BDO Survey: Despite perceived benefits from issuing ESG report, 54% of respondents will not increase budget for ESG report in the coming year

Most small- and mid-cap companies spend HK$100,000 or less preparing ESG Report in FY2016/2017 and 80% of respondents believe that ESG Report could facilitate better internal control and risk management, or enhance investment value of the company

From Right to Left: Mr Clement Chan, Managing Director – Assurance International Liaison Partner, BDO Limited; Mr Ricky Cheng, Director – Head of Risk Advisory, BDO Limited

HONG KONG — BDO Limited (“BDO”, “The Group”), the world’s fifth largest accountancy network, has announced today the survey findings of its “Review on ESG Report Compilation by Hong Kong-Listed Companies” (the “Survey”) following its “ESG Reporting Performance Survey” announced in July 2017. The main purpose of the latest survey is to better understand the challenges that Hong Kong-listed companies1 encounter when compiling their FY2016/2017 ESG reports (the “ESG Report”) required after implementation of the new regulation (effective 1 January 2016). The findings are to be used to determine and analyse the challenges companies face and to facilitate improvements and develop recommendations for future initiatives.

Mr Ricky Cheng, Director and Head of Risk Advisory of BDO, said, “Our survey findings in July 2017 discovered that the majority of Hong Kong-listed companies went beyond meeting the minimum disclosure requirement in their first report after the introduction of the new ESG reporting regulation. Therefore we conducted an in-depth survey to understand the reasons behind this behaviour and the challenges encountered when compiling the ESG report. The latest survey also revealed that more than half of responding companies do not plan to increase their ESG reporting budget in the coming year.”

Key findings:
– 80% of respondents believe that the ESG report enables better internal control and risk management, or enhances the investment value of the company
– Amongst the 60% of companies who invested additional resources, 88% hired an external consultant
– Although all respondents see benefits from issuing an ESG report, 54% have no plans to increase budget for ESG reporting in the coming year
– Most small- and mid-cap companies spent HK$100,000 or less when preparing for the ESG report
– Collection of data and analysis from subsidiaries is the most difficult challenge when preparing this year’s ESG Report, according to 62% of respondents; lack of resources is the second most difficult challenge according to 32% of respondents
– 70% of respondents expressed that collection and analysis of new compulsory data disclosure is their largest concern in preparing for next year’s ESG report
– More than half of the respondents disagreed that the ESG Report could mitigate the negative impact of malicious market rumours or attacks on the company

Although respondents see benefits from issuing an ESG report, most have no plans to increase budget for ESG reporting in the coming year

Although 80% of Hong Kong-listed companies who responded to the survey (“respondents”) believe that ESG reporting facilitates better internal control and risk management, could result in a more positive perception by potential or existing investors and/or enhance investment value of the company, 54% of respondents do not foresee changes in their expenditure for their ESG report in the coming year.

Amongst this 80% of respondents, 46% believe that filing of the ESG report could help improve internal control and risk management (representing 51% of surveyed small- and mid-cap companies); and 34% believe that it could generate positive feedback from investors or potential investors, or enhance investment value (representing 27% of surveyed small- and mid-cap companies).

Hiring external consultant is most preferred as additional resources investment for ESG Reporting to meet new ESG requirements

Amongst the 60% of companies who allocated additional resources, 88% hired an external consultant (representing 58% of surveyed small- and mid-cap size companies). This means that independent third party consultation is preferred by a majority of respondents for compliance and assurance under the new ESG reporting requirements.

Most small- and mid-cap companies spend HK$100,000 or less when preparing for the ESG report

48% of the respondents spent HK$100,000 or less when preparing for the ESG report, which represents 64% of surveyed small- or mid-cap companies; meanwhile, 40% of respondents spent HK$50,000 or less when preparing the ESG report.

Collection of data and analysis from subsidiaries is the most difficult area when preparing this year’s ESG Report

Data collection and analysis from subsidiaries is the biggest difficulty faced, according to 62% of respondents (representing 61% of surveyed small- and mid-cap companies). This is consistent with the finding that nearly 75% of respondents (representing 76% of surveyed small- and mid-cap companies) believe that collection and analysis of new compulsory data disclosure required is their greatest concern in preparing the next ESG Report for FY2017/18.
Some 32% of the respondents (representing 32% of surveyed small- and mid-cap companies) think that the lack of resources (e.g., budget or staff) to compile an ESG report that meets the latest regulation presented the greatest difficulty.

More than half of the respondents disagreed that ESG reporting could mitigate negative impact of malicious market rumours or attacks on the company

Although 46% of respondents think that issuing an ESG report can facilitate better internal control and risk management, 56% of respondents disagreed that meeting minimum ESG reporting requirement could mitigate the negative impact of malicious market rumours or attacks on the company.

BDO recommends the following measures for companies to follow and make the compilation of ESG report easier:

1. Data collection made easy
It is understood that some of the listed companies are entities within the same group. By establishing a centralised ESG function/team, resources can be better utilised to handle ESG data collection of different group entities in a consistent and efficient manner. Besides, it is suggested that listed companies seek assistance from consultants in establishing a data collection model for future consistent application unless there are significant changes in operation.

2. Derive ESG value from reducing carbon footprint
Small- and mid-cap companies often face the difficulty of limited resources for operations and expansion of business. Tightened regulatory and disclosure requirements further divert resources. With reference to our earlier ESG survey results, some listed companies achieved cost-savings from reducing carbon footprint such as adoption of energy-efficient equipments. It is suggested that small- and mid-cap companies consider starting initiation of ESG practices with small pilot projects such as replacement of an energy-efficient lighting system, streamlining logistics and transportation practices, evaluating equipment utilisation patterns, implementing paperless operations, etc.

3. Enhance operational efficiency through engagement of suppliers
Supply chain management is important to every business organisation. Hiccups or breakdown in the supply chain may lead to temporary stoppage of production, failure to fulfill customers’ orders, etc. It is suggested that listed companies conduct a comprehensive supply chain risk assessment and identify possible events that could trigger a supply chain breakdown. Management should then engage with relevant vendors in formulating strategies to mitigate possible risk factors, streamlining supply chain procedures, identifying alternatives, routinely obtaining feedback from suppliers, etc.

4. Constantly revisit ESG practice and strategy
With the experience on first year reporting, listed companies have gained basic knowledge of ESG reporting and may have identified the direction and goals which ESG practices should strive to follow and achieve. It is suggested that listed companies constantly be aware of the latest ESG best-practices and energy-saving technologies as well as options to enhance or refine their ESG strategy.

Mr Cheng continued, “Hong Kong-listed companies need to act fast to raise their ESG reporting and quality of disclosure to match international standards in order to attract global investors and maintain the city’s status as a leading global financial hub. For small- and mid-cap companies with limited resources, we recommend starting off with small pilot projects and eventually setting up centralised ESG functions within the company to keep abreast with ESG best practices and energy-saving technologies.

“We hope that, through our recommendations, Hong Kong-listed companies, especially small- and mid-cap companies, are able to overcome common difficulties they face when compiling ESG reports, and can enhance their operational efficiency as well as refine their ESG strategy and eventually boost the company’s investment value and inspire the confidence of investors.”

The inaugural BDO ESG Awards
To recognise the efforts and positive impact contributed by Hong Kong-listed companies in the areas of Environment, Social and Governance (ESG), BDO is organising the inaugural BDO ESG Awards, with the presentation ceremony to be held in Hong Kong on 25 January 2018. The Awards aim to encourage companies to be more aware of their social responsibility to incorporate sustainability into their business model.

The top three companies from each of the large market capitalisation, middle market capitalisation and small market capitalisation of Main Board companies as well as companies from the Growth Enterprise Market will be selected as winners in each of the three award categories: (1) Best in ESG Awards; (2) Best in Reporting Awards; and (3) ESG Report of the Year Awards. For details, visit: http://www.bdoesgawards.com