Walking the ESG talk: the time is now

Pat Woo

Pat Woo CPA (practising), Partner and Head of ESG, Hong Kong at KPMG China and member of the Institute’s Sustainability Committee, says boards and the C-suite need to stamp out greenwashing within their organizations before the regulatory tide comes in

Defending organizations from within against “greenwashing” – false or fraudulent advertising of companies and their products or services as being environmentally friendly or carbon-neutral – is becoming an urgent imperative as regulatory hammers start to fall across jurisdictions.

A number of landmark cases globally are paving the way for more regulatory action for companies that do not live up to their environmental, social and governance (ESG) and climate action commitments. In March 2022, a major bank paid a US$1.5 million fine to the United States Securities and Exchange Commission to settle a case alleging that certain investments made by its funds, marketed to retail investors as ESG, did not undergo sufficient ESG quality reviews.

Last year, a court ruling in Europe found that a leading energy company was continuing to invest heavily in fossil fuels despite its commitment to be carbon neutral by 2050, and imposed stricter carbon reductions the company must make by 2030. Two global investment banks are also currently being investigated by U.S. and German authorities respectively for alleged greenwashing related to their ESG funds.

With China’s central government working towards achieving the dual targets of peak carbon emissions by 2030 and carbon neutrality by 2060, executives in Hong Kong and Mainland China are foreseeing increased regulatory pressure to report their progress on meeting climate action targets.

A 2021 KPMG survey of 1,325 global chief executive officers found that 42 percent of CEOs in Hong Kong and Mainland China are facing significantly increased demands from local regulators to disclose ESG information – much higher than the global average of 29 percent and up from just 5 percent in 2020. With pressure mounting, boards and executives are grappling with how to align their business practices with the ESG goals and achievements that they are communicating externally.

Reporting gap set to widen as new standards are introduced

At present, part of the problem with creating effective governance lies in the current lack of standardized and comparable ESG reporting. Aiming to address this are the proposed standards by the newly created International Sustainability Standards Board (ISSB), which build on the recommendations and prior standards of the Task Force on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB). The proposed ISSB standards are structured around the four pillars that represent core elements of how companies operate, namely governance, strategy, risk management, as well as metrics and targets.

It is widely expected that reporting under the ISSB’s standards will become mandatory for Hong Kong-listed companies. The Green and Sustainable Finance Cross-Agency Steering Group has expressed its support, and the Securities and Futures Commission and Hong Kong Exchanges and Clearing Limited are currently engaging with industry practitioners to evaluate how the ISSB’s proposed requirements can be applied in Hong Kong.

Despite the current tide towards stricter regulation and enforcement, significant gaps remain between Hong Kong companies’ current climate reporting and the proposed ISSB standards. A KPMG survey of Hong Kong-based governance professionals released in July 2022 found that only 7 percent of companies polled have adopted the TCFD recommendations and just 4 percent have adopted the SASB standards. Meanwhile, 34 percent of respondents, the survey found, don’t have a plan to conduct climate-related scenario analyses. Furthermore, a large majority (86 percent) said that their companies have not yet set a climate transition plan, while 47 percent consider that their companies are unlikely to set one.

Adding to the complexity of governance is the current lack of a mandatory requirement for ESG data assurance to verify that reported data is robust and accurate. Non-financial assurance standards, such as International Standard on Assurance Engagements 3000, are currently in use, but many inconsistencies exist in how organizations apply those standards. Regulatory action to close data assurance loopholes is expected as enforcement of ESG reporting standards progresses.

Effective ESG governance requires a reality check

To stay well ahead of the rising trend among regulators to investigate and crack down on greenwashing, organizations need to close the gap between external expectations and internal realities when it comes to ESG.

From a governance point of view, this will first require boards and the C-suite to understand what climate-related commitments have been made as well as the current execution plans now in place. Secondly, they must confirm who is responsible for leading the company’s efforts to achieve those goals, and how they can oversee those efforts to enforce the commitments. Next is developing and executing the roadmap that the organization will take to deliver on its ESG goals. This should include an understanding of how the goals will affect all aspects of the company’s business model, such as product development, supply chains, and internal business functions. Existing staff across the company’s various departments will also need to be trained and upskilled, as well as incentivized to help the company meet its goals. With these objectives in mind, boards and executives should also be aware of external tools and resources that can be deployed to help them meet ESG targets.

By taking clear ownership of their ESG strategy at the board level, companies will be able to say what they mean and mean what they say when it comes to climate commitments – helping to ensure regulatory compliance as well as a more sustainable future for everyone.

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