Strengthening ESG reporting requirements ultimately benefits business and investors in Asia
In May this year, the Hong Kong Stock Exchange launched a consultation on the review of its Environmental, Social & Governance (ESG) reporting guide and related listing rules. The Exchange’s proposals include:
- Introducing mandatory disclosure requirements in the ESG Reporting Guide, with:
- a board statement setting out its consideration of ESG issues
- applications of relevant reporting principles and boundaries in the ESG report
- Requiring disclosure of significant climate-related issues which have impacted and may impact the issuer
- Amending the ‘environmental’ key performance indicators (KPIs) to require disclosure of relevant targets
- Upgrading the disclosure obligation of ‘social’ KPIs to comply or explain
- Shortening the deadline for publication of ESG reports to align with the publication timeframe of the annual report
The consultation was closed in mid-July and the results yet to be revealed, but there are already signs of reservations from the listed companies, while many institutional investors and civil society organizations support the proposals on the other hand.
While requirements on ESG disclosure may vary among different stock exchanges, the trend of adopting mandatory human rights due diligence (MHRRD) is gaining momentum, especially in Europe. As my colleague Joseph Kibuku showed in his recent blog, such legislation goes beyond mere transparency laws, such as the UK’s Modern Slavery Act, and require companies to identify human rights risks within their supply chains and take effective measures to address them. France and the Netherlands were among the first countries to adopt such requirements, with more countries set to follow suit.
This type of legislation, together with requirements on ESG disclosure, provides investors with useful information in assessing companies’ risks on social and environmental issues. In fact, an increasing number of companies - including BMW, Coca-Cola, Nestlé and Ikea - support this type of legislation, arguing that these laws level the playing field for responsible businesses and provide legal certainty of their responsibilities.
In Asia, where requirements on ESG are barely at the level of optional disclosure, the reliance of general commitments on ESG issues, and information that ignores specific issues and cases, raises doubts about how useful and reliable this information is to investors and other stakeholders.
As Aaron Halegua illustrated in his blog, in response to the recent alleged labour abuses of workers building the casino for Imperial Pacific International (IPI), a company listed on Hong Kong Stock Exchange, the authorities charged the Chinese contractors with dozens of “serious violations” and issued over USD 200,000 in fines. Four Chinese construction firms were required to pay USD 13.9 million in back wages and liquidated damages to over 2,400 employees. Another court case over forced labour and human trafficking claims by seven Chinese construction workers against Imperial Pacific International and its two contractors (a subsidiary of Metallurgical Corp of China (MCC), listed on Hong Kong and Shanghai Stock Exchanges; and Gold Mantis, listed on Shenzhen Stock Exchange) is currently being proceeded in the federal district court on Saipan Island.
Despite these enforcements by local authorities and legal actions, in IPI’s 2018 ESG report, the company wrote:
“Our operation has minimal risk of employing child and forced labour, therefore the issues are considered non-material.”
This information could be misleading to investors and stakeholders given the potential court fees, professional charges, management distraction, additional staff costs, fines, reduced turnover and reputational damages involved. Yet the existing voluntary disclosure requirement makes such claims possible.
The global socially responsible investment (SRI) market was worth almost $23 trillion in 2018, making up ten per cent of all new funds, according to JPMorgan’s report. These are still expanding rapidly, but 80 per cent are concentrated in Europe and the US.
Strengthening ESG disclosure requirements is a small but crucial step for Asia to catch up in the race for socially responsible capital, and to achieve sustainability both in social and environmental aspects. Asian companies, particularly Chinese companies operating overseas will be increasingly accountable to a larger variety of investors, amid international trends such as advances on mandatory human rights due diligence requirements. Disclosure of comprehensive and credible information on ESG will ultimately benefit these companies and investors by securing their competitiveness.