Listed companies embrace green, social role

An increasing number of listed companies are seeing investments related to ESG－environmental, social and governance－as a "must "rather than a "choice".

That is not only because the ESG label can add value to their assets but because of the risk management requirements.

According to a report from Syn-Tao Green Finance, a consultant company providing services in green finance and responsible investing in China, A-share companies had issued 1,021 ESG reports by June 15, accounting for 27 percent of the total listed companies in the onshore market.

About 17 percent of companies included in the CSI 800 Index, a tracker of 800 major shares listed in Shanghai and Shenzhen, gained ESG ratings at B+ or above this year, compared with 8 percent in 2018, indicating a higher quality of ESG information disclosure, the report said.

From July 2018 to May this year, share prices of the top 100 companies by ESG ratings in the CSI 800 Index were 6.65 percent higher than that of the other 100 companies with lower ESG ratings, which indicated a positive correlation between the ESG performance and the share prices, according to the report.

In March 2019, the Shanghai Stock Exchange announced supporting rules for launching the Science and Technology Innovation Board, the so-called Sci-Tech Innovation Board, requiring companies listed on the board to integrate ecological and environmental protection into their development strategy and corporate governance.

Companies listed on the Sci-Tech Innovation Board should also disclose their corporate social responsibility or CSR status in their annual report, and publish a social responsibility report, sustainable development report or environment responsibility report as appropriate.

Investors are expecting the first set of unified regulations of ESG information disclosure applicable to the A-share companies. Companies listed on Hong Kong stock exchange already required to follow the ESG reporting rules. Some of the content of the HKEX ESG Report Guide was updated this year and took effect on July 1.

On May 17 last year, HKEX published a consultation paper on review of the ESG Reporting Guide and related listing rules. The key focus of the consultation is to support and improve issuers' governance and disclosure of ESG activities and metrics.

The proposals emphasized the board's leadership role and accountability in ESG and the governance structure for ESG matters. The proposals also highlight that materiality in respect of ESG is key to meaningful and concise reporting, and echo the increasing international focus on climate change and its impact on business, according to a document of the exchange.

"We found that Hong Kong is ready for the ESG information disclosure, and we want ESG to be a risk management exploit," said Katherine Ng, chief operating officer and head of Policy and Secretariat Services of the Listing Division of HKEX.

"Every single company at the board level needs to consider the ESG risks, they need to tell the investors how they will manage the ESG risks and how they will be mitigated, as well as the plans and targets," said Ng.

In line with the regulatory rules' changes, Huatai Securities, a HK-listed company, included the ESG management into the governance and set up a special ESG committee at the board level.

"The ESG concept has been included in the investment decision-making process, through which we need to assess the potential risks of the investment products in the fixed-asset and equity portfolios," said Zhu Youwei, director of Strategic Research of Corporate Development Department, Huatai Securities.

Robin Hu, head of the Sustainability& Stewardship Group of Temasek International, a Singapore fund management group, said that capital owners and shareholders are taking ESG very seriously, setting an example that the group has increased investment exposure in supporting low-carbon economy development to limit the risks of climate change.

To some degree, the economic impact of COVID-19 is accelerating trends that had already been emerging across many markets. As institutional investors' understanding of climate risk deepens, and technology costs change rapidly, there is significant private capital movement from brown to green development, according to Rebecca Mikula-Wright, director of Asia Investor Group on Climate Change.

A recent study from KPMG showed that consumers and investors have found climate change and sustainability have become much bigger concerns since the COVID-19 pandemic. "And that ESG investments so far appear to be at least, if not more, resilient as mainstream investments to the current economic disruption, a finding echoed by other major firms like BlackRock and HSBC," she said.