Over the last 30 years, environmental, social and governance (ESG) reporting has transformed from a niche practice followed by less than 20 public companies worldwide to a bellwether of company health scrutinized by investors, consumers and regulators.

The growth of ESG awareness has spurred the development of entirely new career paths, business practices and university curricula, and has sent ripples through various professional services.

Accounting is no exception. As demands for ESG reporting among companies rise, so too does the need for accurate and clear data gathering and management systems, complemented by some form of independent assurance to validate the reliability and integrity of this information.

In contrast to the audit of financial information, ESG assurance is not mandatory in most jurisdictions, including Hong Kong. However, new protocols in this area are rapidly developing.

In the European Union, these efforts have taken shape in the Corporate Sustainability Reporting Directive (CSRD), which will require assurance on companies’ sustainability reporting from 2024.

Meanwhile, across the Atlantic, the New York-headquartered International Auditing and Assurance Standards Board (IAASB) recently closed the consultation period on its proposed International Standard on Sustainability Assurance (ISSA) 5000 General Requirements for Sustainability Assurance Engagements. The proposed ISSA 5000 sets a global baseline for those who provide sustainability assurance services and introduces elements that strengthen the assurance process. Once approved, this standard will guide assurers, both professional accountants and non-accountant practitioners, around the world as they review sustainability data.

Larger companies in Hong Kong are responding more rapidly to the fast-moving ESG environment, and have obtained ESG assurance, according to ESG Assurance in Hong Kong 2023: An evolving landscape, a study published in November 2023 by the Hong Kong Institute of CPAs.

The study drew on assurance research covering the sustainability or ESG reports (or, where applicable, the sustainability or ESG sections in annual reports) of 1,882 Hong Kong-listed companies with 31 December 2022 as their financial year-end, including 69 companies listed on the Hang Seng Index (HSI).

“We wanted to hear from providers about the importance of ESG assurance and see the market trend,” says Loretta Fong, Sustainability Deputy Leader, Mainland China and Hong Kong at PwC, and the Institute’s President at the time of the publication of the report and current Immediate Past President. The report updated and expanded the Institute’s 2021 study on this theme to also illustrate the development of the market over the past two years.

The State of play in Hong Kong

In Hong Kong, ESG assurance is a budding field at an earlier stage of development, with many businesses adhering to a mix of standards from across jurisdictions.

The city’s listed companies abide by the ESG Reporting Guide issued by Hong Kong Exchanges and Clearing Limited (HKEX). The guide notes that listed companies may seek independent assurance to strengthen the credibility of the ESG information disclosed.

In addition, over 60 percent of Hong Kong listed companies benchmarked their ESG reports against the Global Reporting Initiative (GRI), and approximately a quarter against the international Task Force on Climate-Related Financial Disclosures (TCFD), according to the Institute’s study.

While assurance on ESG reports is not mandatory in Hong Kong, change is on the horizon, according to Eddie Ng, Partner of ESG Advisory and a member of the Institute’s Sustainability Assurance Advisory Panel. “For Hong Kong as an international financial centre, I would say this is the direction of travel,” she notes.

That said, when the city arrives at this destination is another issue. “In the current situation, I don’t see it becoming mandatory immediately,” says Gigi Lee, Regional ESG Manager at HSBC, and an Institute member. “Instead, it would be more realistic, as in other countries, to adopt a phased approach.”

This would provide breathing room for companies grappling with the task at hand. “75 percent of the businesses feel that they don’t have the policy skills or systems in place or are not confident enough to meet ESG assurance requirements,” says Ng, citing a recent report by KPMG, which surveyed 750 companies globally on this matter. The Institute’s own study echoes these findings and reveals slow uptake of ESG assurance particularly among smaller companies.

The percentage of small companies, defined in the report as those with a market capitalization under HK$6 billion, that sought assurance on their ESG disclosures rose 1.1 percent between 2021 and 2023. In comparison, the rate of ESG assurance among large companies with over HK$38 billion in market capitalization more than doubled over this period, the Institute’s study found.

Smaller businesses, faced with different pressures than larger listed ones, cannot always justify the additional costs or value ESG assurance in the same way, observers note. “In Hong Kong, we are still at a relatively early stage when compared with overseas, where companies may have dedicated resources,” says Ng.

Data gleaned from the study The State of Play: Sustainability Disclosure & Assurance 2019-2021, Trends & Analysis by the International Federation of Accountants (IFAC) positions Hong Kong as a regional leader in ESG assurance among public companies. In 2021, approximately 52 percent of Hong Kong’s 50 largest listed companies had ESG assurance, 30 percent lower than their counterparts in the United States, but 14 percent higher than the same group of companies in Singapore, according to IFAC’s study.

Good business

An increasing number of companies in Hong Kong are voluntarily seeking assurance on their ESG reporting, pushed by stakeholders’ demands and pulled by a powerful range of incentives. Between 2021 and 2023, the number of listed companies that sought external assurance on their ESG reporting rose from 4.5 percent to 7.5 percent, the Institute’s study found.

Their motivations include establishing credibility, building stakeholder trust, improving risk management practices, accessing investment opportunities, and more. “For public companies, whether it is made mandatory is almost a non-issue, because investors and stakeholders increasingly expect ESG assurance to be done,” notes Mark Lam, Head of Investor Relations and Corporate Sustainability at Hongkong Land, and an Institute member.

Engaging a third-party to assure its ESG report can strengthen a company’s credibility over its ESG performance and provide it with standing. “It is better corporate governance to ensure that what a company has reported is appropriate, accurate and reliable,” says PwC’s Fong.

“For public companies, whether it is made mandatory is almost a non-issue, because investors and stakeholders increasingly expect ESG assurance to be done.”

Investors generally look upon this favourably: “Public companies which wish to maintain their access to both debt and equity capital markets will look to deliver credible sustainability reports given the rising concern of sustainability,” says Thomas Mak, Group Supply Chain and Sustainability Director at Jardine Restaurant Group, and an Institute member.

Fong notes that ensuring the accuracy of ESG-related data will also better equip businesses to navigate more sustainability-minded regulatory frameworks, which are rapidly evolving. For instance, as jurisdictions roll out carbon taxes, precision in ESG reporting can be financially beneficial as well. “These numbers have a lot of value and we need to treat them as importantly as financial records,” she explains.

The benefits of ESG assurance are also felt within companies as the assurance process forces stakeholders to challenge their current systems, according to Lee at HSBC. “Internally, assurance examines your own recording system, and at the same time, raises internal awareness on the importance of the quality of the ESG data,” she explains.

“Internally, assurance examines your own recording system, and at the same time, raises internal awareness on the importance of the quality of the ESG data.”

Hong Kong businesses are taking note. By sector, banks were by far the most likely to seek third-party assurance on their ESG reporting, according to the Institute’s findings, followed by property development companies and property investment firms.

But the push factors outlined above aren’t swaying as many privately held businesses, which, like smaller companies, weigh the time and expense of ESG assurance against their value. “The adoption by private companies remains quite uneven and in most cases is entirely voluntary,” says Lam at Hongkong Land.

There are exceptions, though they may one day become the rule. Outliers include Jardine Restaurant Group, which plans to conduct professional assurance on its next ESG report. “Although we are not obligated to do an ESG report as a private company, we want to embrace sustainability and share our effort made to our staff, customers and communities,” Mak explains.

A mountain of data

ESG assurers are scrabbling up a steep learning curve and must contend with a morass of information as companies report on criteria selected from a range of impact-related issues that are relevant to the company and its shareholders.

Indeed, materiality is an important criterion when determining the nature and scope of any assurance, notes the Institute’s study. The Sustainability Accounting Standards Board defines materiality as matters that “are reasonably likely to significantly impact the financial condition, operating performance or risk profile of a typical company.”

Viewed through the lens of sustainability, this broadly translates into the ESG reporting standards we see today where companies focus primarily on water consumption and greenhouse gases of their own operations, Ng at KPMG explains, so are increasingly looking at Scope 3 emissions – which relate to greenhouse gases – and also estimated impact across value chains.

Technology can be a valuable ally to parse through this data and maintain a clear ESG audit trail, she notes, while Lee highlights the importance of preparation at the business end. “For companies who haven’t gone through this before, familiarize your internal stakeholders with the process so when it’s time for the actual assurance, it will not be as painful,” she advises.

There will still be hurdles to clear, says Lee, who has experience with the ESG assurance process in past roles, including working with an external party to audit companies’ reports. “It can be quite time-consuming, tedious and takes a lot of effort for a company depending on the scale,” she adds.

Finding directions on questions of materiality and data collection can be in low supply, and despite a wealth of literature on ESG reporting, “guidance is well short of the level of granularity at which they exist for financial reporting,” says Lam.

And as more companies and auditing firms enter the domain of ESG reporting and assurance, regulations are constantly updating. “The subject matter is getting more complex, the requirements more challenging,” says Ng.

In the midst of these challenges, auditors should look to their past experiences for guidance, the interviewees agree. Swap the emission tons and kilowatt hours of energy for dollar signs, and the auditing process is not so different after all, says Fong at PwC. Ng agrees: “At its core, ESG assurance is similar to financial statement auditing – they are looking for the same thing.”

While the IAASB’s ESG assurance standard, ISSA 5000, is being finalized, Lam at Hongkong Land believes that ultimately, having the right sector and technical expertise is key for assurers. “Using the real estate sector and carbon emissions as examples, the single most important issue is how to disclose and reduce the embodied carbon footprint (i.e. carbon emissions from manufacturing of building materials and the construction process) of new buildings. In order to properly measure this, it’s very important to ensure the expertise are there in the auditors,” he says.

Leading change

According to the Institute’s study, the assurers were CPA firms in 43 percent of cases for all the companies with ESG assurance, while 56 percent were conducted by non-CPA firms. CPA firms are well-placed to guide development of ESG assurance in the city because of their proven track record and experience in financial reporting and auditing.

“ESG reporting standards increasingly emphasize connectivity with financial reporting and ask for financial impacts. CPAs are experienced in this field,” says Ng.

Companies in Hong Kong must have a plan in place as ESG reporting and assurance requirements tighten, and according to the interviewees, CPAs are in a position to guide businesses. “CPA firms will give ESG, which is generally seen as a vague term in the public’s eyes, a baseline or common language for better understanding,” says Mak at Jardine Restaurant Group.

Not all assurance is created equal, with reasonable assurance representing the most robust assessment, limited assurance being the second highest, and moderate assurance the least comprehensive level of assurance for companies to choose.

The Institute’s study found that the majority (59 percent) of Hong Kong-listed companies opted for limited ESG assurance, with this figure rising 10 percent among HSI listed companies.

A quarter of HSI companies sought out a reasonable level of ESG assurance and 6 percent obtained a moderate level, compared with an average of 24 percent and 11 percent, respectively, among Hong Kong listed companies as a whole.

Some companies may not have sufficient confidence in their own data gathering and analysis systems to be subjected to detailed scrutiny, the study authors noted, while others may simply be unaware of the benefits of seeking higher levels of assurance. “The first step right now is more engagement to raise the awareness and interest because otherwise, a lot of the companies may not see the urgency,” notes Lee.

And CPA firms, with their wealth of knowledge and existing relations with Hong Kong companies, are uniquely situated to do just that.

Loretta Fong, the Institute’s President at the time of the publication of the report and current Immediate Past President (middle); Loren Tang, Chairman of Best Corporate Governance (CG) & ESG Awards 2023 Organizing Committee (left); and Patrick Rozario, Chairman of Review Panel of Best CG & ESG Awards 2023 (right) when the ESG assurance research study was released in November 2023.

Between 2021 and 2023, the number of listed companies that sought external assurance on their ESG reporting rose from 4.5 percent to 7.5 percent, according to ESG Assurance in Hong Kong 2023: An evolving landscape, a study published by the Institute.

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