by Geilan Malet-Bates, Co-Founder | Head of Sales – Plentitude
In April I wrote about some of the key initiatives adopted by the Chinese and Hong Kong Governments, to mitigate and reverse the significant environmental and social costs borne as a consequence of decades of aggressive economic growth.
We’re seeing further focus on Environmental, Social and Governance (ESG) in China and Hong Kong, with the most recent example being a controversial consultation in Hong Kong. Consultations can appear dry at the best of times, but not this one – how this controversy plays out will help to shape ESG uptake and understanding in one of the most populous and economically important parts of the world, and pits large investors against large companies.
Citing ‘a general absence of ESG governance structures and a lack of discussions on the process of materiality assessments supposedly conducted’, the Hong Kong Stock Exchange (HKEX) launched their consultation paper ‘Review of the ESG Reporting Guide and Related Listings rules’ last month which primarily re-directs ESG responsibility to listed company boards. Boards are tasked with ensuring detailed explanations of materiality assessments and the greater presence of ESG disclosures, both in a timely fashion.
An EY review of Hong Kong ESG disclosures in October 2018 most notably highlighted that ‘60% of issuers still adopt a “box-ticking” approach (to their ESG reports)’ and ‘most issuers stated that the Board has approved the ESG report but did not elaborate on board composition and responsibility on managing ESG risks’. Box-ticking is better than nothing, but only just.
This important HKEX initiative has therefore been broadly welcomed by the investment universe. Many investment managers and asset owners by now understand the extent to which the financial system can – and must – play a leading role in tackling our climate crisis. A number of the corporations that these asset owners are diligently attempting to steward towards better corporate governance practices, are however disputing the spirit – and the requirement – of increased disclosures. The Chamber of Hong Kong Listed Companies has stated that the additional disclosure requirements are ‘rather onerous and cumbersome’.
Box-ticking is better than nothing, but only just.
This view undermines the important work the Hong Kong Securities and Futures Commission (SFC) is doing in aligning the region’s sustainable finance framework and efforts with that of the international community. The SFC chief executive is therefore rightly on record stating “this guidance drives home the important message to asset managers that they are expected to do more than simply make the claim that they take ESG factors into account, without making clear to investors how they do this”.
If they can get this right, then Hong Kong could benefit significantly: the ESG trend is growing and Hong Kong is not a leader at present. Whilst a May survey report from the UNPRI on ESG integration in Asia Pacific notes that ‘China has seen a significant uptake of ESG investing in the past couple of years ($29.8bn of Chinese funds invested in ESG funds); a major driver has been ESG integration demand from international investors’, Hong Kong has seen much lower levels of ESG integration, requiring ‘proof of alpha and a stronger framework around ESG’ in order to attract greater buy-in.
Furthermore, ‘Corporate Governance is the most impactful ESG factor with social and environmental factors becoming much more influential on share prices and bond yields over the next five years.’ For this reason, how this controversy plays out will be an important battle in a broader war to make “sustainable finance” mainstream, or just “finance”.