Common Mistakes companies make in preparing their annual ESG report to HKEx

With over 350 completed ESG reports over the last six years, in this Insight, Ascent Partners will highlight the five most common errors that companies have encountered when compiling their annual ESG report for the HXEX.

With investors and regulators increasingly looking at ESG factors for all listed companies, it has been a learning curve for all involved over the last six years. Hauman Yeung, Founder, and Director of Ascent Partners, walks us through some of the more common errors that companies make when compiling their ESG reports.

The most common error we see from companies is the reporting of Air Emissions. In the original description of the standard is “Air emissions include NOx, SOx, and other pollutants regulated under national laws and regulations”. But many companies ignore “other pollutants” and just report NOx and SOx, which is disingenuous at best.

Secondly, we have seen some companies misunderstand the concept of Green House Gasses (GHG) completely. There are many types of Green House Gas, and they should be converted into their “carbon equivalent”. However, many of the reports we have experienced and worked on simply state “their Green House Gas emission is xxx tonnes”. This is not a correct measurement and needs to be converted into the “carbon equivalent”.

Moving onto the materiality index. Some company’s interpretation of the stakeholder’s engagement is wildly unrealistic, sometimes coming up with a very ridiculous materiality assessment. One of the largest financial service companies in Hong Kong (including stock trading, financial tools formation and trading, and IPO sponsor) came up with a result that “child labour” is one of the most material factors they need to be concerned with.

Looking into Scope 2, emissions, internationally, the most common measurement of sewage is chemical oxygen demand (COD). This measures the number of chemicals in the water in direct proportion to the oxygen it draws into the water. The internationally recognized unit used is mg/L (milli-gram per litre), which is quite easy to understand. However, many mainland companies report it as total tonnes, which does not reflect the actual quality of the water.

Finally, the last point we see is somewhat understandable in many industries. Managing your supply chain in regards of the environmental and social impact of the whole chain can be a very tricky exercise. Many companies have expressed their control of the supply chain in terms of cost control, rather than requesting supplies to audit their ESG risks annually. This last problem is much less cut and dried than the previous points, and measurement will always prove somewhat difficult.

Hopefully, as people and companies become more conversant with the rules and regulations, examples like the above will fade into memory. At least, that is the theory.