How can integrated reporting help Hong Kong companies?
Ellie Pang, Member of the Institute’s Sustainability Committee
Recent focus on corporate reporting including environmental, social and governance (ESG) reporting in Hong Kong has seen a convergence of a number of different sustainability initiatives. Although each with unique purpose and features, these initiatives share some common threads. For instance, most of them recommend a disclosure of the company’s strategic focus on ESG issues, especially at board level. They also require the company to report on the process and results of their stakeholder engagement and materiality assessment, and encourage sustainability reports to be quantitative, consistent, balanced and complete. In an effort to align with international best practices, the proposals in Hong Kong Stock Exchange’s consultation on a review of the ESG Reporting Guide and related Listing Rules published in May 2019 have taken on board some of the latest recommendations in the global sustainability initiatives.
Integrated reporting is one of the major global sustainability initiatives that has seen increasing support. Compared with a standard ESG report, integrated reporting provides greater context and paints a more holistic picture for investors to gauge the company’s performance. While an ESG report often only includes the company’s ESG considerations, i.e. how these issues are identified, prioritized and managed, and the company’s performance under certain ESG key performance indicators, an integrated report contains both financial and non-financial information.
Integrated reporting promotes a different way of thinking from the traditional reliance on financial capital. Instead, it believes that what makes an organization successful should rely on a much broader set of capitals. According to International Integrated Reporting Council (IIRC), the six capitals are: (i) financial; (ii) manufactured; (iii) intellectual; (iv) human; (v) social and relationship; and (vi) natural. One of the seven Guiding Principles in the International Integrated Reporting Framework (Framework) published by IIRC advocates the need to disclose the inter-relatedness and dependency of the various factors that affect the company’s ability to create value in the short, medium and long term.
Integrated reporting encourages the company and its board to better understand the company’s operations and key stakeholders’ concerns. By scrutinizing the inter-relatedness, and uses, of the various capitals available to the company, it promotes long-term value creation.
Integrated reporting is likely to be the future of corporate reporting and Hong Kong as a premier international financial centre should take the lead in Asia in this space.
Chris Joy, Executive Director, Standards and Regulation at the Institute
The Hong Kong Institute of CPAs has been monitoring the development and application of integrated reporting for a number of years. In 2011, the Institute held a forum to kick-start local consideration of a discussion paper issued by the IIRC on an integrated reporting framework, and in early 2013 co-hosted one of 10 events worldwide to launch the formal consultation on the framework issued that year.
Integrated reporting was developed for the benefit of investors who have increasingly demanded that companies report more than traditional financial information to enable them to make better informed investment decisions. This thinking has become more and more “mainstream” and many jurisdictions have introduced reporting requirements to provide what investors are demanding.
The IIRC framework provides a mechanism to report this information, and encourages the development of business processes that capture and reliably generate such information. The IIRC approach applies principles and concepts that are focused on bringing greater cohesion and efficiency to the reporting process, and adopting ‘integrated thinking’ as a way of breaking down internal silos and reducing duplication. It improves the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital. Its focus on value creation, and the capitals used by the business to create value over time, contributes towards a more financially stable global economy.
Of course, looking at principles rather than a specific reporting framework means that the IIRC framework isn’t the only way of satisfying the demand for more relevant information that focuses on sustainable development rather that short-term gain. In Hong Kong, listed companies have since 2014 had to report in accordance with the Hong Kong Stock Exchange’s ESG Reporting Guidelines. Also, under the Companies Ordinance rules, they have to provide comprehensive reports on risk assessment and response. So Hong Kong companies do report many of the elements of “integrated reports” but not all in the same report.
As a leading international capital market it is important that Hong Kong keeps pace, or even sets the pace, of developments in corporate reporting that investors are demanding. The requirements of regulators in many other jurisdictions, including Europe, Japan and Singapore, are moving inexorably in the direction of “integrated reporting” even if it’s not the IIRC framework that is being mandated. A recent KPMG survey reported that in Japan, 414 companies representing 58 percent of the market capitalization of the Tokyo Stock Exchange produced integrated reports at their last reporting dates. Hong Kong may be heading in the same direction but doing it in its own unique way.
“It is important that Hong Kong keeps pace, or even sets the pace, of developments in corporate reporting that investors are demanding.”
David Simmonds, Group General Counsel and Chief Administrative Officer at CLP Holdings
CLP was the first company in Hong Kong to adopt integrated reporting, as envisaged by the International Integrated Reporting Council’s (IIRC), when we published our 2011 Annual Report. This approach supports our commitment to long-term, sustainable value creation by providing a connected view of how we manage different aspects of our business, moving beyond a narrow focus on financial performance.
People want to buy from, work for and invest in companies they have trust in. Integrated reporting and the philosophy that underpins it are key elements of our high standard of corporate governance and transparency, which is fundamental to building and maintaining trust with our stakeholders.
In addition to financial capital, our integrated reporting also covers other resources critical to the company: manufactured capital, intellectual capital, human capital, social and relationship capital, and natural capital. Each is overseen by a member of senior management, ensuring the reporting is championed and coordinated throughout the organization.
We have seen growing interest from our stakeholders in ESG topics particularly in the years following the Paris Climate Agreement. CLP was an early mover in ESG, and we started publishing a separate Sustainability Report in the early 2000s. In 2007, we were the first Asian power company to set carbon intensity reduction targets when we published Climate Vision 2050, our commitment to long-term decarbonization of our business. In 2017, we further strengthened our targets, committing to an 80 percent reduction in our carbon intensity by 2050, based on 2007 levels, with interim decadal targets.
As an electricity utility providing an essential service to the community, we have a natural focus on ESG. In addition to our focus on delivering clean, reliable and affordable power, we work hand-in-hand with community partners at all levels in Hong Kong, Mainland China, India and Australia to improve social, as well as environmental conditions, supporting a wide range of projects including education, youth engagement, community health and improving access to clean water.
Taking a broader and integrated approach may incur more resources in the short term, but we believe there is a strong business case for this. More than 2,500 financial institutions around the world, with a total of US$86.3 trillion in assets under management, are now signatories of Principles for Responsible Investment, an United Nations organization that promotes the integration of ESG principles in the investment process. In these changing times an integrated approach to ESG is now more valuable than ever.
“People want to buy from, work for and invest in companies they have trust in.”