This means that it is often not easy to determine what exactly they are basing their ratings on. The Report points out that none of the providers assessed in the survey align their indicators with Hong Kong’s ESG Reporting Code (Appendix 27 of the Listing Rules). The Code is organised around a number of key performance indicators (KPIs) covering companies’ carbon emissions, energy consumption, employee health and safety, diversity, board structure and anti-corruption measures, for example. However, even the ratings provided by the Hang Seng Index (HSI) are not organised around these KPIs. 

‘This means that if a Hong Kong–listed company wants to get a higher score/rating on its ESG evaluations, it cannot just disclose what HKEX requires it to, it also needs to make some adjustments to its ESG reporting coverage and disclose relevant information according to the preferences of the ESG rating agencies,’ the Report states. 

This task, however, will be made all the more complicated by the fact that different ratings providers focus on different indicators. For example, the Report notes that the Bloomberg ESG Disclosure Score looks at some unusual indicators under the social aspect, such as the number of employees unionised and whether fair remuneration policies are in place. This might explain why Bloomberg tends to give companies lower scores on the social aspect compared with other ratings providers.

there is a growing worldwide recognition that ESG ratings can play a positive role in facilitating a transition to more sustainable capital markets

In addition to the need for a good understanding of how ESG ratings providers operate, the Report also recommends that governance professionals facilitate interaction with these providers on their ESG practices. 

‘The governance professionals should seek to facilitate engagement with rating agencies as relevant stakeholders, where appropriate. The caveat is that certain rating agencies do not wish to engage with companies, but base their ratings on market data or other methodologies,’ the Report notes. 

Is regulation needed?

There is a growing worldwide recognition that ESG ratings can play a positive role in facilitating a transition to more sustainable capital markets. Nevertheless, to achieve this there needs to be more transparency about their methodologies and about how they address any potential conflicts of interest. 

Globally, this journey has already started. In November 2021, the International Organization of Securities Commissions (IOSCO) issued a report setting out 10 recommendations in regard to ESG service providers. A year later, in November 2022, IOSCO also called on financial markets voluntary standard-setting bodies and industry associations to promote the adoption of its recommendations amongst their members on a voluntary basis.

The IOSCO recommendations provide a good basis for best practice in this area, but different jurisdictions are choosing different routes to get there. The EU, for example, is bringing in regulation under which ESG ratings providers will need to be authorised and supervised by the European Securities and Markets Authority, and to comply with transparency requirements, in particular with regard to their methodology and sources of information. ESG ratings providers will also be subject to specific measures to prevent and manage conflicts of interest.

The UK, which already has a voluntary code, is considering going down that same route. Japan also has a voluntary code in place, while both Hong Kong and Singapore are in the process of bringing in their own voluntary codes to set out baseline best practices governing the conduct of ESG service providers based on the IOSCO recommendations.

Hong Kong’s Voluntary Code of Conduct (VCoC) is being coordinated by an industry-led working group, namely the Hong Kong ESG Ratings and Data Products Providers VCoC Working Group (VCWG). The International Capital Market Association, a self-regulatory organisation and trade association that acted as one of the Secretariats of the ESG Data and Ratings Working Group in the UK, will serve as the Secretariat of the VCWG.

The VCoC, once finalised, will be open for ESG service providers to sign up voluntarily. ESG service providers will be encouraged to complete and publish (for example, on their website) a self-attestation document demonstrating adherence to the VCoC in order to foster greater transparency among ESG service providers.

The research report reviewed in this article was authored by Institute Council member Professor Alan Au Kai-ming FCG HKFCG, Dr Xiao Shanyun, Professor Xie Nina, Liang Luojia, Ye Yulian and Liu Qingyu of Hong Kong Metropolitan University. Institute Deputy Chief Executive, Mohan Datwani FCG HKFCG(PE), was contributing editor and the Institute would like to thank the Institute’s Technical Consultation Panel members for their input and support of the project. 

The report can be found in the Thought Leadership section of the Institute’s website: The ‘Report on the fact-finding exercises on ESG ratings and data products providers’ can be found on the SFC website: