ESG A GROWING FOCUS FOR HONG KONG COMPANIES

In the Asia-Pacific region as in markets around the world, environmental, social and governance concerns are now mainstream and it is essential for senior corporate executives to adopt a proactive approach to ESG.

In Hong Kong, company directors were recently reminded of their responsibilities with regard to ESG reporting and risk management by the Stock Exchange of Hong Kong (HKEX), which says ESG performance has become “a proxy for a company's resilience and risk management capabilities’’.

In mainland China, there is a fast growing interest in environmental protection and social responsibility, and the China Securities Regulatory Commission has this year released guidelines for publicly listed companies on the disclosure of risks posed by ESG factors.

Internationally, countries are cooperating to develop shared sustainability and climate-related disclosure standards, and stakeholder groups from investors to consumers and communities expect business leaders to be up to speed with ESG-related developments.

Morrow Sodali is a leading provider of strategic advice, including corporate governance and ESG reporting and strategic advisory services, to corporate clients globally. From headquarters in New York and London, and with Asia-Pacific offices in Hong Kong, Beijing, Sydney, Melbourne, Seoul and Tokyo, the company serves more than 1,000 of the world’s leading multinational corporations, giving it deep insights into the challenges facing company directors and executives today.

Raymond Chen, Morrow Sodali’s Managing Director - Hong Kong & Mainland China, says while some Hong Kong issuers still view ESG as a minimum compliance issue, this approach is now outdated.

“Through their dealings with international customers, investors and ratings agencies, Hong Kong companies are becoming increasingly aware of how important ESG concerns are to their stakeholders,’’ says Chen.

“At the same time there’s a growing realisation that the new reporting requirements due to be released soon by the International Sustainability Standards Board, which have been backed by Hong Kong authorities, for  issuers here as elsewhere. Forward-thinking company boards are preparing their organisations to cope with these challenges and meet these new requirements.’’

As a global advisor operating in many important markets where ESG issues are already deeply integrated into corporate decision-making, Morrow Sodali is well positioned to help Hong Kong and mainland China-listed issuers catch up with their global peers, and Chen says board evaluation is a good starting point.

“The HKEX has highlighted how important regular board evaluations are to good governance,’’ says Chen. “While internal evaluations are useful, external board assessments conducted by professional, independent facilitators are necessary to maximise boards’ effectiveness by building on their strengths and highlighting potential areas for further development.’’

An external board evaluation conducted by Morrow Sodali is generally planned in collaboration with the company secretary, and begins with a questionnaire circulated to all board members.

“Once we have gathered directors' feedback, we are able to address any issues directors wish to raise and then to make recommendations to the board, for example on developing plans to improve communication and disclosure around ESG risk identification and management,’’ says Chen.

“The external board evaluation process adds considerable value by enhancing decision-making at the top of the organisation more broadly, which is why ratings agencies will enquire about this when assessing companies”’

International investors in particular require high-quality, transparent, reliable and comparable reporting by companies on climate transition plan and other ESG material matters to the companies, says Fang Yuan, Morrow Sodali’s Manager of Corporate Governance (Sustainability).

“We assist companies to embark and develop their ESG journeys and reporting frameworks, and a key aspect of this process is understanding their investors’ perspective,’’ says Yuan. “Because we work closely with so many international investors, we understand their requirements and expectations and can help our clients tailor their ESG strategy and reporting to meet investors’ needs.’’

Yuan says designing an ESG strategy for a client usually starts with materiality assessment integrating desktop research into available data such as ESG rating reportreviews, ESG influence, peers benchmarking and trends, internal and external stakeholder engagement.

“Morrow Sodali does not provide templated ESG solutions, we work with companies to develop appropriate metrics for each of their three pillars of E, S and G,’’ says Yuan. “It’s about creating an approach which fits in with a company's overall business strategy, links to its values and purpose and matches its current development level.’’

Preliminary findings and recommendations based on initial research are presented to the company internally, followed by internal and external stakeholder outreach, whether through one-on-one meetings or with groups.

“This goal is to help a company to understand potential ESG areas for improvement and identify what further measures could be implemented,’’ says Yuan. “This may include for example selecting the ESG reporting framework most suited to their current needs, such as GRI (Global Reporting Initiative) or TCFD (Task Force on Climate-Related Financial Disclosures).’’

“Some organisations are historically very target-oriented, and we are frequently asked ‘can you explain to us the direct relationship between ESG and profit?’’, she says.

“Of course, the answer to that question is multi-faceted. ESG carries opportunities and risks. Part of Morrow Sodali’s role is to educate and to increase awareness globally of how integrating environmental, social and governance concerns into business strategy can reduce risk and costs, unlock growth opportunities and future-proof brands in an increasingly ESG-aware world.’’