Hong kong stock exchange sustainability index
Mandatory disclosures by Hong Kong companies about policies and how they plan to tackle operational risks will have far-reaching implications for the environment, society. For many fund managers in Asia, investment decisions were often based on returns and had nothing to do with factors like environment, social and governance.
But ESG may no longer be just a concept as policymakers and regulators around the world are increasingly using it as a criteria to gauge listed companies, while asset managers are using it to maximise investment returns. Starting next year, listed companies in Hong Kong will have to make mandatory public disclosures about company policies and how they intend to deal with the operational risks that have far-reaching implications for the environment and the wider society.
Though ESG data is a valuable tool for maximising fund performances, it has been slow to take off in Asia. Most of the asset managers are not yet ready for the big leap, while companies are still in the preparatory stages of disclosures. Stephen Tong, an investment consultant at global professional services firm Towers Watson, said ESG criteria is increasingly being used for portfolio development in many overseas markets.
China has grown in power, but at a terrible cost to environment. Favourable response during public consultation last year saw the Hong Kong Exchanges and Clearing HKEX , the operator of the local bourse, making it mandatory for listed firms to make general disclosures on their ESG policies and whether they are in compliance with laws and regulations for the financial years starting January 1 or later this year.
HSI Quote - Hong Kong Hang Seng Index - Bloomberg Markets
For the financial years beginning January 1 or later next year, firms will need to make ESG disclosures on measurable key performance indicators like targets and achievements. The HKEX has also stipulated that firms need to give proper explanations if they fail to adhere to these norms. That is a stark departure from the past, when such disclosures were only recommended and voluntary in nature.
On the environmental front, aspects covered include emissions and use of resources, while social issues comprise employment, health and safety, training and development, labour standards, supply chain management, product responsibility, anti-corruption and community investment.
According to HKEX and findings from index compilers, share prices of companies that score high on ESG issues often outperforms the wider stock market. Officials in China have to take environmental concerns seriously. In Hong Kong, indices provider Hang Seng Indexes has launched five corporate sustainability indices since The Hang Seng Corporate Sustainability Index, which tracks 30 Hong Kong-listed stocks selected based on their market capitalisation, turnover, listing history and sustainability performance, recorded an average 1.
For mainland-listed stocks, the Hang Seng China A Corporate Sustainability Index that follows 15 stocks, had an average annualised return of 6. It has also produced an index for the Bank of Japan to facilitate its investment in firms that have good track record and future plans on physical assets and human capital investment. Asked if its fund managers use ESG criteria for making investment decisions, the HKMA spokesman said: But he said it has faced difficulties in implementing other ESG investment criteria and assessing the results, due to their often qualitative and sometimes controversial nature.
One could argue it feeds more people. Others could argue it disrupts the environment and post a threat to food [security] due to a lack of diversity. Take another example, is nuclear power generation an ESG [friendly] investment? Pension funds in Europe have been at the forefront of ESG investments. They usually use a customised benchmark such as an ESG-compliant stock index, or employ an investment consultant or agent to assist them.
In the United States, listed firms must make filings on their environmental control spending and risks. Stock exchanges including those in India, Sri Lanka, Malaysia, South Korea, Vietnam, Thailand have become members of the United Nations-backed Sustainable Stock Exchanges Initiative, by committing to promote long-term sustainable investment and improve ESG disclosure and performance of listed firms.
Reynolds said varied economic development across regions has led to divergent opinion on ESG policy making. The PRI has opened an office in Hong Kong and plans to expand its presence in mainland China and Asia in the next few years to promote ESG reporting and investing.
In a June survey sent by the bourse on ESG disclosures of listed firms, only 21 per cent responded with around two-thirds of them indicating that they were yet to report their ESG performance. Last year, a study by Bloomberg on randomly-selected Hong Kong-listed firms found that 46 per cent had reported their ESG performance for their financial year.
Finding a balance between economic and environmental sustainability. The disclosure ratio among mainland-incorporated H-shares was 83 per cent, much higher than the 38 per cent among Hong Kong-incorporated firms, partly due to mainland exchange requirements. The Shanghai and Shenzhen stock exchanges had mandated that some listed firms must make ESG disclosures from , including constituents of the Shanghai stock exchange corporate governance index, the Shenzhen index, financial firms and those with overseas listed shares.
In Singapore, the stock exchange had earlier sought public opinion on making it mandatory for listed firms to issue sustainability reports covering ESG issues starting from the financial year, within five months of their annual filings. Companies that failed to adhere to these regulation need to come up with sufficient explanations and a revised regulation on these grounds is expected soon.
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