With up to 90 percent of a company’s value now resting in intangible assets, according to Intangible Asset Market Value Study, released by intellectual property merchant bank Ocean Tomo, it seems clear that we can no longer manage businesses the ways we managed them in the past. In an ever-changing and complex business environment, we can no longer solely focus on financial data to assess business performance, drive long-term strategies, and generate sustainable value.
As a consequence, corporate reporting itself is changing. We are seeing companies move towards a more integrated approach to corporate reporting, in which financial and sustainability-related financial information is more closely connected. A study from AICPA & CIMA, in partnership with the International Federation of Accountants, found that globally 95 percent of companies reviewed report some level of sustainability information.
In Hong Kong, the Hong Kong Stock Exchange (HKEX) is continuously enhancing its environmental, social and governance (ESG) and sustainability reporting requirements. HKEX has been requiring that listed companies report on their ESG and sustainability information, alongside their annual reports, since 2013. In 2019, it amended the timeline of the report submission, shortening it to no later than five months after the financial year-end, and introduced new mandatory disclosures on ESG factors and climate-related risks. In 2021, HKEX revised its reporting guidelines to include even more ESG factors and mandatory “comply or explain” disclosure requirements. More recently, HKEX announced that the proposed implementation date for the climate-related disclosures proposed in its April 2023 Consultation Paper will be postponed to 1 January 2025 so that it can take in account the recommended approaches for scaling and phasing-in of requirements, as provided in the International Sustainability Standards Board Adoption Guide, which was set to be published before the end of 2023.
Groups, such as customers, workforce, society, governments, and investors, all demand greater organizational transparency beyond the traditional financial metrics. ESG is fast becoming one of the primary lenses through which an organization’s performance and prospects are judged in Hong Kong and beyond. Therefore, being able to clearly and effectively communicate material ESG information will help organizations grow their resilience and strengthen their reputation by demonstrating to investors and other stakeholders their commitment to ESG priorities:
As with everything in business, if something is to be managed it must be measured and businesses can’t build trust with their stakeholders unless they provide consistent, comparable information on a variety of metrics, including ESG metrics. A willingness to engage with ESG matters in corporate reporting improves stakeholder engagement and shows investors that the company is forward-thinking and aligned with strong, unified, and global reporting standards supporting consistent and transparent reporting, such as the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2 Climate-related Disclosures standards, which came into force in January.
While many still believe that sustainable growth requires financial trade-offs, research shows that this is not always the case. A recent analysis from McKinsey indicates that financially successful businesses that integrate ESG priorities into their business strategy to drive long-term value creation outperform their peers, provided they also outperform on the fundamentals when it comes to profit and growth. Investors are also showing greater interests in ESG and sustainable business practices for evaluating businesses as it correlates with higher returns, lower risks, and long-term business success.
By increasing their focus on ESG, businesses can also attract and retain a diverse pool of talent. This is especially true for the younger generations who want to work for organizations that share their vision, values, and purpose and that have a positive impact on society as a whole. In fact, more than 40 percent of Gen Z and millennials would switch jobs over climate concerns, according to a survey by Deloitte, highlighting the growing importance of having a clear ESG strategy with measurable actions in place. In addition, data shows that a greater focus on diversity and inclusion helps businesses perform better.
The accounting and finance profession has long focused on assessing and managing financial risks. However, the global risks we are seeing today are pushing our profession to expand its remit. As core members of almost every business and non-governmental organization, accounting and finance professionals have a pivotal role in providing sustainability-related financial and financial management information to drive business performance, develop strategies, and influence decision-making. They own the processes, systems, data, management information, reporting, and assurance that will support their organizations’ transitions to sustainable businesses.
They bring a unique set of skills and knowledge to the table and can work with stakeholders to integrate responsible and sustainable practices into their business and operating models. Without the rigour and business acumen of accounting and finance professionals, it may prove impossible to truly embed sustainability into “business as usual.” The profession’s very nature makes it a powerful force for supporting and implementing strategies and programmes aligned to organizational goals and assuring this information and the systems.
