Hong Kong companies must wield double-edged sword of ESG reporting with care

Putting more pressure on organisations in Hong Kong to deliver on their climate pledges is critical if the city is to achieve its net-zero goal
Using reporting standards to create greater transparency is a smart way to apply some of that pressure, but it also comes with reputational and business risks for firms

Mark Jackson

Published: 4:30pm, 10 Apr 2024

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At last month’s One Earth Summit, the Hong Kong government ratcheted up plans to require Hong Kong Exchanges and Clearing-listed firms to disclose more detail on their progress against sustainability metrics. The city’s authorities will join New Zealand, Australia, Singapore, the Philippines, Japan and now Malaysia in enacting mandatory climate-related disclosures based around the International Sustainability Standards Board disclosure framework.

It will mean more than 32,000 companies in Asia alone will need to be more transparent in their environmental, social and governance (ESG) reporting, creating more openness around how – or perhaps if – they are meeting their climate goals.

Hong Kong has yet to finalise a start date but a working timeline of January 1, 2025, has been suggested. However, the move cannot come quickly enough. Carbon emissions in the city have largely been steady since 2020, putting Hong Kong’s ability to meet its 2050 climate obligations in jeopardy.

Rising levels of private car usage, mountains of plastic waste and falling biodiversity are just some of the challenges facing Hong Kong. The new reporting standards will help make clear how businesses are contributing to solutions or making the problems worse.

The new reporting framework will standardise data, allowing all stakeholders to make informed decisions about which businesses they engage with. At its simplest level, the new standards will create greater accountability and allow investors to funnel money towards more sustainable businesses.

There are a host of other benefits, too, including in the competition for talent. A 2023 survey of more than 22,000 Gen Z and millennials across 44 countries found that more than half research a brand’s environmental impact and policies before accepting a job. While it’s still too early to tell, there is a growing sense that Gen Alpha – those born between 2010 and 2025 – will be even more fastidious with their choice of employer when the time comes for them to enter the workforce.

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ESG factors also weigh on consumers’ minds. One in 10 consumers in the UK make a purchase decision based on carbon footprint information, while one in three have stopped purchasing brands or products because of sustainability concerns.

All of this shows that delivering on corporate ESG metrics should not be perceived as a business cost; it is an opportunity for businesses to truly connect with their employees and consumers. It is also an opportunity to tap into the trillions of dollars of investment funds now available across a whole swathe of sectors.

Despite political headwinds, total “responsible” fund assets rose nearly 11 per cent to stand at US$2.56 trillion as of November 30 last year, compared with the previous 12 months. While still only a fraction of total global fund assets, it is still a sizeable pool of investment.

The importance of adhering to ESG practices is underscored by the fact that 89 per cent of investors consider ESG issues as part of their decision-making process. Nearly a third of European investors say ESG is central to their investment approach.

What is ESG and why does it matter for businesses and investors?

Herein lies the rub with the new ESG reporting regulations. Many firms will regard them as simply another box to be ticked. Once published, though, the reports will live online for anyone to see and analyse.

That is fine for those companies that are performing well, but imagine a scenario where environmental metrics fail to improve. That is a not-unlikely situation given how few Hong Kong businesses have third party-validated net zero goals. A simple piece of desk research will show stakeholders any problematic areas, presenting a significant reputational risk with the attendant costs of putting things right.

In fact, a recent survey across a range of sectors in Europe, the Asia-Pacific, North America, South America and Africa placed governance, environment and social issues as three of the top five reputation risks of most concern to senior executives.

It is not only a reputational risk; ESG reporting also represents a significant business risk. Investors use ESG reports to inform their qualitative and quantitative decision-making about where to invest. This creates the potential for firms in Hong Kong to find capital options are squeezed or come at a price that makes investment simply too expensive.

To overcome this possibility, businesses need to properly plan their ESG communications. They need to build a narrative that provides context for any stakeholder likely to dive into the numbers and use them to make decisions. That does not happen through a simple report but requires planning and must start well before the regulations require reports to be published.

It also requires the ESG team to be joined at the hip to the investor relations and communications teams. This ensures that the right information is delivered to the right audiences at the right time, rather than leaving stakeholders to draw their own conclusions.

Putting more pressure on organisations in Hong Kong to deliver on their climate pledges is critical if the city is to make good on its 2050 “net zero” goals. Using reporting standards to create greater levels of transparency is a smart way to apply some of that pressure. However, it comes with real business risks that many firms will not see until it is too late.

“Never put off until tomorrow what you can do today”, as the old saying goes. The time for businesses to act is now to make sure that business risk does not follow in the wake of a simple report.

Mark Jackson is managing director of Reputation Works

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