‘Comply and explain’ marks a departure from voluntary reporting approach
ERNEST.KAO@SCMP.COM
PUBLISHED : Monday, 28 December, 2015, 12:30pm
UPDATED : Monday, 28 December, 2015, 12:30pm
HKEx’s David Graham said benefits included better risk management and lower operational costs. Photo: SCMP Pictures
Tighter standards for environmental, social and governance disclosure from the start of the year could induce greater change in corporate behaviour that may lead to more ambitious cuts in emissions.
But a more overarching form of “integrated reporting” binding together all financials and non-financials of a company to reflect its true value would be the next step for the city, an international expert said.
Revisions in criteria to the Hong Kong Exchanges and Clearing’s corporate governance code and stricter obligations for environmental, social and governance, or ESG, disclosure were set to take effect on January 1. The change would raise current voluntary levels to a standard of ‘comply or explain’.
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David Graham, HKEx’s chief regulatory officer and head of listing, said there was overwhelming support for strengthening disclosure obligations.
“Issuers starting to report on their ESG performance may reap the benefits of better risk management, improved access to capital, greater capacity to meet supply chain demands and lower operational costs,” said Graham in a statement.
Paul Druckman, CEO of the International Integrated Reporting Council, said the move was meant to spark a change in corporate behavior. “More transparency means the company will have an incentive to reduce [carbon emissions],” he said.
But while tighter ESG disclosure could spur change in corporate conduct as the world seeks to reduce emissions to avoid the worst climate change effects this century, reports should offer a fuller picture that reflects the true value of a company and allow investors to make better decisions, he added.
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“Comply or explain is only part of the end game,” Druckman said. Integrated reporting was needed, and was a relatively new concept for corporates that united a company’s strategy, governance, performance indicators and prospects and how these can lead to the creation of value, he added.
Druckman said regular ESG reporting might not connect all information to give investors and stakeholders the “whole story”. “I am more concerned about regulators not thinking holistically,” he said. “If it’s not in context, investors may not pay so much attention.”
Only one jurisdiction in the world, South Africa, had mandatory integrated reporting.
Regardless, Ivan Tong, partner for climate change and sustainability services at audit firm EY, said demand for ESG and integrated reporting services was rising as investors and stakeholders applied more pressure on listed companies.
According to the firm’s recent study of 200 institutional investors around the world, more than 70 per cent considered integrated reports essential or important when making investment decisions, up from just 61 per cent last year.
Tong said having ‘comply or explain’ in the city was already a major step as what listed companies were doing at present was not sufficient to meet the needs of investors and stakeholders.
“The company will now have to evaluate the relevance of an issue or risk and explain to the public whether they have this risk and how they formulate strategy to tackle this risk,” Tong said.
A public consultation on the new standard and associated changes launched by the HKEx earlier this year collated 203 responses, 186 of them original. They were largely supportive of the proposals.
Among some of the main changes to the ESG and listing rules included requirements for listed companies to state in annual reports whether they had complied with provisions set out in the ESG guide for the financial year, and, if they had not, to give an explanation.
The guide itself was revised to bring it more in line with international standards and re-arranged into two areas, environmental and social.
http://m.scmp.com/news/hong-kong/health-environment/article/1895501/hong-kong-stock-exchange-begins-tighter
