Intensive reading is one way of analyzing important documents. Since an ESG (environmental, social and governance) report or sustainability report allows us to learn more about key ESG topics that may have significant impact on a company, it should be read thoroughly, in particular paying careful attention to the following ESG disclosures.
Material climate-related Issues
Climate change is an important ESG topic. Since 1 July 2020, listed companies in Hong Kong are required to disclose significant climate-related issues that have impacted or may impact them, and to elaborate on potential mitigation actions. When reading an ESG report, pay close attention to the “physical risks” posed by climate change to the company. These may include disruptions of operations and supply chains, which can affect a company’s financial performance. Moreover, during the shift to low-carbon economic activities, there may be “transition risks” arising from changes in policies, laws, technologies and markets.
As listed companies need to identify and prioritise material ESG topics specific to their line of business, it is not uncommon for different industries to have different focus and priorities. For instance, the energy and materials industries would regard greenhouse gas emissions as the most important ESG topic, while for the consumer products industry, disclosures on product safety and quality, and supply chain management would have higher priority. It is important to understand the materiality assessment process of the companies, and consider, for example, the international standards adopted and stakeholders consulted. Shareholders, investors, employees, suppliers, customers, professional organisations and regulators are all important stakeholders. If these stakeholders are consulted extensively, the company will be able to identify and disclose material ESG topics objectively.
Reporting and explanations are equally important
“Comply or explain” is a rule of ESG reporting. A company can choose not to report on a specific ESG topic deemed immaterial, yet it needs to provide a thoroughly considered explanation. The companies can comply and report, or choose not to comply but explain. However, like reporting, it is equally important to provide explanations to inform investors the assessments undertaken to identify the impact of various ESG factors on their businesses, and whether such ESG disclosures are reasonable, clear and carefully considered.