When it comes to sustainability reporting, it is theoretically crunch time in Hong Kong and Singapore. Last December, the Hong Kong Stock Exchange upgraded the disclosure requirement for environmental, social and governance (ESG) reporting to ‘comply or explain.’
This means that the city’s listed companies must disclose information on the environmental and social subject areas set forth in Appendix 27 of Hong Kong’s listing rules, or explain why they are unable to do so.
In 2017, the Hong Kong exchange will expand the comply-or-explain requirement to include 12 environmental key performance indicators (KPIs), among them greenhouse gas emissions, hazardous wastes, water consumption, energy use and significant impact on the environment and natural resources and the actions taken to manage them.
“Our findings show that companies that are publishing these materials generally have good quality reports and are not far from meeting HKEX requirements”
That’s D-Day in Singapore, too. Companies listed on the Singapore stock exchange (SGX) will be required to prepare a sustainability report in the financial year starting on or after January 1, 2017 – also on a comply-or-explain basis.
In theory, companies that fail to submit the report will be in breach of the listing rules and could put their listing in jeopardy. Non-compliance could also tarnish their reputation in the investing community, potentially affecting the share price, and among civil society, activist groups and current and would-be employees.
What Hong Kong Requires
One year on, what has happened in Hong Kong? The stock exchange has yet to report on compliance with its December 2015 rule, but researchers at Alaya Consulting examined 60 standalone ESG reports published so far in 2016.
“Our findings show that companies that are publishing these materials generally have good quality reports and are not far from meeting HKEX requirements,” says Alaya, a certified training partner in Hong Kong of the Global Reporting Initiative (GRI), and also a GRI data partner.
Nearly seven out of ten of the reports “were able to report General Disclosures for all 11 environmental and social aspects,” it adds. Those aspects are:
- use of resources
- the environment and natural resources
- health and safety
- development and training
- labor standards
- supply chain management
- product responsibility
- community investment
These are only 60 reports, representing less than 1% of the 8,752 companies listed on Hong Kong’s main board and Growth Enterprise Market. Alaya drew this sample from the 200 biggest companies in terms of market capitalization. The content analysis does not cover ESG sections in the annual report, which will also satisfy the HKEX's sustainability reporting rule.
Even so, the 60 standalone ESG reports offer insights into how companies in Hong Kong (and their CFOs) are complying with the new disclosure requirements. They also indicate how companies are approaching next year’s report, when disclosure of the 12 environmental KPIs will be required.
Already, some companies have reported on both the 11 aspects and the 12 KPIs – and also KPIs around social aspects that HKEX recommends should be discussed (but does not, as yet, include in the comply-or-explain requirement).
These recommended KPIs include total workforce and employee turnover by gender and age group, measures to avoid child and forced labor, protection of intellectual property rights, and contributions to community engagement. The governance aspects have previously been made a required section in the annual report.
The Case in Singapore
Singapore is moving in the same direction as Hong Kong. “Issuers make regular financial reports to their investors that are used for assessment of the likelihood of repayment (in the case of debt securities) and the returns on investment (in the case of equity securities),” notes the SGX.
“Increasingly, investors are demanding that issuers fulfil these obligations in a responsible and sustainable manner.”
Disclosures around environmental, social and governance factors will “show the risks and opportunities within sight, managed for future returns,” says the SGX. “Taken together, the combined financial and sustainability reports enable a better assessment of the issuer's financial prospects and quality of management.”
Some of the ESG reports do not provide reasons explaining why there is no disclosure on some of the 11 aspects, or simply indicated ‘Not Applicable.’ That’s not good enough
The ESG factors in Singapore are similar to the environmental and social aspects in Hong Kong. Broadly, they include materials, energy, water, emissions, effluents and waste, as well as labor rights, diversity, anti-corruption, product responsibility and supplier assessments.
“The issuer should consider not just its internal circle of operations but also widen that circle to include persons and processes in the value chain that contribute to the issuer's product or service,” the SGX says.
“Parts of the business outsourced to third parties (for example, freight and logistics), as well as downstream processes (for example, product defect response), constitute an integral part of the issuer's business and need to be included in the sustainability report.”
Companies in both jurisdictions have the option to do early ESG reporting, something that leading companies such as electricity utility CLP Holdings in Hong Kong and telecom operator Starhub in Singapore have already done. Some of the 60 stand-alone reports in Hong Kong analyzed by Alaya have also gone beyond what is required.
Here are some of the early lessons learned from early reporters and the Alaya study:
Prioritize the company’s sustainability goals and metrics. The HKEX ESG Reporting Guide enumerates the 11 environmental and social aspects that companies should report on and the 12 environmental KPIs from next year. But under the comply-or-explain approach, the organization has the option of not focusing on all of them – provided it explains why.
The test is materiality. “Each of these areas may have more minor or major impacts to you,” says Geert Peeters, CFO of Hong Kong’s CLP Holdings. “If you’re a textile company, probably you’ll have goals about workshops and sweat shops. If you’re a power company, you’ll have goals around carbon emissions.”
Some of the ESG reports Alaya analyzed do not provide reasons explaining why there is no disclosure on some of the 11 aspects, or simply indicated ‘Not Applicable.’ That’s not good enough, advises Alaya. The stock exchange may deem this an infraction of the listing rules. A more detailed explanation should be made, such as that the particular aspects are deemed not material because of such and such reasons.
Alaya also recommends publishing a visual representation of the prioritized outcomes, called a materiality matrix -- 42% of the ESG reports it analyzed contain such a representation. The matrix makes the company’s strategic priorities transparent to all stakeholders, and tells the regulator why some aspects and metrics have been prioritized over others.
Address both local and global audiences. The majority of the standalone ESG reports that Alaya studied followed the guidelines issued by the HKEX and the GRI Sustainability Reporting Guideline. Some also follow guidelines issued by the Shanghai Stock Exchange and the Chinese Corporate Social Responsibility Report Preparation Guide developed by the Chinese Academy of Social Sciences.
“The adoption of the GRI framework is a good indication that a large majority of companies are willing to put more effort into communicating their sustainability performance by adhering to international standards, and thus reach out to their global audience,” writes Alaya.
The International Integrated Reporting Council (IIRC), which focuses on integrated financial and sustainability reporting (rather than standalone ESG reports), has also developed practical guidelines.
Another option is to prepare what Alaya calls a “linkage document.” With this report, it says, “companies would find it easy to migrate from HKEX to GRI standards, which enables international peer comparisons.”
“If you’re going to the compliance route only, the users of your report will very quickly recognize that. You’ll very quickly get hit if you’re not playing this transparently and honestly”
Don’t regard sustainability reporting as just a compliance exercise. The fact that companies are following international standards suggests that they recognize the positive potential of ESG reporting as a communications tool. And that’s a good thing, says Peeters.
“If you’re going to the compliance route only, the users of your report will very quickly recognize that,” he said at the 7th CFO Innovation Hong Kong Forum in October. “You’ll very quickly get hit if you’re not playing this transparently and honestly,” given the emergence of environmental activists and millennial and Generation Z social media users.
CLP was the first company in Hong Kong to voluntarily issue a standalone sustainability report in 2003 and is a founding member of the IIRC. The company is going the integrated reporting route, but will continue to publish a standalone report “because so many users like it.”
“Try to motivate your management team and say, let’s make a good thing out of this necessity,” counsels Peeters. “If you’re not conducting the business sustainably and communicating about that, you’ll be squeezed out or some companies will not invest in you.”
Make the entire organization part of the sustainability project. Sustainability reporting “is something that [engages] the entire company and the stakeholders,” says Dennis Chia, CFO of Starhub in Singapore. “Buy-in from the entire organization, whether it is internal or external parties, is very important.”
Starhub issued its first sustainability report as part of its 2011 annual report, one of the first in Singapore to embark on the initiative. What it has found is that “sustainability reporting is very much a team effort,” says Chia, involving the board, CEO and “all our internal departments as well as our vendors and stakeholders.”
“I’m very glad to say that, with the increasing recognition of the importance of sustainability reporting, our vendors and our partners have now joined us as part of our sustainable journey,” reports the CFO. With the use of technology, data today is collected and reported across the supply and value chain.
Engage the organization’s stakeholders. Eight out of ten of the standalone ESG reports that Alaya examined contain some type of information about stakeholder engagement, including how the company is responding to stakeholder concerns.
Depending on the company’s business, industry and other factors, these stakeholders could include:
- Customers and potential customers
- Suppliers/business partners
- Government and regulators
- NGOs and lobby groups
- Local communities
- Experts and specialists
“Stakeholder engagement is imperative to companies identifying the potential risks and opportunities in their sustainability practices,” writes Alaya. “Being transparent with this process is also a convincing way of communicating to shareholders how their concerns are being dealt with.”
Commission third-party assurance. Neither Hong Kong nor Singapore requires validation of the reported numbers and outcomes, but Alaya says companies “should consider externally assuring their reports to increase credibility.” The third-party validation will also be an opportunity to have their internal processes reviewed so action can be taken to improve them.
Four out of ten (45%) of the Hong Kong ESG reports Alaya examined were externally validated. The most widely used standard is the International Standard on Assurance (ISAE) 3000, followed by AccountAbility’s AA1000.
“Credibility is very important,” agrees Peeters. CLP commissioned PwC, which audits its financial reports, to also certify its sustainability performance using the ISAE 3000 and ISAE 3410 standards. The CFO credits the credibility of its sustainability reports for CLP’s inclusion in the various sustainability indices, including those compiled by Dow Jones.
“It is important for any company . . . to build recognition as a trusted brand and company while remaining environmentally and socially responsible . . . Sustainability reporting is good for business and good for sustainable development”
Not Just Compliance
It remains to be seen whether the stock exchanges will seriously assess the sustainability reports in the same way they look at the financial reports, and will crack the whip on non-compliance. At this point, it may be that companies could get away with mere box-ticking.
But the experience of CLP and Starhub argues for sustainable reporting as far more than mere compliance. “It doesn’t always pay off on the upside, but it surely pays on the downside,” says Peeters, particularly for a company that is vulnerable to perceptions it is not doing enough to mitigate the impact of its power-generation activities on the environment.
“Let’s not forget financial analysts and portfolio managers, the people that decide whether they like your stock or not,” he adds. “Many of those are younger people. They look at all this [sustainability] information and they challenge you.”
For his part, says Chia, “it is important for any company, as part of the sustainable reporting efforts, to ensure timely and relevant disclosures, and to build recognition as a trusted brand and company while remaining environmentally and socially responsible.”
“Sustainability reporting is good for business and good for sustainable development.”