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25 Nov Hong Kong’s ESG Development Implications for Mainland [PT 1]: Current Corporate Disclosure Status
Overview of Hong Kong’s corporate ESG disclosures
According to Sohu, citing data from the Chinese independent consultancy SynTao, by the end of September 2019, a total of 1,868 Hong Kong-listed firms published their ESG reports for the prior financial year, accounting for around 80% of all the 2,395 listed companies in the Hong Kong stock market. In comparison, the number of companies that made ESG disclosures was 1,522 in 2017 and 1,832 in 2018. Among the 1,868 companies, enterprises operating in the consumer goods and manufacturing industry accounted for the largest proportion of reporting companies, at 22%; real estate firms were the second, accounting for 18%.
Source: PwC, Evaluation of ESG Reports by Hong Kong Listed Companies 2020
In addition, regarding the quality of ESG reports, according to a PWC assessment of 2019 Hong Kong-listed companies’ ESG reports, the consulting agency found that those firms were paying an increasing amount of attention on ESG developments and improving the quality on their ESG disclosures. Regarding Figure 1, an increasing number of companies are formulating detailed ESG reports to present their non-financial performances using ESG language. Moreover, besides the HKEX’s ESG reporting standards, such enterprises are also referencing standards issued by other agencies or stock exchanges, such as the GRI, Chinese Academy of Social Sciences (CASS), Shanghai or Shenzhen Stock Exchange, etc. Meanwhile, Hong Kong-listed firms are looking to enhance the credibility of their ESG reports through third-party audits. In 2016, the proportion of companies that did so was only 4%, while the ratio increased to 16% in 2019.
A-Share companies’ ESG disclosures lag behind those in Hong Kong, mainly focusing on CSR reports
Source: SynTao Thinktank
In comparison, citing data from SynTao Thinktank, by September 2019, 945 out of 3,702 A-share listed firms, or 26%, published corporate social responsibility (CSR) reports for the year ended 2018, including 568 Shanghai-listed companies and 377 Shenzhen-listed companies. Among the 945 firms, 485 were manufacturing companies (51%) and 81 were and financial companies (9%). Furthermore, A-share companies mainly publish CSR reports, with only a small proportion of firms writing ESG reports. In 2019, there were only 23 individual ESG reports available from all A-share firms.
A-share firms’ deal with ESG disclosure problems and meeting a unified standard
Currently, China’s securities watchdog, CSRC, has yet to issue unified standards governing ESG disclosure for listed companies, and this is the main reason behind poor information disclosure of Chinese publicly-traded firms. According to a report published by Ping An, for mainland listed firms, there are nine sets of ESG disclosure guidelines available for use, including those drafted by stock exchanges, industry associations, and academies. In 2019, the top three guidelines that Chinese-listed companies used the most were from the Global Sustainability Standards Board (GSSB), Shanghai Stock Exchange, and Chinese Academy of Social Sciences (CASS). In addition to the guidelines, Chinese companies also try to match ESG indicators given by third-party rating agencies, requiring their disclosure to be even more diversified.
Another pain point for ESG disclosures in the Mainland is that Chinese firms usually ignore ESG indicators that are important for stakeholders, and instead are more willing to disclose data that is relatively easier to obtain, such as the ratio of male/female employees. What is more, most companies do not have a complete internal mechanism in place for data collection. Therefore, cross-departmental data compilation throughout the company takes a longer time and lowers data quality. For companies owning several subsidiaries, the data collection process would become even more tedious and complicated.
How does Hong Kong outline its ESG reporting rules?
In December 2019, the HKEX issued its latest revised set of ESG reporting requirements, which came into effect on July 1, 2020. While the HKEX first released the drafted disclosure rules in 2012, the bourse made revisions regularly every year to increase company ESG performance transparency. Compared with previous versions, the latest rules added several mandatory disclosure requirements in areas such as ESG governance, risk management, reporting boundaries, etc, marking a step further for HKEX to impose stricter compliance rules on ESG reports, similar to annual reports.
In comparison to old rules, HKEX now requires H-share companies to publish their ESG reports as close to the release of their annual reports as possible. As for a specific deadline, the bourse demands publication of ESG reports within five months after the financial year-end. The new rule will prompt listed companies to make advance preparations for their ESG reporting. Moreover, HKEX now asks companies to include a statement from the board of directors in the ESG report, clarifying the role the board takes in assessing and addressing ESG-related risks.
Such a compulsory disclosure requirement will hold the board of directors accountable for corporate ESG risk management. Furthermore, HKEX applies three reporting principles, including “materiality”, “quantitative” and “consistency”. As a fundamental principle, materiality requires companies to identify ESG issues that are of significant relevance and thus allows for more targeted disclosures that are helpful for investors. Environmental KPIs will have to involve the “quantitative” principle, clarifying the computation of emission and energy consumption data, through methods, assumptions, and conversion factors, which will help improve the accuracy and credibility of ESG data.
For other environmental-related disclosures, HKEX’s new reporting standard requires companies to disclose climate-related issues that have impacted them. The change is in line with the ESG disclosure framework provided by the Task Force on Climate-related Financial Disclosures (TCFD), established by the Financial Stability Board, an international body that monitors global financial systems. For “social” KPIs, the HKEX has upgraded all indicators under the category to “comply or explain”.