Roy Lo, Deputy Managing Partner, SHINEWING (HK) CPA Ltd, and Gloria So, Manager, SHINEWING Risk Services Ltd, give a brief guide to environmental, social and governance reporting.
Environmental, social and governance (ESG) reporting is currently a major issue in the business world. Investors increasingly take ESG criteria as a key factor in making valuations and investment decisions, and there has been a global trend towards increased regulatory requirements relating to ESG disclosure. Many stock exchanges around the world, for example, have implemented measures in view of this trend. For instance, Bursa Malaysia has required ESG disclosure; the Shanghai and Shenzhen Stock Exchanges have published ESG guidance; and the Australian Securities Exchange has imposed a 'comply or explain’ approach to ESG reporting.
Here in Hong Kong, Hong Kong Exchanges and Clearing Ltd (HKEx) published a consultation paper on its proposed Environmental, Social and Governance Reporting Guide (ESG Guide) in late 2011, seeking comments from institutional investors, issuers, business associations, practitioners, non-governmental/ non- profit organisations, individuals and unlisted companies. The ESG Guide was generally welcomed by different parties. The consultation conclusions were released in August 2012 and the ESG Guide was added to Hong Kong's listing rules as a recommended practice, with effect from the financial year ending after 31 December 2012.
Why ESG reporting makes sense
Credibility and reputation
Comprehensive and continuous disclosure of ESG subject areas helps to enhance an issuer's credibility and reputation. Moreover, if an issuer has achieved better ESG performance than its competitors, that creates a competitive advantage and adds value to the company's brand.Management efficiency
The reporting process helps issuers review their ESG performance and identify areas for improvement such as workplace quality and environmental protection, etc. With better awareness, issuers can implement appropriate policies to increase management efficiency and stimulate employee loyalty.Risk Management
Evaluating ESG matters helps issuers to analyse the potential risks to their business, which is clearly important for improving their internal process and strengthening risk management.Attracting investors
Producing a highly informative report helps to attract investors, both institutional and retail, as it provides them with insights into how ESG factors influence the company's overall strategy and performance.What to report
As proposed in the Exchange's ESG Guide, there are four key ESG subject areas to cover in your ESG reporting. These need to be supplemented with information regarding different aspects and key performance indicators (KPIs). Suggestions for the key information which should be included are set out briefly below.1. Workplace quality
Working conditions – policies and compliance and material non-compliance on compensation and dismissal, recruitment and promotion, other benefits and welfare.
Healthy and Safety – policies and compliance and material non-compliance on providing a safe working environment and protecting employees from occupational hazards.
Development and training – policies on improving employees’ knowledge and skills and information about training activities.
Labour standards – policies and compliance and material non-compliance on preventing child or forced labour.
2. Environmental protection
Emissions – policies and compliance and material non-compliance on air and greenhouse gas emissions, discharges into water and land, generation of hazardous and non-hazardous wastes. Resource use – policies on use of resources including energy, water and other raw materials and the statistics of consumption. The environment and natural resources – policies on minimising significant impact on environmental and natural resources.3. Operating practices
Supply chain management – policies on risk management relating to the supply chain. Product responsibility – policies and compliance and material non-compliance on health and safety, advertising, labelling and privacy. Anti-corruption – policies and compliance and material non-compliance on bribery, extortion, fraud and money laundering.4. Community involvement
Community investment – policies on understanding the community's needs where the company operates and meeting the long-term interests of the community.How to report
Issuers are encouraged to state in their ESG reports which entities in the group and/ or which operations have been included. The issuer should also keep consistent the aspects and KPIs reported for each period. In addition, the report could cover the issuer's ESG management approach, strategies, priorities, objectives, opportunities, risks, challenges and remedies.When to report
The reporting should be done regularly once started. The issuer could choose to disclose the ESG information in its annual report regarding the same period covered by the annual report, or in a separate report on any period, in print or on its website. Though the reporting period is not fixed, the issuer is encouraged to report regarding the same period as in the annual report.Who is responsible for ESG reporting?
The board of directors is responsible for ESG reporting. The involvement of the board in the reporting process is crucial since it makes the disclosure more accurate and credible. However, the board may assign the task of compiling the ESG report to its employees or a committee, to assist in evaluating the issuer's performance and to draft the report.Tips on getting started
Company officers, including company secretaries, starting out with ESG reporting should consider the following preparatory steps:
• review the key ESG subject areas, aspects and KPIs precisely, so as to identify the important areas which are relevant to your business and to determine the scope of reporting
• engage stakeholders periodically to examine material aspects and KPIs and understand their views through meetings, conferences, workshops, web-based forums, and
• assess whether your existing internal system are adequate to provide sufficient data for the evaluation
of ESG issues and establish more effective procedures for collecting the data for such purposes.
It takes some time for issuers to fully adapt to ESG reporting. Recognising this, the Exchange has initially introduced its ESG Guide as a recommended practice and has put a lot of effort into educating issuers and promoting best ESG practices. The Exchange plans, however, to raise the obligation level relating to the
ESG Guide to the level of 'comply or explain’ by 2015. The adoption of best practice relating to ESG issues will help establish a more transparent and efficient capital market in Hong Kong, thereby underpinning the status of Hong Kong as a global financial hub.
Roy Lo
Deputy Managing Partner, SHINEWING (HK) CPA Ltd
Gloria So
Manager, SHINEWING Risk Services Ltd
The authors can be
contacted by email at: sw-risk@SHINEWING.com.hk.
