Governance Is Still At Low Tide

By Jane Moir, Vivian Yau 18 June, 2021

How can companies rethink their ESG to deliver real change? Check out the 6 suggestions from ACGA's Moir & Yau

CG Codes need a sharper focus on climate risk & should give practical guidance for companies to set a sensible target, rather than broad statements on ESG risks
Company boards must work with management on improving structure & operation of sustainability governance & be accountable for ESG efforts
Investors need to take companies to task on sustainability, disclose the engagements, develop & publicize their stewardship policies

Hong Kong company directors came precariously close to having to wade through two feet of water to get into the financial district in 2018 when a mega typhoon hit. The prospect of flooded shores—graphically illustrated by China Water Risk at our recent conference on corporate governance—is one of myriad climate issues executives are ill-prepared for.

Ask any company in the region about sustainability and they will agree it is a smart business option. After years of seeming disinterest, Asia’s capital markets are moving quickly to adopt new policies on green finance. Policymakers are putting sustainability concerns high on their agendas as they grapple with the long-term effects of environmental degradation.

Real progress on ESG requires companies to rethink how they operate & govern

Real progress on ESG however requires companies to rethink how they operate and govern themselves. That is our focus at the Asian Corporate Governance Association (ACGA). As a non-profit membership association, we conduct research and advocate at the regulatory and corporate level to improve standards and practices. Our belief is that only companies which are well-run and trade on markets with sound regulatory policy are going to be able to meet the challenges of climate change. Pressure for companies to measure, disclose and ultimately respond to environmental risk is only going to increase. They need to be fit for purpose.

ACGA’s latest research on corporate governance shows that progress is being made in APAC – Japan & Taiwan in particular

The good news is that there is progress being made in the Asia-Pacific, as we reveal in our latest report card on corporate governance for 12 markets in the region, CG Watch 2020: Future Promise. Aligning governance and ESG in Asia. Corporate governance practices are improving; Japan and Taiwan in particular are examples of concerted efforts paying off. How companies report on their sustainability efforts too is becoming broader and deeper.

But it is apparent from our research of these 12 markets that policymakers, regulators and companies need to take a new tack if ESG efforts are to deliver real change. With that in mind, here are a few suggestions:

1. Coordinated efforts by policymakers and regulators

ESG issues may sit high on a public policy agenda but there needs to be a rethink of how corporate governance rules, regulations or codes can best be adapted to fit with this policy.

2. CG Codes need a sharper focus on climate risk…

While many corporate governance codes now reflect modern concerns such as board diversity, lead independent directors and managing stakeholder concerns more effectively, they tend to take only a high-level consideration of the importance of ESG and sustainability.

…and should give practical guidance to companies

Listed companies need support on ESG reporting: it is a new and complex area and getting it right is not easy.

CG Codes tend to lack specifics on how companies should tackle climate risk. Do they need to set up new committees with directors who have specific training in environmental issues? Do directors need to gain new skills? How can boards weave ESG concerns into strategic decision-making?

Unless boards and management are thinking through these questions a company will struggle to respond adequately to these risks.

3. Company boards should set the tone and be accountable for ESG efforts…

While companies are getting better at producing ESG and sustainability reports, they are often silent on the role of the board and the extent of oversight on these issues. A company’s ESG report should set out details of the board’s role, how it identifies climate risks relevant to its business and makes decisions on these issues.

Boards should work with management to ensure they are satisfied with the company’s sustainability governance, including the structure and how it operates at a practical level. The board has ultimate responsibility and any questions raised around its disclosure of sustainability efforts should be addressed.

Some companies are trying to answer these questions by setting up new sustainability committees at board level, while others are consulting experts and non-profits on the adverse impact of climate risk to their businesses.

…and avoid boilerplate disclosure

At ACGA we surveyed 180 large-cap listed companies and 120 mid-caps in the region as part of our CG Watch 2020 report.

Focus reporting on ESG issues that are of most financial relevance to the investors…

We found that less than half of the large caps disclose concrete steps they are taking to address the physical risks of climate change. A further 20% acknowledged the risk but did not explain how they are responding to it. A third of companies ignore it entirely. Companies need to focus their reporting on ESG issues that are of most financial relevance to their investors: explain the data and what it means for your business going forward in the next five to ten years.

…& identify the specific risks & report on the potential impact on the operations & business models

Unfortunately, most CG Codes today only expect companies to make broad statements on material ESG risks and how decisions are made on these issues. Company reports can thus be very formulaic rather than pinpointing the climate risks and response measures unique to their business. Companies need to identify the specific risks and report on the potential impact on their operations and business models.

4. Think about targets

Writing a sensible target is difficult. In our survey of large-cap and mid-cap companies in the region, less than 15% of the 180 firms scored top marks for having targets linked to most of their material issue areas. But it can be done.

5. Don’t just report – hold your company accountable

Unlike a company’s financial statements, most ESG reports are not audited or reviewed by independent third parties. But having these reports assured could boost stakeholder confidence in the quality of a company’s sustainability disclosure. An assurance firm would also make recommendations as to how companies could improve their reporting.

6. Investors need to take companies to task on sustainability…

Investors are getting better at holding companies to account on governance and ESG issues and have a critical role to play. Many CG Codes in the region encourage investors to develop and publicise their “stewardship” policies in this regard, but there is much room for improvement:

….and disclose the results

There is great value in investors disclosing to the market how they have been engaging with companies on ESG issues and what they intend to do in future. Reporting on these policies and practices is still patchy in the region. Investors can shape the debate about CG and sustainability through their words and actions, including attending AGMs and asking difficult questions of directors and auditors.

Further Reading

  • Regulators Have A Role To Play In Tackling The Global Water Crisis – Financial regulators must ensure the economic recovery is resilient to climate & water risks. Ceres’ Miller expands
  • 2021 Top 10 Trends in Responsible Investment in China – China’s low carbon transition is in full swing. SynTao Green Finance shares their 10 trends for responsible investment in 2021
  • ESG Doomsday Preppers – Many laughed at Doomsday preppers but who is laughing now as companies integrating ESG outperform during the crisis? ADMCF’s Lee expands
  • Connecting Finance & Water Risk – Natural Capital Coalition’s Mark Gough & Joseph Harris-Confino on their newly launched supplement for the finance sector – see how can this help bankers, investors and insurers alike amidst increasing ESG adoption
  • The Future Of Finance – HKGFA’s Dr. Ma Jun believes in post-COVID times, investors & bankers should expect more emphasis on environmental disclosure by regulators, which will pave the way for higher quality green finance products

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Jane Moir
Author: Jane Moir
Jane Moir joined ACGA in January 2021 as a Research Director focused on Hong Kong. Prior to joining ACGA, she worked as a barrister and financial journalist, including 11 years at the South China Morning Post covering legal and regulatory issues. Jane has also worked as a part-time lecturer in law at HKU Space and was a contributing writer for Lexis-Nexis on securities law, corporate crime and money laundering. A native of Scotland, Jane holds a Masters of Arts (Hons) in Economics and Politics from the University of Edinburgh, a Postgraduate Certificate of Laws (PCLL) from the University of Hong Kong and a Graduate Diploma in English and Hong Kong Law from Manchester Metropolitan University. She was admitted as a barrister in 2012.
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Vivian Yau
Author: Vivian Yau
Vivian Yau (游可欣) joined ACGA in August 2020 as a Research Analyst after spending 4 months as an intern for the biennial CG Watch report survey. She previously spent 5 years in finance and accounting roles within different industries, including retail and advertising. She is currently pursuing her Masters in Environmental Science and Management at Hong Kong University of Science & Technology, and previously passed her CFA Level II. Vivian was born and raised in Hong Kong, and received her undergraduate degree in Business Administration from Ivey Business School, University of Western Ontario in Canada.
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