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30 Nov Hong Kong’s ESG Development Implications for Mainland [PT 2]: Recommendations for the China Market
Compared with developed markets such as Europe, the US, and Japan, Hong Kong started relatively late in the ESG space. For reference, in 2016, Hong Kong only accounted for 0.06% of the world’s ESG assets, whereas Europe and the US made up 52.6% and 38.1%, respectively. By October 2020, Hong Kong had 50 PRI signatories, accounting for 1.5% of the global total. Of the 50 institutions, 16 signed up in 2019 and ten in 2020, showing that Hong Kong has been catching up with global ESG development in the recent two years.
Currently, Hong Kong has a good foundation of policies and regulations on ESG disclosures. In 2012, HKEX published its ESG reporting guide to urge companies listed in the region to disclose ESG information. Aside from issuance of the guide, the bourse had also been updating and tightening related policies, such as expanding the scope of mandatory disclosures, in a move to keep up with international ESG developments.
In addition to policies, the Hong Kong government also contributed to the construction of its regional ESG ecosystem. In June 2018, the HKSAR government announced the launch of a three-year green bond grant scheme to attract more institutions to issue green bonds in Hong Kong. Later, the HKSAR government proposed in its 2018-2019 fiscal budget to issue government green bonds. In 2019, the government officially issued Hong Kong’s first government green bonds worth USD1bn with a five-year maturity, providing a risk-free benchmark rate for green bonds issued in its market.
Since the epidemic this year, the Hong Kong government has been making greater efforts to promote the city as an international investment hub. It claimed in its fiscal budget plan earlier this year that it intended to issue green bonds totaling to HKD66bn in the next five years and establish a green finance R&D fund. In June, the HKEX announced that it planned to set up Asia’s first sustainable and green finance platform named “STAGE” to provide all HKEX stakeholders with access to an online database of information on sustainability and impact investing. Later, in July, the HKEX started requiring all IPO candidates to disclose their ESG risks.
How can the Mainland learn from Hong Kong’s ESG development?
The priority to domestic ESG development is to establish a framework governing ESG disclosure of public companies. Mainland policymakers need to introduce uniform disclosure guidelines, supplemented by mandatory disclosure requirements. While various industries have a different emphasis on ESG efforts, it will also be viable to establish disclosure requirements based on industrial characteristics. For example, manufacturing companies, which have significant energy consumption and emissions, may put their ESG disclosure focus on environmental indicators. The financial industry, which mainly provides services, should pay more attention to disclosing information regarding social performance. Besides the issuance of ESG reports, mainland regulators should also encourage listed companies to increase the credibility of their ESG reports through recognized third-party audits.
Once the Mainland publishes its first ESG reporting guide, it should eventually transition to making more ESG indicators mandatory for companies to disclose. In reference to rules in Hong Kong and overseas countries such as Australia and India, listed companies operating in those regions now have to comply with certain ESG KPIs, otherwise, they will be asked to explain the reason why they fail to do so. Chinese regulators may consider first applying the higher standards to large-cap or high-polluting companies, and then, expand the regulatory scope to smaller firms.
From the perspective of listed companies, they may have to adopt more digitalized methods to collect ESG data. For trans-department statistics, the firms should establish an automated process to gather all the information, instead of relying on manual collection, which will also enable a firm to carry out ongoing monitoring on its ESG performance, rather than once a year.
Other than disclosure directives on ESG performances, formulating policies to encourage ESG investment will also boost the development of China’s ESG development. At present, ESG-driven investment is still rare, while most investors or mutual fund managers still have a wait-and-see attitude. Chinese regulators may motivate ESG investment by releasing some favorable policies for such types of investment or piloting government-invested ESG funds.
On the other hand, the Mainland should also foster development of more professional ESG third-party rating agencies and databases. Specifically, such third-parting rating firms should be motivated to collect ESG information from credible intermediaries, and consequently construct their databases for ESG matters. Drawing on foreign experience, many well-known rating agencies treat databases as their core business. The more powerful the database is, the more reliable the evaluation results will be. In further developments, financial institutions can improve their databases through the use of fintech from aspects such as data mining, analysis, research, risk warning, etc.