Hong Kong versus China in the new Asia Pacific sustainability index

As the mainland introduces better environmental reporting, can Hong Kong companies stay ahead?

When it comes to sustainability reporting and environmental, social and governance (ESG) disclosure, how far ahead of their mainland Chinese counterparts are Hong Kong’s companies? The newly established Dow Jones Sustainability Asia/Pacific Index (DJSI Asia/Pacific) offers some clues. The index is based on analysis of corporate economic, environmental and social performance by SAM, a sustainability investment specialist. In the area of environmental performance, it covers general issues like environmental reporting and business strategies in response to climate change, as well as criteria specific to each of 57 industry sectors. The existence of the index sends a clear signal to Asia Pacific companies that they can prepare themselves to tap into a pool of socially responsible investors’ money. While the Index does not list any mainland Chinese companies, it does include three based in Hong Kong and listed on the Hong Kong Stock Exchange. Two of them – the MTR Corporation and the CLP Group – publish sustainability reports and disclose emissions generated by their business operations (for example, air and water pollutants and greenhouse gas levels). In addition, they have both implemented climate strategiesdesigned to meet emission-reduction targets. CLP is way ahead of its only competitor, Hong Kong Electric, in terms of its levels of disclosure and transparency. Meanwhile, the MTR enjoys a similar status in the public transport sector. However, Hong Kong should not feel complacent about the “backwardness” of mainland companies, nor the “sophistication” of the city’s two showcases. Indeed, the “business-as-usual” attitude of Hong Kong’s regulators is dangerous when one considers that it only has a 3-0 lead over the mainland in terms of the number of companies listed on the new index, and that this could disappear rapidly. For one thing, the Chinese mainland regulators are catching up – both the Shenzhen and Shanghai stock exchanges recently issued their own guidelines to encourage companies to make regular evaluations and disclosures about their environmental performance. These initiatives stemmed from the emphasis that China’s regulators – namely the China Securities and Regulatory Commission (CSRC) and the Ministry of Environmental Protection (MEP) – are placing on environmental performance and compliance requirements. Questions remain for the time being about the availability of data and thus

the quality of disclosure on the mainland. But, most importantly the emphasis of these bodies is creating a momentum for more accurate and transparent disclosures once the sustainable and responsible investment market becomes more solidly established in China. The fact that the Hong Kong SAR government has embarked on developing a green economy based on the Pearl River delta region means that its regulators should not shy away from making fundamental changes that could integrate ESG issues into the broader disclosure and regulatory framework for its companies. Sustainability issues underpin the financing mechanisms for new sectors such as waste and water treatment, and they are increasingly important to investors. The influence these factors already have on investment decisions is likely to increase further when the financial crisis abates. In short, it will take a lot more than importing electric cars and imposing a levy on plastic shopping bags to create a green economy. While hundreds of Hong Kong companies are awarded various green trophies or claim to be “caring companies”, still less a handful of them can prove that their efforts to protect the environment and promote sustainability directly contribute to their financial performance.Secondly, Hong Kong’s regulators like to describe it as “Asia’s leading financial centre”. The inclusion of 77 Japanese and 30 Australian companies in the DJSI Asia/Pacific Index, compared with Hong Kong’s three, might seem to be an acceptable ratio; yet seven South Korean companies were also listed, which makes Hong Kong’s representation look poor. However, a closer look reveals that the measures Hong Kong is taking to reform its regulatory framework for social and environmental disclosure are falling behind those of other emerging markets. This is notable in areas such as the lack of environmental demands being made on forestry companies when listing in Hong Kong.South Korea, by comparison, has been making promising reforms in this area since 2001 (see “Environmental & Social Credit Risks in Korea”, a presentation at a UNEP Financial Initiative workshop entitled: Changing Landscapes: Towards a Sustainable Economy in Asia.
The new Asia Pacific sustainability index appears to be warning, however, that Hong Kong may have overlooked these sustainability issues for too long.
Tam Man Kai is a sustainable finance campaigner for Greenpeace