29 September, 2012
On 31 August 2012, the Hong Kong Stock Exchange (HKEx) announced that it will make sustainability reporting (also known as Environmental Social Governance (ESG) reporting) recommended best practice for listed companies starting from the end of 2012. The HKEx has now firmly placed Hong Kong on track to follow the wider regional and global trends of increased ESG disclosure.
Just as the world of financial disclosure underwent a transformation decades ago to move towards standardisation and harmonisation, ESG or sustainability information is now undergoing a similar transformation in terms of its importance for internal management and for external disclosure.
ESG disclosure moving into the mainstream
On 31 August 2012, the Hong Kong Stock Exchange (HKEx) announced that it will make sustainability reporting (also known as Environmental Social Governance (ESG) reporting) recommended best practice for listed companies starting from the end of 2012. The HKEx has now firmly placed Hong Kong on track to follow the wider regional and global trends of increased ESG disclosure. In 2011, KPMG’s global survey, Corporate Sustainability – a progress report indicated that 95 percent of the G250 produced reports. A larger sample that surveyed 3200 companies across 32 different countries showed 66 percent were issuing reports. Closer to home, the number of reports issued by companies in mainland China has grown to nearly to 1000 in the space of just a few years. The Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines has become established as the de facto international standard on reporting and provides a detailed framework, principles, and indicators to support companies in reporting.
The trend towards disclosure reflects the increasing importance of environmental and social performance to business success. Through initiatives such as the Principles for Responsible Investment (representing USD 20 trillion in assets under management), investors have moved to better integrate ESG into investment analysis; such information is now mainstreamed into data services such as Bloomberg. Beyond investors, there is also a wide range of other stakeholders from
young consumers to community groups to employees who are all increasingly considering and acting upon corporate sustainability performance.
What do the new Listing Rules mean for me?
The HKEx has produced a guide on ESG disclosure, which will start as best practice and, subject to consultation,the HKEx plans to raise the obligation level of the Guide to ‘comply or explain’ by 2015. The HKEx will also recognise the use of international guidelines, particularly the GRI. The ESG guidelines released by the HKEx identify a broad set of parameters around the process of preparing a report and subsequently lists around 30 specific KPIs that companies are encouraged
to consider in their reporting. Companies are expected to be able to provide insight into their strategy and management of issues as well as concrete, measured performance across their company operations.
While the disclosure rules are best practice for now, it is clear that listed companies need to start making decisions about their strategy around transparency. Companies that seek to conform to best practices in corporate governance will want to consider steps towards issuing a first report in 2013 or 2014.
However, regardless of your view on best practice, all companies should start preparing for ESG disclosure to become a ‘comply or explain’ requirement over the next two years. By that point, companies will benefit from having an established set of KPIs and internal reporting system to ensure that the company is in a position
to disclose these. It is also worth considering the need for a wider strategy of engagement with stakeholders around sustainability, including opportunities to use the internet or social media to report on performance.
Why do companies report?
In KPMG’s 2011 International Survey of Corporate Responsibility Reporting, the two greatest reporting motivations by companies were external accountability and improving internal management processes. Companies use sustainability reporting to improve their brand/reputation, enhance their competitive position, and motivate employees or business partners. At the same time, the development of such a report may be the first time that companies have created a consolidated overview of their activities and results. Therefore, sustainability reporting also serves to create internal alignment, set targets, define gaps in activities, and manage risks. Good strategy, management, and monitoring are the fundamental building blocks for effective reporting.
Hong Kong listed companies should consider the following:
- What is the overall relevance of environmental and social issues to your industry sector or your business in the eyes of you and of your stakeholders?
- What is your ability to identify and measure your current initiatives and activities across your business that are related to sustainability?
- How will you be able to use transparency and reporting to improve your internal management or build your reputation and credibility within the market?
Some companies may be in a position to immediately begin preparing a report while others may need to first spend time building internal management systems to enable them to coordinate and monitor sustainability initiatives. However, ultimately, all companies will need to decide on a strategy for ESG disclosure.
Tips about pursuing reporting
Use reporting to build management capacity alongside reputation – Issuing a report is an opportunity to build internal consensus regarding the focus of sustainability activities, define targets, set up a KPI structure and improve internal reporting. Reporting should be the result of good management and not an independent activity.
Allow time to prepare – The first report requires the most effort. Give yourself time to define your focus, educate internally, and gather information. Do not try to write your first report in just a few months.
Plan in stages – Nobody can produce a perfect report in the first year. Plan to build your reporting in stages and invite your stakeholders to help you.
Leverage standards – Guidelines such as the GRI or ISO have developed over the course of many years and provide a useful reference for companies trying to understand sustainability. Look to them for insights.
Utilise stakeholders – The stakeholders outside your organisation are potential partners and sources of insight. Use your reporting to engage, learn and build collaboration.
What is the future of integration?
The HKEx guidelines recognise either stand-alone sustainability reporting or the integration of sustainability information into an annual report. Over the last few years, companies have gradually started to experiment with integrating sustainability information into annual reports in a more structured and systematic manner. Some companies have moved to a single report format and others have maintained both an integrated report and a sustainability report.
The future of reporting continues to evolve. However, there are two clear trends that remain regardless of the type or report. First, there is a growing investor audience interested in understanding a company’s sustainability performance. This audience will expect a narrative about the links between sustainability and value drivers, as well as an outline of the quantitative indicators. All stakeholders (not just investors) also now expect sustainability information to be tracked, consolidated, and disclosed in a much more systematic way. Second, reporting needs to shift from a philanthropic focus to one that examines how environmental and social trends affect the company and its management strategy.
This article was supplied by KPMG.