HKICPA Awards find improving ESG but companies need to do more to integrate their corporate governance and ESG
To become more sustainable and resilient in the long term, Hong Kong listed companies and public sector organizations will need to further integrate their corporate governance (CG) and ESG (environmental, social and governance) policies and practices into their strategy and operations, according to the judges of the Hong Kong Institute of Certified Public Accountants (HKICPA) flagship Best Corporate Governance & ESG Awards (Awards).
Most Sustainable Companies / Organizations Awards
“We were pleased to see more interest than ever in the revamped Awards this year, with high numbers of annual and ESG reports reviewed and more companies making it onto the short list, particularly in the ESG section of the Awards”, said Mr. Raymond Cheng, HKICPA president and chairman of the judging panel.
With a growing awareness around the world of the importance of integrating CG and ESG, the Institute introduced a new, top category of awards, namely the Most Sustainable Companies / Organizations Awards (MSCO Awards). They reflect “sustainability” in its broadest sense, not merely focusing on ESG. They recognize listed companies and public sector organizations that have performed to an equally high standard in both CG and ESG and that are taking steps to integrate these two key aspects of their performance. For companies to achieve long-term success and be able to face the economic, environmental and social challenges ahead, the board needs to have effective oversight of governance and ESG matters, and the company needs to incorporate ESG considerations into its vision and operations, including its strategies, investments, risk management and stakeholder engagement, said Mr Cheng.
Ms. Loren Tang, chair of the 2021 Awards Organizing Committee, explained, “We are pleased to see that the judges were able to identify as number of winners of the new MSCO awards. Most of these are familiar names that have been continuing to strengthen their CG and ESG practices and disclosures. However, the judges decided not to give out any diamond awards as they believe that, at this stage, in Hong Kong, there are still areas where more needs be done. This includes, for example, speeding up the process of board refreshment and establishing quantitative key performance indicators for different ESG initiatives.”
The Institute congratulates the 10 awardees in the inaugural MSCO Awards, including CLP, which continued its winning ways, with a platinum award in the Hang Seng Index (HSI) category. HKEX also won an award in HSI category. MSCO awardees in other categories were Prudential, Standard Chartered, The Hong Kong and Shanghai Hotels, Hysan and Lenovo. The Link REIT and Pacific Basin Shipping were given special mentions. The sole MSCO winner in the public sector/ not-for-profit category was the Airport Authority, with a gold award. Other awards were given out in separate sections for CG and ESG. In all, the judges recognized 29 companies and organizations in the 2021 Awards.
The Awards judges this year found various areas of good practices and disclosures, such as explanations of ESG governance structures and clearer linkages between companies’ vision, strategies and action plans in the ESG sphere. Information on stakeholder engagement and how stakeholder concerns are being addressed is also improving.
Areas for Further Improvement
In terms of further improvements, the judges would like to see more evidence that companies are treating CG and ESG as key issues on the board’s agenda, as well as additional information on how companies are setting, monitoring, and periodically reassessing their ESG targets and key performance indicators, and whether and how directors and senior management remuneration is tied to these. The majority of companies do not seem to share their quantitative performance targets to help them track progress towards achieving economic, environmental and social goals. Climate change is specific concern at the global level, but, for many companies, it is not clear whether they have really analysed the potential physical and transitional risks that they may face from global warming, Ms. Tang said.
At a more procedural level, where companies conduct board evaluations, the Institute would urge them to provide more insightful information about the scope, findings and recommendations. Many of the disclosures are quite boilerplate. Are directors being asked about the board’s efforts to strengthen diversity on the board, for example, Ms. Tang asked.
Although the MSCO winners continue to raise their performance above the ascending bar set by the Listing Rules and legislative requirements, the judges accept that the highest level of the MSCO awards will remain aspirational for the time being, as the path to fully integrating CG and ESG is not straightforward. Furthermore, while ESG standards have been progressing, there has also been some tailing off in terms of overall improvements in CG, said Mr. Patrick Rozario, chair of the Awards Review Panel.
The Institute has made a number of recommendations for further improvements in CG practices. For example, there is are large number of family controlled businesses in Hong Kong, often with long-serving independent non-executive directors (INEDs), whose independence could be open to question. Appointing a lead INED, to engage more with stakeholders, and report on the work done by INEDs during the year, would give investors and other stakeholders more confidence that the company is taking on board their concerns.
As regards board diversity, in practice, many companies still seem to be paying lip service to the idea, said Mr. Rozario. Only one in seven directors of Hang Seng Index-constituent companies is female, which leaves Hong Kong lagging well behind other major financial centres. While gender is only one dimension of diversity, the lack of women on boards clearly needs to be addressed. Diversity on boards encourages better leadership and CG and minimizes the risk of “groupthink”. It can also help increase corporate performance and competitiveness and, ultimately, strengthen resilience, added Mr. Rozario.
Other areas that need to be enhanced include transparency of the processes around the nomination, selection and resignation of directors, as well as disclosure of cross-directorships. More information about the process and findings of internal control reviews would also be welcome.
ESG Assurance Research
With increasing demand from investors and other stakeholders for more ESG information and data, the question of obtaining assurance on that information is often raised nowadays. Obtaining assurance on ESG information and data from an independent, reputable, service provider can help companies build trust and confidence in their ESG reporting with investors, and improve their competitive advantage.
To understand the current situation with ESG assurance Hong Kong, the Institute conducted a brief research covering all the December year-end listed companies for 2020. The Institute found that, among the almost 1900 companies included in the research, only 85 of them obtained external assurance, i.e. only 4.5% in total and, in most cases, it was only a limited scope assurance.
There are believed to be various factors relevant to the low penetration of ESG assurance in the market. One reason is that, currently, there are no generally accepted international ESG reporting standards, unlike for financial reporting.
However, with the announcement at COP26, the recent United Nations Climate Change Conference of the Parties in Glasgow, of the formation of a new International Sustainability Standards Board to develop a comprehensive global baseline of high-quality sustainability disclosure standards, it is likely that there will be greater harmonization and comparability of ESG-related standards globally in the future. Investors can then have greater trust and confidence in companies’ reported ESG performance, and this will be enhanced by the added comfort that independent assurance can provide.
The Institute’s study also found that International Standard on Assurance Engagements (ISAE) 3000 issued by the International Auditing and Assurance Standards Board, or the Hong Kong equivalent, namely HKSAE 3000 (Revised) Assurance Engagements Other than Audits or Reviews of Historical Financial Information, issued by the HKICPA was by far the most commonly adopted standard used for assurance reports.
“Accountants definitely have the skill sets and understanding of key processes, such as financial and data analysis and internal control and risk management, to take a leading role in ESG assurance, as well as reporting, said Mr. Cheng. “Members of the profession are trained to apply professional standards and are bound by a code of professional ethics,” which makes them ideal providers of assurance services”, he added. Furthermore, the Institute has published a Technical Bulletin (AATB) 5 Environmental, Social and Governance (ESG) Assurance Reporting, to assist practitioners in performing ESG assurance engagements, in accordance with HKSAE 3000.
The Awards is supported by media sponsors Hong Kong Economic Times, The Standard and ET Net.
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The Hong Kong Institute of Certified Public Accountants (HKICPA) is the statutory body established by the Professional Accountants Ordinance responsible for the professional training, development and regulation of certified public accountants in Hong Kong. The Institute has over 47,000 members and 17,000 registered students.
Our qualification programme assures the quality of entry into the profession, and we promulgate financial reporting, auditing and ethical standards that safeguard Hong Kong’s leadership as an international financial centre. The CPA designation is a top qualification recognised globally. The Institute is a member of and actively contributes to the work of the Global Accounting Alliance and International Federation of Accountants.
HKICPA contact information:
Mr. Jun Sat
Associate Manager, Public Relations, Corporate Communications
Phone: +852 2287 7002
Topic: Press release summary