By Jemelyn Tadao
The growing importance of environmental, social and governance performance is causing a stir among Hong Kong-listed companies. Jemelyn Yadao finds out about the challenges facing accountants as they play a more prominent role in sustainability reporting.
The world is growing rapidly. According to estimates, the global population will rise from 7 billion in 2012 to 9 billion in 2050. This growth is expected to increase demand for vital energy resources that have become increasingly scarce, creating barriers to sustainable growth in society and business.
Sustainability, over the years, has therefore been pushed up on the agenda of companies and policy-makers around the world and many countries in Europe and Asia Pacific have made the disclosure of environmental data in company reports mandatory.
Richard Tse is one of many who view sustainability as an increasingly important financial reporting criterion. With an enviable view from his office, he can see the green hills of Tai Po Kau Nature Reserve and the tranquil waters of Tolo Harbour. Other windows offer views of Plover Cove and the Ma On Shan Country Park.
As Vice President of Finance and Corporate Services at Hong Kong Science & Technology Parks Corporation, Tse is doing his bit to ensure the view remains for generations to come: his office is amid a cluster of glass-fronted, solar-energy-powered towers.
The company provides infrastructural services to technology-based companies to assist in the development of areas including biotechnology, electronics and green technology. Tse, a Hong Kong Institute of CPAs Council member, says that puts his company at the forefront of sustainability.
During the past 12 months, Tse, who is also a member of the Institute’s Sustainability and Integrated Reporting Advisory Group, has been busy overseeing the creation of the company’s first sustainability report, which will be released later this year. “I don’t think the majority of accountants have entirely grasped the sustainability concept,” he says. “But this will change. I am lucky because I work for this corporation.”
A sustainability report takes into account the economic, environmental and social impacts caused by an organization’s everyday activities. By embedding such sustainability-related considerations into their decision-making and reporting, companies can provide better visibility on sustainable or socially responsible investing.
With his company’s background, Tse says they are ideally positioned to produce a sustainability report. “Green technology is a key area for us, and secondly, as a public-sector entity, it’s important for us to demonstrate to society that we should and can do it,” he says.
Many other companies are examining their sustainability reporting in the wake of Hong Kong Exchanges & Clearing’s decision in 2012 to implement its Environmental, Social and Governance, or ESG, Reporting Guide, for companies listed in Hong Kong as a recommended best practice. ESG reporting bears many similarities to sustainability reporting.
Requirements are expected to be stiffer next year as HKEx plans to raise the obligation level of some of the recommended disclosures in the guide to “comply or explain” by 2015, meaning companies would have to set out to the exchange why if they are not adopting ESG reporting.
The HKEx’s guide sets out four subject areas, which an issuer can – for now – voluntarily report on: workplace quality, environmental protection, operating practices and community involvement. Under each subject, there are various aspects for which there are provisions for both general disclosures and key performance indicators.
Tse’s company used the HKEx’s guide as a benchmark for their own sustainability report. For example, the report disclosed information on the company’s policies for reducing carbon emissions that involve blocking roads for cyclists within the premises, under the “subject area” of environmental protection and the “aspect” of emissions.
While some larger companies have been undertaking sophisticated sustainability reporting for many years, there are many who are yet to start moving ahead. “If you look at the business leaders in charge, they’re still not convinced that it helps,” says Peter Wong, Chairman of the Institute’s Sustainability and Integrated Reporting Advisory Group, and a former Legislative Council accountancy functional constituency member.
“I can point to a lot of my colleagues at LegCo who moved on to Executive Council, who feel that there are more important things,” he says. “But one thing they don’t realize is that this is an activity in which the leaders are engaged in, not only in Hong Kong but around the world.”
Wong has been pushing to raise environmental awareness for decades and says he has all too often witnessed companies drag their feet in this area due to a fear of being completely honest and accountable. “I know a number of companies who have prepared their reports but they never published [them], because they don’t want to let other people know they are doing something well and also something bad,” says Wong.
The former Institute president says he believes most companies are watching carefully what the stock exchange is going to mandate. “If everybody has to do it, nobody will mind, but most of them don’t want to be the first.”
Once the floodgates open, Institute members are likely to be at the forefront in providing sustainability-reporting-related services to corporate entities. In the past, demand for such services has been low in Hong Kong.
Wong, a consultant to Deloitte in Hong Kong, looks back at when sustainability was just a small part of the Big Four firm’s business. “It was very difficult to allocate management, time and resources to deal with it,” he remembers.
Some of Wong’s Big Four colleagues agree. “[That is] because such value, which is pretty intangible, has not been widely articulated,” says Ivan Tong, EY’s Assurance and Advisory Business Services Partner.
Today, the number of clients in Greater China asking for sustainability services is rising, with the release of the HKEx guide playing – to an extent – a part as a market driver.
The firms themselves are building awareness too. “There are few business cases to arouse managers’ attention to this matter,” says Tong, “and this is where we come in.”
One case worth mentioning is that of CLP Holdings, which became the first listed Hong Kong company to publish annual environmental and safety reports in 1997. It has since been known for its consistent reporting and for setting a benchmark for others. “Even to this day, I think they are trying to lead others,” says Wong.
Publishing the report brings a number of benefits to CLP, says Jeanne Ng, Director of Group Sustainability at the electric company. “It spurs continual operational performance improvement – once you commit to a target publicly there is pressure to meet it and even where there are no targets, external stakeholders will ask and push us to think about improvement,” she says. “It also informs our stakeholders of our difficulties as well as our strengths and hopefully builds trust among our stakeholders both internally and externally.”
Gayle Donohue, Assurance Partner at PricewaterhouseCoopers and an Institute member, says it will likely take a “comply or explain” stage for listed companies to pay attention to sustainability reporting. “Having said that, the ones who were on board in the past few years are taking it more seriously and it’s giving more profile to the organizations,” she adds.
The volume of sustainability-related data that clients seek assurance for has also increased, Donohue notes. “Previously it was around carbon intensity or some very narrow environmental metrics, and it’s now much broader into other social and more qualitative data, which historically I think auditors have shied away from a little bit,” she says. Examples of such data assurance outside of environmental metrics, she notes, are safety and fatality data, and code of conduct violations.
Deloitte has also seen an uptick in clients and the driving forces for them to go beyond the HKEx requirements, according to Hugh Gozzard, Enterprise Risk Services Partner at the firm and an Institute member, who points to the growing concerns of stakeholders and investors who know that sustainability translates into profits.
“Companies are just now realizing that there’re risks on their reputation if they don’t address these issues and report on them, while for other more progressive companies, they realize the strategic benefit for doing this,” says Gozzard. “There is also a degree of peer pressure building up. The first thing they want to know is what their competitors are doing.”
Tse at Hong Kong Science & Technology Parks Corporation hopes to one day see the wider profession – not just the major firms – further extend its professional services to audit and assure the information included in such reports. “As a professional accountant, I would have preferred a CPA to have chipped in [for our report] as part of the services they provide,” he says. “But it takes time and learning.”
Filling the gaps
As well as using the HKEx’s guide, companies working on their sustainability reports also follow guidelines recommended by the Global Reporting Initiative, an Amsterdam-based non-profit group that promotes the use of sustainability reporting for organizations that want to become more sustainable and contribute to sustainable development. Last year, GRI introduced its upgraded G4 guidelines that emphasize what is material and encourages organizations to provide information that is relevant to their business and stakeholders.
Materiality in the context of ESG reporting is a hot topic, “partly because the guidance is different in different places,” says Donohue. “There’s quite a debate as to who’s your audience and therefore what’s material.”
Calculating materiality in the context of ESG reporting is not entirely a mechanical exercise, say Institute members. CPAs are trained to have a finely tuned sense of professional judgment, and that can contribute to clarifying loose concepts of materiality.
Donohue is unfazed by any knowledge gap that CPAs might face when working on sustainability reports. “You do have to get up to speed with GRI but I don’t see that as being particularly different to understanding a new company that you go in to audit,” says Donohue. “The fundamental skill-set is very similar.”
One of the challenges for accountants, however, is developing systems, controls and processes similar to those related to financial reporting, says Gozzard. “These are very traditional and have been going for hundreds of years, and so trying to replicate that for the non-financial area is a major challenge because people within different functions, such as human resources, need to be producing non-financial information and accountants need to impose that kind of rigour.”
For chief financial officers or finance directors, the task of persuading management to adopt sustainability reporting can also be difficult. “A lot of the sustainability initiatives don’t have board buy-in, so CFOs may have to convince boards to do more and get their support,” says Gozzard.
Many Institute members see more opportunities than challenges as sustainability reporting allows them to develop in the area of non-financial reporting in general. “We are having to push ourselves and our risk management processes a bit further,” says Donohue, “because you are not necessarily giving a black-and-white opinion.”
This article was published in the November 2014 issue of A Plus. Read the pageflip version here.
Committing to walking the talk
Demonstrating its strong support for the Hong Kong stock exchange’s initiative to introduce environmental, social and governance reporting to Hong Kong, the Hong Kong Institute of CPAs’ annual report this year is the first to include information based on HKEx’s ESG reporting guidelines. The report’s overall theme is also on sustainability to look into various groups and people, including CPAs in Hong Kong, and how they are doing their part to make the city a better place to live.
“The Institute has been promoting sustainability and integrated reporting and supports the HKEx’s initiative,” says Chris Joy, the Institute’s Executive Director. “Time to walk the walk.”
As part of the move, readers of the report will find disclosures that focus on workplace quality, environmental protection, and community involvement and achievements. “The most difficult part [of creating this report] was deciding what was material and relevant for a professional body like the Institute,” says Joy.
Beyond the release of its first sustainability report, the Institute previously contributed to a guidebook on the application of HKEx’s ESG reporting and organized relevant continuing professional deve- lopment programmes for members.
Since 2011, the Institute’s Best Corporate Governance Disclosure Awards has included the “sustainability and social responsibility reporting award” category to encourage companies to improve their disclosures and practices in this area.
Recognizing the need to educate CPAs about developments in sustainability reporting, the Institute also established the Sustainability and Integrated Reporting Advisory Group in 2011 with the aim of passing on best practice among members.
“We don’t have the resources to lobby, but what we do have is connections with the top companies who are now convinced that this is the right way to go,” says Peter Wong, Chairman of the advisory group, and a former Legislative Council accountancy functional constituency member.
One of the group’s missions is to develop sustainability reporting guidelines within the profession, according to group member Richard Tse, Vice President of Finance and Corporate Services at Hong Kong Science & Technology Parks Corporation, and Institute Council member. “That could be a big job in the future,” he says. As standards and methodologies mature, another core focus is the idea of incorporating sustainability reporting elements into accounting courses at university and the Institute’s Qualification Programme syllabus.