Hong Kong’s corporate governance waning

Standards and expectations have moved quickly on ESG and sustainability reporting over the past four years, and the Hong Kong Exchange (HKEx) through its “Consultation Paper on Review of the ESG Reporting Guide and Related Listing Rules” has made an attempt to participate in this evolutionary process. This paper is an update to the exchange’s previous 2015 ESG guide, and while this step seems outwardly positive, we don’t believe it warrants an epaulette on HKEx’s shoulders?

We, the Asian Corporate Governance Association (ACGA), a not-for-profit membership association chartered under the laws of Hong Kong and founded in 1999, believe that the proposed amendments do not go far enough and will leave Hong Kong well behind leading practices in other regional markets, and globally. We feel that the exchange’s approach is incremental in key areas and highly “path dependent” (ie, constrained by the framework and content of the original guide). For an international financial centre like Hong Kong something more innovative and internationally minded is needed.

To help illustrate, there are three areas where the guide could provide additional guidance; 1) board statements, 2) climate change impact, and 3) international ESG reporting standards.

On board statements, the guide could provide additional language on how it could be made more meaningful to investors and other stakeholders (ie, company specific) and how to avoid boilerplate.

On climate change impact, the wording of the new general disclosure obligation and KPI is extremely brief.  This will probably result in boilerplate statements from companies. A more helpful approach would be to reference the logical framework provided by the Task Force on Climate-related Financial Disclosures (TCFD) and encourage companies to report in line with it.

On international ESG reporting standards, the guide mentions that issuers can opt to follow various international standards in ESG reporting, however, it does not incorporate practical guidance on these. We suggest looking at Sustainability Accounting Standards Boards (SASB) of the United States and “integrated thinking” approach of the UK for guidance.

There are also some policy issues that the guide could address. For example, on “comply or explain”, the presentation of the environmental and social KPIs could be read as implying that companies must gather and report on all these metrics, despite the fact that they fall under the “comply or explain” part of the guide. We suggest that a more explicit statement emphasising that companies should apply a materiality threshold to each KPI would be better.

On anti-corruption, the disclosure is positive, however, it is not properly supported by the Hong Kong CG Code which still leaves whistleblowing policy as only a “recommended best practice” (ie, not subject to comply or explain”). This is an area where the CG Code needs to be amended soon.

On ESG assurance, companies that choose not to seek assurance should perhaps be required to provide a detailed explanation of their data gathering and analysis process. We acknowledge that the Guide does address this issue to some extent but should be more explicit.

ACGA looks forward to the exchange taking a measured and responsible approach towards improving its guide. We are concerned that Hong Kong could suffer the same fate as many other Asian markets, namely sophisticated ESG/sustainability reports standing alongside mediocre and unchanging financial and corporate governance reports.

We highlight that this is a worsening issue in many places and is readily apparent from the 100-page GRI-style reports published by some companies (often large caps) alongside annual reports that contain limited narrative to their financial statements and CG reports that are cut-and-pasted from one year to the next. To conclude, the efforts to bring in higher standards in ESG reporting in Hong Kong are necessary, however, it should not result in a weakening in other areas of disclosure.

Bilal Khan is advocacy and data manager for the Asian Corporate Governance Association.


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