Why ESG is Key for Business

With growing awareness and expectations from consumers, employees, investors and other stakeholders regarding corporate responsibility and sustainability performance, environmental, social and governance (ESG) related strategies are becoming an ever more important concern for companies around the world.

In view of global targets on decarbonisation and sustainable development in the decades ahead, developing a robust ESG strategy is vital for businesses to contribute to shaping a sustainable global economy and mitigating the long-term impact of climate change. As an international financial centre with a strong ecosystem of wealth and asset managers, regulators and other relevant stakeholders, Hong Kong is uniquely positioned to become the leading ESG investment hub in Asia.

The ESG Landscape

ESG investments cover a diverse range of issues under three pillars, which generally correspond with the goals set out in international framework agreements such as the United Nations’ 2030 Agenda for Sustainable Development and the Paris Agreement:

1. Environmental factors may include the reduction of carbon emissions and pollution, efficient use of energy and resources, as well as waste management, all of which have become prominent items on Hong Kong’s policy agenda over the past decade.
2. The social component relates to the areas of labour conditions, equality, privacy and data security, as well as public health and safety. Amid the Covid-19 pandemic, investor focus on the latter in particular has notably increased.
3. Common governance aspects include corporate structure, financial reporting, and ethical business conduct and culture. As one of the most business-friendly cities in the world, international standards of corporate governance are firmly embedded in Hong Kong’s DNA.

In order to make green and ESG related investment products more visible and transparent, and to help interested investors to better understand the nature of these products and make informed investment decisions, international institutions have put in place numerous policies and guidelines for investment management companies in recent years.

The Financial Stability Board established a Task Force on Climate-related Financial Disclosures (TCFD) in 2015 to develop recommendations for voluntary climate-related financial disclosures to improve information transparency around climate risk. In its 2020 Status Report, the TCFD announced that over 1,500 organisations around the world had already come out in support of these recommendations, including some 1,300 companies with a market capitalisation of US$12.6 trillion and financial institutions managing assets worth US$150 trillion. The United Nations Global Compact, a voluntary platform for ESG reporting launched in 2000, currently counts more than 12,000 signatories from 162 countries, including over 500 organisations from Germany.

In 2019, the Securities and Futures Commission (SFC) in Hong Kong issued a circular to management companies of SFC-authorised trusts and funds with investment focus on climate protection, environmental or sustainable development. In the circular, the SFC noted a “disclosure gap” among green and ESG funds, as a majority of these funds did not provide specific information on how green or ESG related features actually factor into the fund managers’ investment selection processes.

Therefore, the circular sets out expectations and guiding principles for investment management companies regarding the disclosure/reporting of relevant information on ESG related investments, including descriptions of a fund’s primary investment focus and underlying investment strategy, e.g. assessment criteria and reference benchmarks. In addition, the circular states that fund managers ought to regularly monitor and (re-)evaluate green and ESG funds to ensure they do not deviate from their stated objective.

An updated version of the circular was published in June 2021 and will replace the former effective January 2022. A list of SFC-authorised green and ESG funds, which fulfil the requirements set out in the circular, is openly available on the SFC website. Meanwhile, the Stock Exchange of Hong Kong (HKEX) released an ESG Reporting Guide in late 2019 with mandatory disclosure requirements for listed companies. With the ESG landscape becoming more and more transparent for investors, sustainable investment funds can be expected to gain further traction in the foreseeable future.

Good for the Environment, Good for Business

Over the past decade a consensus has emerged that integrating ESG into corporate strategy can be a win-win proposition for companies: On the one hand, research indicates that a stronger ESG performance correlates with a higher shareholder value, as well as greater employee motivation and loyalty, compared to companies that show less commitment on ESG issues. On the other hand, sustainable business practices may also help to create benefits for the wider environment or community in which a company is operating, which in turn may help nurture a positive corporate reputation and stakeholder relations over the medium to long term.

Multiple studies and surveys among business executives and investment professionals suggest that ESG practices drive rather than diminish value creation. For instance, a 2019 McKinsey survey found that 57% of respondents saw added value in adopting environmental, social and governance factors into their business strategy. One in four respondents perceived no effect and only 3% thought ESG had a negative effect on shareholder value. Among those respondents who believed in added value from ESG programmes, a majority saw both short-term and, even more so, long-term benefits on business performance.

A comprehensive ESG strategy may deliver various material and immaterial returns: From lowering operational costs by optimising resource efficiency and waste reduction, to improving B2C relations by developing sustainable products and services for environmentally and socially conscious customers, to qualifying for related government subsidies and incentive schemes, to attracting and retaining motivated talent by reinforcing a positive corporate image.

Companies in Hong Kong that are proactively investing in measures to improve their energy performance and reduce their carbon emissions may claim tax benefits under several schemes. For instance, companies that purchase environment-friendly commercial or private vehicles approved as such by the Environmental Protection Department may deduct these expenditures under profits tax. Meanwhile, construction costs of energy efficient building installations, such as lighting, air conditioning, elevators and escalators, may be tax-deductible under the Energy Efficiency Registration Scheme for Buildings.

Government authorities and financial regulators in Hong Kong have made continuous efforts in recent years to promote sustainable finance and encourage green and ESG related investments. In his 2021-22 Budget Speech, Financial Secretary Paul Chan emphasised the importance of sustainable finance for achieving the SAR’s target of climate neutrality by 2050. Relevant measures announced in the budget included a doubling of the borrowing ceiling of the Government’s existing Green Bond Programme to HK$200 billion, as well as the launch of a three-year Green and Sustainable Finance Grant Scheme. The Hong Kong Monetary Authority released a guideline on the Scheme in May 2021.

With its highly developed financial market infrastructure and transparent regulatory framework, Hong Kong provides a sound basis for international companies to build up their ESG track record and ensure a competitive and sustainable performance in the long run. The ongoing GCC Sustainability Series offers comprehensive insights into available resources and business incentives.

By Hendrik Hillebrecht