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Listed companies must raise awareness and take significant steps to improve their ESG reporting framework to meet new disclosure requirements and achieve long-term sustainability

HONG KONG SAR – Media OutReach – January 12, 2021 – During the fourth year of research on environmental, social and governance (ESG) reporting, improvements have emerged in the dissemination of ESG in some areas and this is reflected in the fact that the boards of directors of listed companies are increasingly aware of the importance of ESG Management. However, the survey results are still far from satisfactory in terms of compliance and quality. In particular, the results of certain areas, such as ESG risk management and materiality assessment, are low. In this research, 7 main findings and 12 recommendations are made that can serve as a reference for listed companies to intensify efforts in ESG reports and practices, as well as achieve long-term sustainability.

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(Left to right) Mr. Ricky Cheng, Director and Chief Risk Adviser at BDO, Mr. Clement Chan, Managing Director of BDO Assurance and Mr. Johnson Kong, Managing Director of BDO Non-Assurance announced today the fourth year results of the survey “The ESG Reporting Performance of Hong Kong Listed Companies”

Currently, ESG continues to gain strength in corporate reporting regimes and in the financial institutions sector from the standpoint of long-term sustainability and responsible investment. Users and investors are demanding an ever-increasing disclosure of ESG information from listed companies in order to facilitate investment decisions, alignment of interests and values, business partnerships and joint efforts to overcome global challenges. In particular, with the continuing adverse effects of COVID-19 and the HKEx ESG Reporting Guide (“the Revised Guide”), which came into effect on July 1, 2020, priorities have changed and reinforced public commitment to ESG. The ESG reporting regime has evolved to meet increasing user expectations and it is more important to improve ESG disclosure and to become aware of the importance of ESG management, which will allow listed companies to better prepare themselves to address ESG issues and risks and address the disclosure requirements of the Revised Guide. As the fifth largest accounting network in the world, BDO has always gone to great lengths to conduct comprehensive ESG studies to provide useful results for use by listed companies.

This year, the BDO survey entitled “The ESG Reporting Performance of Hong Kong Listed Companies (the Survey) randomly sampled 400 of the most recent ESG reports published by the Senior Management and companies listed on GEM on or before July 31, 2020. Most of the surveyed companies come from the discretionary consumer sector (20%), followed by Industrials (17%), Finance (15%), Property and construction (11%), Materials (8%), Information technology (8%), Basic consumer products (5%), Health (5%), Energy (4%), Utilities (3%), Telecommunications (2%), Conglomerates (1%) and Others (1%).

Of the 400 companies surveyed:

  • 60% were small, 23% were medium-sized and large companies constituted 17%
  • The boards of listed companies were increasingly aware of the importance of ESG management, with 54% (2019: 34%) of surveyed companies disclosing information about board oversight on ESG issues and 74% of the Board’s review of ESG performance of companies. companies in relation ESG goals and targets

Below is a summary of the main findings of the 2020 Survey compared to the results of the 2019 Survey:

Search area

Key data points

Inquiry 2019

Research 2020

Increase / Decrease / Sustained

ESG Governance

High-level commitment and management

34%

54%

Increase

ESG Committee or staff

24%

32%

Increase

ESG risk management

28%

26%

Decrease

ESG Strategy

36%

48%

Increase

Stakeholder engagement

72%

76%

Increase

Materiality assessment

66%

60%

Decrease

Warranty verification by independent third parties

3%

5%

Increase

Goals in ESG management

15%

13%

Decrease

Team Career Development Program

61%

60%

Sustained

Occupational health and safety training

69%

64%

Decrease

Customer service and support

67%

63%

Decrease

Reporting system

67%

65%

Decrease

Independent anti-corruption management committee

23%

16%

Decrease

Adoption of different reporting standards / guidelines from the HKEx ESG Reporting Guide

9%

10%

Sustained

Anti-corruption training

37%

17%

Decrease

Table 1: Summary of the main research findings on “The performance of ESG reports from listed companies in Hong Kong in 2020”

Boards are increasingly involved in ESG governance

The Survey results showed that 54% (2019: 34%) of companies released information about the board’s oversight of ESG issues. At the same time, among all companies surveyed, boards gained momentum by disclosing their involvement in ESG performance monitoring and ESG risk management approaches in their preparations to meet the mandatory disclosure requirements of the Revised Guide. Meanwhile, the Survey also found that boards of large companies (76%) tended to do more to oversee ESG issues. Regarding the dissemination of other ESG governance information in ESG reports, the Survey showed that there was a slight improvement in the allocation of dedicated resources to manage ESG issues and formulate ESG strategies, such as disseminating an ESG vision, ESG structure and ESG policy.

The quality of the reports does not allow significant comparisons

The Survey concluded that the information disclosed in accordance with the four reporting principles of the Revised Guide, namely materiality, quantity, balance and consistency, was inadequate. In disclosing the quantitative, only 48% of the surveyed companies disclosed standards, methodologies, assumptions, calculation tools used and conversion factors used to report data on emissions or energy consumption. Less than 29% of companies cited changes made to the calculation methods or key performance indicators (KPIs) they had used or any other factors that could affect the comparison of the information in the report. In addition, only 64% of companies disclosed their reporting limits in the report. Among the companies that released their reporting limits, only 30% explained the method they used to determine them.

The quality of the disclosure of the materiality assessment is reduced

The Survey results showed that 60% (2019: 66%) of the companies reported that they carried out a materiality assessment, while the rest or the remaining 40% did not provide any materiality information in their ESG reports. Of the 40%, small listed companies were the ones most likely to not mention a materiality assessment. Among the companies that carried out a materiality assessment, the information disclosed was often inadequate. Only just over 50% of these companies provided comprehensive descriptions of how ESG issues were prioritized and presented the results through visual aids, such as a materiality map. It is observed that when companies do not disclose adequate information about their materiality assessments, investors may find it difficult to verify whether the data being reported is relevant to their investment decisions.

Disclosure of issues related to climate change is limited

Climate change is a new addition to the Revised Guide. Listed companies are now required to disclose their policies on the identification and mitigation of any significant climate-related issues that have impacted or may impact, and the measures taken to manage them. The survey showed that only 12% of companies cited issues related to climate change. Among these companies, it is noted that more than half (54%) disclosed the risks and opportunities related to the climate that apply to them; and the majority (83%) reported measures they adopted to mitigate their climate-related risks. The Survey also found that larger companies were more likely to consider climate risks and ways to mitigate them. Among the companies that reported on climate change, only 15% referred to the Task Force on Climate Related Financial Disclosure (TCFD) when disclosing information related to climate change. Most of them were large companies listed in the health, financial and telecommunications sectors.

Setting goals for KPIs in the environment is limited

Only 15% of companies set goals for environmental KPIs, and these goals were mainly set by large listed companies. Among these companies, the most common goals set for environmental KPIs were to reduce waste, energy consumption and greenhouse gases (GHG). Companies took a variety of approaches to setting the goals of their environmental KPIs, while the most common were to align KPI goals with the company’s views and goals (33%) or with national or regional laws and regulations (40%) .

The recognition of the UN SDGs on climate action is stronger

According to the survey results, there is a growing trend for listed companies recognizing the United Nations Sustainable Development Goals (UN SDGs). This year, more listed companies (2020: 8% vs 2019: 6%) identified SDGs that were relevant to their business operations and strategic objectives.

Independent assurance on ESG reports remains stable

The Revised Guide recommends that listed companies seek independent assurance on their ESG reports. However, the Survey found that independent verification was obtained for only 5% of ESG reports published by companies. There were no significant changes in these results when compared to the results of the previous two years. Among companies that sought independent verification for their ESG reports, 56% obtained verification for the entire report.

BDO Recommendations:

Integrate ESG into the enterprise risk management framework

In the context of risk management, ESG risks should not be dealt with separately, but should be integrated into a company’s corporate risk management (ERM) structure, referring to widely recognized best practices. The ERM framework should include robust mechanisms to identify and assess the impact of ESG risks that can influence the company’s strategy and objectives. At the same time, when considering the challenges and responses, the company can identify new opportunities based on predicted trends.

Training in climate change

Given that climate change can affect a company through physical and transition risks, companies may need to understand the implications of these risks for financial performance. Climate change is associated with specialized knowledge and complex technical terms. Therefore, the company’s board or management may need to rely on the perceptions, knowledge or external experience of sustainability professionals in order to assess the impact of climate risks during the process of identifying, assessing, prioritizing and mitigating climate and other risks. questions. Companies can create a dedicated committee or working group to guide climate change management. A climate change committee aims to ensure board-level oversight of the strategic management of climate-related risks and opportunities. A climate change working group can build the company’s capacity in relation to climate risk and accelerate the integration of climate considerations into the ERM framework.

Improve the quality of reports

To increase the reliability and accuracy of the content, any changes must be explained explicitly in the ESG report. In addition to the Revised Guide, companies can refer to the Global Reporting Initiative’s standards for relevant reporting principles to improve the quality of their reports. It is also important that companies take a consistent and well-defined approach to considering the scope and including relevant operations or entities in the ESG report. Companies with a more complex structure can apply their own judgment criteria to define the reporting boundaries.

Consider industry factors

Disclosure of factors related to a particular sector can show investors that these sector-specific ESG issues have been properly considered and addressed by the company. Listed companies may refer to some global reporting frameworks, such as Global Reporting Initiative Standards (GRI) and Sustainability Accounting Standards Board Standards (SASB). These frameworks provide industry specific guidelines on how to report a wide range of economic and ESG impacts of the operation in a given sector.

Linking feedback from stakeholder engagement with materiality assessment

It is recommended that the companies’ response be disseminated along with the results of stakeholder engagement so that readers can know if the concerns raised by the stakeholders are material to the company and if strategies or measures have been formulated to address them.

Elaborate the impact of climate change on the business model

It is recommended that companies provide specific details on how climate change can affect various components of the business model from a strategic point of view, in order to improve the development of a governance structure to manage the risks of climate change and make changes in its business model, as well as its strategic goals and objectives with a view to long-term sustainability.

Specify the nature of climate risks that can impact business

Listed companies are required to disclose, for example, the types of extreme weather events that are likely to impact the business and which business processes or critical assets would be affected by those events. Listed companies are also required to disclose whether stakeholders they depend heavily on, such as customers or suppliers, would also be affected by certain climate risks.

Alignment with the objectives of the Paris Agreement

While the presence of environmental targets allows companies to assess their environmental performance and reduce their impact on operations to an expected level, companies are recommended to align their strategic objectives with the objectives of the Paris Agreement so that they can achieve zero net carbon emissions . Companies can consult some international methodologies when setting goals for their environmental KPIs, such as science-based goals.

Improve the quality of environmental impact disclosure

To give investors a comprehensive view of the company’s environmental footprint, companies should disclose more basic information about environmental KPIs in their ESG report and how KPIs are related to their business operations. Companies can consider the disclosure of information, such as the sources of each environmental KPI, environmental policies and a roadmap to reduce the impact and long and short term reduction initiatives and action plans to achieve the goals.

Expand outreach to include Scope 3 emissions

The Revised Guide requires listed companies to disclose direct and indirect energy GHGs, with the aim of transparency and integrity in presenting the carbon footprint for investors to understand. It is recommended that listed companies also consider disclosing Scope 3 emissions. There are up to 15 types of Scope 3 emissions listed in the Greenhouse Gas Protocol. Listed companies can disclose information about the types of emissions that are relevant to their individual situation.

Integrate the UN SDGs to create more positive results

There is a view that companies can benefit from the integration of the UN SDGs into their business strategies and operations. Thus, when conducting SDG reports, companies can consider strategies such as identifying and understanding the impact of all SDGs and targets on the business portfolio, aligning the SDGs with strategic goals that can have a critical impact on business operations and may require significant changes to be made and prioritizing the SDGs and targets.

Ensuring the credibility of the report by external verification

To ensure the credibility and transparency of the disclosed ESG data, listed companies should begin by obtaining independent assurance about certain essential ESG information, such as their environmental or social KPIs, rather than the content of the entire ESG report. Companies can choose to have the entire ESG report guaranteed when they are comfortable and accumulate adequate experience in ESG reports.

Clement Chan, managing director of warranty for BDO, said: “An ESG report is a useful tool for communicating to stakeholders the organization’s ESG performance and progress in addressing operational challenges, including climate change. Furthermore, since the COVID-19 pandemic has caused unprecedented disruption to economies and financial systems, we believe that green financing is the key to rebuilding the economy on a fairer basis, as recovery is urgently needed. In this report, we see that companies have made noticeable improvements in the involvement of the ESG strategy. Even so, our research found that there was limited information released to the public, which discourages investors and users with recent concerns about developing companies’ sustainability. Listed companies must now step up efforts to improve the dissemination of ESG information to meet the information and investment needs of stakeholders, as well as to meet the requirements of the HKEx Revised Guide. “

Johnson Kong, Executive Director of BDO Non-Guarantee, noted: “There is no doubt that green finance is becoming more prominent amid the growing awareness of the investment community, and ESG has been growing worldwide, especially in the fields of health and information technology since the Covid-19 outbreak. . As such, the transparency and accuracy of the ESG report is increasingly important for investors and capital market institutions, as they consider ESG performance in investment decisions, as they often consider ESG-related information to determine whether a company is managing adequately, not just for reputation benefits. However, our survey showed that only a limited number of companies reported climate-related issues with the release of restricted information. For an effective management of ESG issues, we look forward to seeing greater engagement by companies in ESG reports, elaborating on the topics of the business model ”.

Ricky Cheng, Director and Head of Risk Consulting at BDO, said: “We are pleased to see that there has been an improvement in ESG reporting for most listed companies. However, the results are still not satisfactory. Since HKEx launched the Revised Guide and went into effect on July 1, 2020, listed companies are required to meet the highest ESG reporting standards to comply with the integrated ESG component. Users of ESG reports are focusing on relevant and material ESG issues that affect an organization’s business operations. They would also like to see an organization’s board of directors playing a vital role in driving its ESG strategy and ensuring that ESG issues are integrated into the corporate risk management framework as well as across the organization. We hope that our suggestions can provide more specific guidelines and guidance for companies to improve their ESG reports, with the ultimate goal of increasing the value of their investment and inspiring investor confidence ”.

About BDO

BDO’s global organization spans 167 countries and territories, with more than 91,000 professionals working in more than 1,600 offices – and they have one goal: to provide our customers with exceptional service. BDO was founded in Hong Kong in 1981 and is committed to facilitating business growth by advising the people behind them. BDO in Hong Kong offers a wide range of professional services, including warranty services, business and outsourcing services, risk advisory services, specialist advisory services and tax services. For more details, visit www.bdo.com.hk.

Paula Fonseca