Green Finance Advisor of Friends of the Earth (HK)

There is an increasing number of corporates proactively talked about the key words like “sustainability”, “carbon emission”, “environmental”, “diversity”, and they are concerned how they perform regarding their ESG data and ratings. Not only because there are more evidences on ESG financially relevancy, i.e. companies with high ESG ratings had on average higher profitability and lower tail risk, but also more investors continue to integrate ESG considerations into their investment process.

While there is a significant improvement in general ESG disclosure and awareness, the demand for more ESG disclosure is likely to rise as new regulations are taking effect and voluntary reporting standards are becoming mandatory in some countries. For example, the Task Force on Climate-related Financial Disclosures (TCFD) reporting became mandatory for UNPRI signatories in 2020. Locally in Hong Kong, SFC recently issued a Consultation Paper that proposed amendments to the Fund Manager Code of Conduct (FMCC) addressing climate-related risk and it referred to the Recommendations of the TCFD to foster a “more consistent disclosure framework and minimize the industry’s compliance burden”.

In Europe, there is Sustainable Finance Disclosure Regulation (SFDR), which proposes the investment institutions to report on their portfolio companies on extensive ESG datapoints and could be as early as March 2021. In addition to the obvious and widely reported ones like carbon emission, board gender diversity, anti-corruption and anti-bribery policies, the other required data are gender pay gap, excessive CEO pay ratio, water emissions, deforestation etc. Some of these data points may require alternative data or proxy as those risks maybe unexplored or emerge at the macro level that need information external to the corporates.

These reporting requirements are putting a lot of pressure on the investors and they will certainly reach out to the corporates soon for these disclosure gaps. Many corporates have set up their sustainability departments and working groups with involvements from their finance, legal, investor relations and even C-suite executives. Some of them are also working closely with corporate advisors and data providers to help them with the reporting requirements. Dear corporate issuers, are you prepared?

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