Carbon accounting and reporting in Hong Kong
Few companies in Hong Kong are monitoring and reporting on their greenhouse gas emissions. CSj takes a look at the growing stakeholder and regulatory pressure to ensure businesses catch up with international best practice in this area.
In 2013, Carbon Care Asia (CCA) undertook a survey of carbon emission reporting by companies registered on the Hong Kong Stock Exchange and concluded that such reporting among Hong Kong companies was ‘at a very preliminary level’.
The report found that about one-tenth of the 357 companies listed in the Hang Seng Composite Index (HSCI) had produced formal reports on greenhouse gas (GHG) emissions. Moreover, only 1.7% of all HSCI companies had set clear targets for carbon reduction. Among the 1,221 listed companies outside HSCI, none of the companies surveyed had any form of carbon disclosure.
Some of the companies surveyed had produced sustainability or equivalent reports, but these did not always mention GHG emissions, indicating a low level of awareness of the importance of this area of environmental disclosure.
It would seem, then, that climate change and the need to report on GHG emissions have not been high on the agenda of most businesses in Hong Kong. There is mounting regulatory and stakeholder pressure on companies, however, to adapt international best practice in this area; in particular monitoring and adapting to climate change risks should be part of company’s risk management programmes.
Carbon accounting and risk management
Dr Trini Leung, Director of Carbon Care Asia, believes that awareness of the risks involved in climate change are growing in Hong Kong. ‘Compared to seven years ago when we started CCA, I think more companies are aware of climate change. They are aware that if we want to survive, as a business or as a person, we need to transition to a low-carbon economy.’
Why then are so few businesses in Hong Kong moving to the next stage, namely taking action to monitor, report on and reduce GHG emissions? One likely reason is that climate change risks are rarely seen as presenting a danger to businesses in the near term.
‘The problem with a lot of the companies here is that the business strategy is very short term. The businesses that are looking at the long or even the medium term know that it makes business sense for them. They know that they have to have a business strategy on climate change,’ says Dr Leung.
Climate change risks may sound like a distant prospect, but they have already arrived in Hong Kong. The transition to a low-carbon economy, for example, is already having an impact on companies in Hong Kong.
This is most obvious in the energy sector where companies need to identify and manage risks such as the increasing regulatory constraints on carbon emissions and the increasing competition from innovative companies able to exploit new low-carbon technologies. Few businesses in Hong Kong, however, are unaffected by these trends. The shift in consumer demand towards products and services which are low-carbon and environmentally friendly is already a factor for a wide variety of different businesses. Similarly, the growing stakeholder and regulatory pressure on businesses to adopt international best practice on disclosing and managing their GHG emissions cuts across all sectors of the economy.
Since 2013 there has been an increasing regulatory focus on how businesses disclose and manage their GHG emissions. Hong Kong Exchanges and Clearing’s (HKEx) Environmental, Social and Governance Reporting Guide (ESG Guide) came into effect for listed companies in January 2013. The ESG Guide, which now forms part of the Listing Rules of the Stock Exchange of Hong Kong, brought in Hong Kong’s first recommendations on ESG reporting. Those recommendations are still voluntary, but in an article in this journal last year (see CSj, September 2014), David Graham, Chief Regulatory Officer and Head of Listing, HKEx, outlined the HKEx plan to raise the obligation level of some recommended disclosures in the ESG Guide to ‘comply or explain’.
‘ESG reporting is fast becoming a standard practice and the Exchange has an important role to play in urging companies to adopt this practice in order to stay ahead of the curve and maintain their long-term competitiveness,’ Mr Graham said. He explained that HKEx plans to publish a consultation paper on the proposed upgrades this year, and implement changes to the ESG Guide by late 2015 or early 2016.
In addition to these developments, the new Companies Ordinance, which was implemented in March 2014, has now made some form of ESG reporting mandatory for many Hong Kong incorporated companies. Companies not eligible for simplified reporting need to comply with the ‘Business Review’ requirement brought in by the new Ordinance, which requires companies to include in their directors’ reports a discussion of their environmental policies and performance, and an account of their key relationships with stakeholders.
Regulators and the government in Hong Kong recognise that the regulatory ‘stick’ is only part of the equation. Many companies in Hong Kong are relatively inexperienced with ESG reporting and need help getting started. The HKEx ESG Guide recognises this and aims to provide businesses with practical resources and tools to improve their competency in this area.
Another resource for companies is the carbon footprint repository (CFR) website (www.carbon-footprint.hk) launched in December 2014. The Environmental Protection Department (EPD) commissioned Carbon Care Asia to develop the website. Dr Trini Leung, who managed this project for CCA, explains that the website is intended to provide a user-friendly portal for listed companies to disclose carbon inventories in a simple, consistent and credible manner.
The website is not only a repository for GHG emission data, it is also an online resource for companies. The website links to a wide variety of online guidelines and tools, such as the ‘carbon calculators’ developed by the WWF (World Wildlife Fund), the University of Hong Kong, and Chinese General Chamber of Commerce to help businesses and individuals calculate their carbon footprints.
The website also has a ‘Success Stories’ section designed to highlight the positive benefits of carbon accounting and reporting, such as better stakeholder relations, improving operational efficiency and making direct cost savings as a result of reducing energy and material consumption.
Dr Leung emphasises that the design brief for the CFR website was to make it easy to use. ‘The most comprehensive carbon reporting website is that of the Carbon Disclosure Project (CDP) and the companies’ disclosures on the CDP often run to 50 pages or more. We were aiming initially to create a carbon reporting template running to about 10 pages, but the government wanted us to come up with a very simple one so we managed to produce a three-page form,’ she says.
She adds that this task was actually more difficult than producing a longer template since it had to be simple but also compliant with the essential reporting standards and guidelines. The website has to get the right balance between usability and credibility. One issue that is key here is how far down the supply chain the accounting process should go. Should companies only account for their direct emissions? Should they account for the emissions of their subsidiaries? What about the emissions due to consumer use of their products or the emissions resulting from the production of the raw materials they use?
The further down your supply chain you go, the more carbon you find. When, in 2010, the Germany-based sportswear manufacturer Puma started producing an environmental profit and loss account which included data from the farthest reaches of its supply chain, it found that only 6% of its environmental impact came from its own operations. Another 9% came from its direct suppliers but a staggering 85% came from areas outside the company’s direct control or influence – the rubber plantations, the cattle ranches, the cotton farms and the petroleum refineries that lie unseen and often ignored at the root of most companies’ operations.
Dr Leung points out that, since most companies making disclosures on the CFR website will be at the starter phase of carbon reporting, mandating this degree of disclosure would be counterproductive. The website allows the reporting companies themselves to define the boundaries of their reporting, so long as they disclose where those boundaries are.
‘Some people might think that this is not comprehensive enough, but we think of this as a first start. The most important thing is to get companies on board and to start the process. You can’t go to the sky in one step. If they take this first step, then they will get to know the methodologies and the accounting methods involved, then they can take the second and third steps,’ Dr Leung says.
The role of the corporate secretary
The developments discussed in this article have a particular relevance for corporate secretaries in relation to their board advisory function. The April edition of this journal (CSj, April 2015, pages 6–11) pointed out that corporate secretaries facilitate the board in its responsibility to oversee risk management. The scope, and the planning horizon, of risk management is expanding and directors’ responsibilities and liabilities in this area are likely to expand with it. It is no longer sufficient for boards to solely focus on the traditional areas of operational, regulatory and legal risks. They need to be addressing issues such as GHG emission reporting requirements and the reputational risks associated with the company’s environmental and social policies and performance.
Corporate secretaries have an opportunity to be the board’s ‘sentinel’ for these risks and also for longer-term sustainability risks arising from climate change, such as rising sea levels, persistent droughts, erosion of biodiversity and the depletion of natural resources. These risks may seem to be far away on the horizon, but, as Dr Leung points out, the winners in the emerging business environment will be those with a long-term strategy for sustainability.
‘The low-carbon economy is our only way out. Winners in this carbon paradigm shift would be those institutions and businesses who are well prepared and positioned to avoid damages and capture new opportunities,’ she says.
Kieran Colvert, Editor, CSj
More information is available on the CFR website: www.carbon-footprint.hk.
In parallel to the development of the CFR, the government has also set up a free supporting helpdesk service (email: helpdesk@ carbon-footprint.hk; tel: 3568 4078) to handle enquiries and offer technical advice on carbon auditing and carbon disclosure to all listed companies in Hong Kong.
The 2013 ‘Hong Kong Carbon Performance Report’ can be downloaded from the Carbon Care Asia website: www.carboncareasia.com