Time to kick off your ESG reporting journey

Hong Kong Stock Exchange (HKEx) released consultation conclusions regarding Environmental, Social, and Governance (ESG) Reporting Guide last December, announcing the upgrade of ESG disclosure requirement from recommended best practice to "comply or explain" in two phases.

Upgrading all General Disclosures to "comply or explain" is effective on or after 1 January 2016. The upgrade of the Environmental KPIs to "comply or explain", however, will be effective on or after 1 January 2017.

Nevertheless, companies are required to state in their annual reports or ESG reports whether they have complied with the "comply or explain" provisions; and if they have not, to give considered reasons.

General Disclosures refer to company policies or information on the policies e.g. compliance with relevant laws and regulations that have a significant impact on the company. HKEx stated that disclosing this information is an essential first step for companies to take to begin incorporating ESG practices into their business operations.

We believe the upgrade will help enhance corporate transparency and strengthen governance, in the long run driving listed companies to kick off their sustainability reporting journey. Globally, surveys already suggest companies have increasingly included sustainability information in their annual reports which is now firmly established as standard practice.

In fact, a survey conducted by KPMG suggested that close to 60 percent of the largest companies in the world do this, a rise from only 20 percent of companies in 2011. In many countries, this is being driven by regulation. And I am sure you will see a similar trend happening in Hong Kong.

Coping with the rising trend to include non-financial information in corporate reporting, companies have adopted a more serious attitude in sustainability or ESG reporting and recognised the value in accurately documenting their key sustainability activities and performance. For companies who wish to publish their first ESG report in 2017, they are advised to start engaging their stakeholders now.

While most of the ESG data already sit in the company database, it is critical to understand what information is needed and why it is needed.

Going forward, the demand for increased level of disclosure and quality will become the primary challenge for ESG reporting. A high-quality report should be concise and focuses on performance. If reports are too lengthy, it seems to me that the material meaning of sustainability for the company has not yet been grasped.

A good quality report also puts sustainability in the context of external trends and explains how the company responds to the impacts of these trends on the business. Key criteria forming the crucial ingredients of quality reporting include stakeholder engagement, materiality, governance, strategy, performance targets, balance, supply chain management, etc.

I will explain more in detail about these elements in future articles.