EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.
How EY can Help
With growing demand for transparency and increasing importance of non-financial reporting, ESG disclosure has thrived in recent years. Regulatory bodies in Greater Bay Area (GBA) are tightening ESG disclosure requirements while investors are placing more emphasis on ESG performance. According to the EY Global Institutional Investor Survey 2021, 90% of investors surveyed attach greater importance to companies’ ESG performance when it comes to their investment strategy and decision-making while 74% of the surveyed institutional investors are now more likely to divest from companies with poor ESG track records. To ensure full compliance with regulatory requirements, respond to investors’ concerns and build their confidence, companies in the GBA are encouraged to upgrade their ESG management and strive for a more well-rounded ESG disclosure.
By adopting a higher level of ESG disclosures, it also opens doors for more ESG-related investment and green finance opportunities. The number of green and sustainability-linked financial products in the market has begun to grow exponentially with the rapid expansion of green finance market and the keen support from the regional government. Companies can seize green finance opportunities and roll out green and sustainability-linked financial products by strengthening ESG disclosure and grasping green investment demand.
Here are some of our recommendations for companies in the GBA to step up their efforts in enhancing transparency and alignment with the global trend.
1. Disclose ESG information according to recognized international sustainability reporting standards
Investors value the comparability of ESG reports. In the EY Corporate Reporting Survey 2021, 89% of investors surveyed preferred the reporting of ESG performance measures against a set of globally consistent standards to be a mandatory requirement, whereas only 74% of finance leaders surveyed preferred the same, reflecting that companies often underestimate investors’ desire for comparability from consistent standards. One way to enhance comparability of ESG reports is to disclose ESG information with reference to international sustainability reporting standards, including the Global Reporting Initiative (GRI) and the future global baseline of sustainability related disclosure standards being issued by the ISSB in 2022. The GRI Standard is considered an internationally recognized standard for sustainability reporting and is the most referenced guideline after the Hong Kong Exchanges and Clearings Limited's (HKEX) ESG Reporting Guide for Hong Kong companies. In a study performed by the Hong Kong Institute of Certified Public Accountants (HKICPA)1, 65% of the Hong Kong-listed companies sampled referred to the GRI standards when preparing their reports. Companies are also suggested to follow the most up-to-date standards issued and alignment with international sustainability reporting standards will undoubtedly help improve the comparability, transparency and visibility of the ESG disclosure. In particular, the GRI Universal Standards were revised in October 2021 and will be in effect for reporting from 1 January 2023. After the revision, GRI will be the first reporting standard to fully reflect due diligence expectations for organizations when managing sustainability impacts. Companies referencing GRI in ESG reporting are recommended to prepare in advance for the updated reporting requirements and strengthen their disclosure on areas such as due diligence and human rights.
In addition, companies are encouraged to disclose sector specific ESG information according to the sector standards, in order to address material issues specific to certain sector and achieve a more tailored sustainability disclosure. For instance, GRI 11: Oil and Gas Sector 2021 has been released under the GRI Sector Program2. Oil and gas companies can refer to these sector-specific standards when drafting ESG disclosures, so as to provide the most relevant information that stakeholders require when assessing a company’s sustainability opportunities and risks.
To enhance the reliability and comparability of ESG reporting, companies in the GBA are suggested to look beyond current sustainability reporting requirements as requested by regulatory bodies and seek to align with international sustainability reporting and disclosure practices.
2. Align with topic-specific disclosure framework and international advocacy
In addition to sustainability reporting standards, GBA companies are also suggested to align with topic-specific disclosure frameworks and international advocacies when preparing ESG disclosure. The Task Force on Climate-related Financial Disclosures' (TCFD) recommendations address the risks and opportunities associated with climate change and are widely adopted by the major regulatory bodies in Hong Kong. To ensure compliance, companies should begin to strengthen climate-related management and prepare disclosure according to the TCFD recommendations under the four major pillars: Governance, Strategy, Risk Management, and Metrics and Targets. Companies are also encouraged to refer to other international advocacy including the United Nations Sustainable Development Goals (UNSDG). By mapping ESG performance against the UNSDGs, companies can show their commitment to global sustainability goals and report on the progress they have made on their sustainability journey.
3. Disclose ESG governance, strategy and oversight of the company
Currently, only listed companies under HKEX are required to disclose the governance structure for ESG management. Although disclosure on ESG governance, strategy and oversight is not mandated for other companies in the GBA, companies are recommended to disclose voluntarily by making reference to the four pillars under the TCFD recommendations and expanding it to the wider ESG aspects.
For instance, companies can consider defining and disclosing ESG responsibilities of the board, management and working groups, as well as Group-level ESG strategy and targets. By doing so, companies can illustrate how ESG issues are taken into consideration in the strategic development of the company, reveal how ESG elements are incorporated into management and showcase the execution of ESG practices in daily operations. The above information can show stakeholders whether or not the company has the foresight, capability and preparation required to address ESG issues, allowing them to gain more insights into the prospects and long-term viability of the company.
4. Disclose other performance aspects as requested by ESG ratings and indices
The number of ESG-related investment products has grown drastically in recent years. Among them, ESG ratings are one of the most popular tools that investors leverage in order to analyze the ESG performance of companies. Companies with outstanding ESG performance are often entitled to participate in ESG or sustainability-related indices. Good ESG ratings and participation in ESG indices are beneficial for companies as they unlock more opportunities for funding, helping to attract more attention and interest from investors and the market. According to the investor relation management survey conducted by SZSE, 70% of the surveyed listed companies believe that ESG ratings have an important impact on investor confidence3, shedding light on the importance of ESG rating participation.
Some of the most popular ESG ratings and indices in the GBA include the Dow Jones Sustainability Index (DJSI), MSCI ESG Rating, Hang Seng Corporate Sustainability Index Series, Sustainalytics, ISS ESG & CDP. These ESG ratings and indices often go beyond the level of compliance and tend to require ESG information that is not covered by HKEX. Therefore, companies in the GBA participating in ESG ratings and indices are recommended to disclose the ESG information voluntary, based on the requirements from ESG ratings and indices. For instance, information on zero deforestation, responsible marketing, gender pay indicators, etc. are not currently covered by HKEX but are considered by one or more ESG ratings. Companies can consider disclosing the above information to enhance transparency and seek to improve ESG ratings and indices performance. Sector-specific ESG rating is also available for companies to participate. For instance, companies in real estate business can participate in GRESB and disclose relevant real estate information related to ESG. By voluntarily disclosing ESG information outside the mandated scope, companies have a higher chance to outperform peers and obtain better results in ESG ratings and indices.
5. Disclose ESG Policies
Although ESG policy disclosure is voluntary in the GBA, it is observed that more companies are willingly disclosing their ESG policies, such as the Group’s Sustainability Policy or the Group’s Code of Conduct, on their corporate website. Disclosing ESG policy helps to illustrate the ESG strategy of the company and demonstrate their ESG commitment. Stakeholders can understand the status quo of the company and how ESG issues are carefully managed. Not only can these policies be referenced by internal and external stakeholders, ESG rating agencies often also reward disclosure of various policies. When evaluating ESG performance, rating agencies sometimes refer to these publicly disclosed policies and provide scores based on the content of the policy. As a first step, companies in GBA can consider establishing and disclosing an overarching Group-level Sustainability Policy, followed by other ESG-related policies such as the Anti-corruption Policy or Health and Safety Policy. By facilitating a more transparent business operation, stakeholders can be more informed and gradually build confidence in the company.
6. Achieve a comprehensive coverage of the report
A reliable and credible ESG report should cover all the essential areas that the business has impact on. It is of vital importance that a company clearly states the reporting boundary of the ESG report. For instance, if a company operates in both Macau and Hong Kong but is only listed in Hong Kong, the company should consider disclosing ESG management and policies from a Group-level perspective, and supplement with regional breakdowns. In this case, qualitative and quantitative ESG information of both regions should be covered in the report, unless the company does not possess significant ownership and operational control of the area of operation. In particular, multi-national companies in GBA with operations across continents or countries are recommended to develop a global ESG report, with a view to aligning with international best practice.
7. Obtain external assurance for the ESG report
An external assurance on ESG data and reports can unquestionably enhance the credibility of ESG disclosure. According to the EY Global Institutional Investor Survey 2021, 48% of the surveyed investors do consider whether a corporate’s ESG reporting receives independent, third-party assurance to an international standard4, revealing investors’ consideration on ESG disclosure assurance. Currently, ESG disclosure assurance is optional for companies in the GBA.
Research conducted by the HKICPA5 shows only 85 out of 1,897 listed companies (4.5%) in Hong Kong obtained assurance for their ESG reporting. The statistics reveal that listed companies with ESG assurance are still uncommon in Hong Kong and only companies with larger market capitalization tend to invest more resources and seek external assurance for their ESG disclosure. Considering the increasing expectation on ESG reporting from international investors, companies with greater capability and more resources are recommended to obtain external assurance for ESG disclosure, thereby increasing the reliability and credibility of the non-financing reporting.