Over the past five years or so, there have been growing calls from mainstream investors for action to tackle environmental, social and governance (ESG) issues. Larry Fink, Chairman and Chief Executive Officer of BlackRock, the world’s largest asset manager with over US$7 trillion under management, stated explicitly in his annual letter this year to CEOs that “climate change has become a defining factor in companies’ long-term prospects.”
In the letter, titled A Fundamental Reshaping of Finance, he wrote that ESG now plays an increasingly important role in how investors make their decisions, because investors are now “recognizing that climate risk is investment risk.”
Fink’s words reflect a paradigm shift in how the investment community views the role of business. Business leaders should recognize that ESG performance is no longer considered a burden, nor a nice-to-have addition, but can represent an opportunity for growth.
At the same time, companies need to respond on the regulatory front. In Hong Kong, we are seeing more stringent ESG disclosure requirements for listed companies following the release of the revised ESG reporting guide by the Hong Kong Stock Exchange (HKEX) last December, which will become effective for financial years commencing on or after 1 July 2020. The amendments represent a shift away from “reporting” to “management,” with an emphasis on the role of the board in the governance structure for ESG matters.
So, amid rapid developments in the ESG space and increasing shareholder demands for improved ESG performance, it is essential for business leaders to adopt a proactive approach to holistically integrate ESG into their business. The effort should encompass corporate governance, strategies, reporting and more.
Sustainability never has been a question of “if.” Rather, sustainability has always been a question of “how.” For every company, the first step in integrating ESG into business is to set common ground for the company and its key stakeholders to agree on the definition of ESG and its importance to the company. When one tries to seek the buy-in and support from the board and senior management, it is important to speak the language of C-suite executives. For example, when talking to the chief financial officer it may be important to focus on efficiency improvements or cost reductions.
Finding a common language to communicate a company’s approach to ESG is also essential because there are different terms about ESG that could broadly reference similar things but have different meanings to different people. There are terms such as corporate social responsibility, sustainability, corporate citizenship or shared value. So, it is necessary to make sure all key stakeholders, especially the board, are clear on what the company refers to and what each term means to the business as a practical matter.
Theoretically and ideally, materiality is key to meaningful and concise reporting as it enables readers to better understand a business’ overall management of ESG issues. However, at the moment, there are still quite a number of companies that “fall into a ‘box-ticking’ approach whereby attempts are made to populate each provision with data without conducting a suitable assessment of each provision’s materiality and relevance,” as the HKEX described in its Analysis of Environmental, Social and Governance Practice Disclosure in 2018. In other words, many companies are disclosing too much immaterial information.
All issuers should keep in mind that there is no “one-size-fits-all” approach for ESG reporting. Whether to issue disclosures on certain issues depends on the industry, the geographical location of an issuer’s operations and the actual situation of the company. While there is no standard number of material topics that a company should address, companies are suggested to focus on two or three strategically important ESG issues with the greatest impact on their business and stakeholders. Strategically focusing on key issues fundamentally improves the quality of disclosures and affects a company’s competitive advantage.
To help companies better understand and integrate ESG issues into their business strategies, I have conducted an e-learning course for the Hong Kong Institute of CPAs from a sustainability practitioner’s perspective. “Understanding the latest ESG practices” is intended to help business leaders, including CEOs and CFOs, through step-by-step guidance and insights from companies with best practices to help corporates address the central issue of integrating ESG into their business. The course provides practical suggestions for incorporating ESG concerns into business strategies to meet stakeholders’ needs and expectations, and thoughts on how to comply with the new reporting requirements.
Patrick Chu is the National Head of Business Reporting and Sustainability at KPMG China. He is also National Head of Mining and Regional Head (northern China region) Industrial Manufacturing at the firm. Chu has more than 20 years of experience at KPMG providing audit and advisory services and is an experienced sustainability and environmental professional. He leads sustainability assignments across a range of sectors, namely power and utilities, real estate and transport and also completed the first green bond issuance in Mainland China in early 2016.