Investors want mandatory board oversight, but Hong Kong leadership not CSR savvy
On November 24th, members from CSR Asia attended the GRI Regional Hub China Annual Network Meeting, hosted by GRI and Fuji Xerox. The event offered updates and insight about the changing face of ESG reporting, and in addition to a panel discussion, offered themed presentations on sustainable finance, financial risks for climate changes and corporate knowledge sharing on streamlining sustainability reporting.
As it is now mandatory for listed firms in Hong Kong to make general disclosures on their ESG policies, representatives from several of Hong Kong’s largest companies attended the event. As reported in SCMP in July, HXEX’s requirements for companies to explain how they intend to deal with operational risks that have far-reaching implications for the environment and society at large, and whether they are following laws and regulations, have become of increasing importance for Hong Kong companies because of the new reporting rule – but, what about leadership buy in? In a city largely run my family-owned conglomerates, has CSR made it to the C-suite agenda?
According to findings from Ernst and Young’s recent ‘Is your financial performance revealing the true value of your business to investors?’ report and survey, their third instance of research among institutional investors to examine investors’ views on the use of nonfinancial information in investment decision-making, the answer is decidedly – no. The report focuses on how investors view ESG reporting. Despite being one of the main audiences that companies target with their sustainability reports, investors are also one of the least well-understood and hardest to access. The sustainable investment community increasingly relies on performance data to make investment decisions and have become more discerning about investment opportunities that might suggest significant sustainability challenges, such as climate change, health and human rights, etc.
In recent years, with an increase in ESG reporting, investors’ focus has shifted beyond the basics of disclosure to ESG issues like changing societal expectations, impacts of disruptive technologies, changing demographics, scarcity of water and other resources, climate change, post financial-crisis executive pay, and leadership buy in. Notable responses to the survey include:
- When asked if certain disclosures would make them change their investment plan, 39% of investors said that a risk or history of poor governance would force them to rule out an investment immediately, while 32% said they would do the same due to human rights risk from operations and 20% said limited verification of data and claims would rule out an investment.
- The top reasons for reconsidering an investment:
- risk or history of poor environmental performance (76% of survey respondents)
- risk from resource scarcity (at 75%)
- risk from climate change (at 71%)
- Investors have high regard for board and audit committee oversight, which are typically viewed as keys to good corporate governance and risk management. Both mandatory board oversight and audit committee oversight were important to investors surveyed: similar numbers said both types of oversight were “essential” or “very useful” (See Figure 1).
Figure 1: EY’s Investors demand more from company ESG reports
These results, particularly those regarding board oversight, are not news to CSR Asia, nor anyone in the CSR field. Articles and reports about the need for more leadership buy in go back over a decade or more. CSR professionals consistently cite this as the crucial factor for enabling CSR initiatives, and it holds true across all industries and geographic regions. We actively advocate to clients that C-suite buy in is critical to making their business sustainable. Without effective top-down leadership, employees at all levels of a company will likely not be fully committed to achieving large scale ecosystem change.1 So, why are Hong Kong companies dragging their feet?
A Forbes article on ‘How To Get Executive Buy-In For CSR’ suggests that leadership avoidance of CSR indicates a lack of understanding of its benefits or a misalignment of human and social values. Executives do not need to be CSR experts. But they need to understand that CSR, to be effective, is not something that is solely the responsibility of a few people within the company. Without high-level support and oversight, CSR policies are drafted but not implemented, and stakeholders are heard, but not understood.2 Even if it can be difficult to achieve executive buy-in, CSR’s positives far outstrip the negatives for all parties.3
If for no other reason, Hong Kong’s C-suites ought to take investors cues seriously to widen the discussion about sources of company capital (such as natural, social, human), other than financial, which have real impacts on perceived value. A CSR savvy C-suite can transform a company and give it a competitive edge. It also bodes well for executives, who are increasingly being judged on ESG factors.
When it comes to ESG reporting, EY suggests that ‘rather than being a source of comfort for an organization, such reports, by nature, should create some discomfort. Otherwise, it becomes easy for the exercise to produce a mostly triumphant message, raising questions as to its long-term credibility.’ The ESG reporting process can help companies pinpoint serious reputational and environmental risks, which can have very real impacts on bottom lines. Planning ahead and addressing these topics can lower investment risks, and may even help outdated company cultures and practices (which are rife in Hong Kong’s hierarchical working culture) become a thing of the past.
The pull for increased transparency, organisation-wide collaboration and proactive upper management is not a trend. The greater the collaboration across the supply chain, the more benefits a company can discover. It is time for senior executives to understand global standards for CSR, and to refocus their CSR and sustainability efforts in ways that benefit society and their organization.
The goal of all CSR activities is to create shared value for all stakeholders while delivering business results. CSR is integral to long-term business success, but many CSR programmes are either misconstrued to mean “Corporate Philanthropy” or aren’t part of a coherent portfolio—often they are unstructured, unconnected, poorly managed and have little to do with the company’s business goals. Every organization (private or public) will benefit from a strategically planned CSR policy with a unified central vision. Therefore, the need to strategically engage all units in the complexities of CSR work is invaluable.
CSR Asia provides advisory services and training that support new and established CSR programmes and can help develop overarching CSR strategies that create value and achieve long-term results. By bringing greater alignment and direction to your CSR activities and identifying the right KPIs to measure results effectively, CSR Asia can help your team learn how to maximize the value of CSR investment for all stakeholders, while building a solid foundation for sustainable best practices. To learn more about our services, contact us at [email protected].