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A cat and mouse game for investors: assessing ESG disclosure of supply chain listings in Hong Kong

Environmental, social and governance reporting on the Hong Kong stock exchange

Authors: S. le Clue
Publisher: The Association for Sustainable & Responsible Investment in Asia , 2006

Full text of document

Environmental, social and governance (ESG) issues are now recognised by leading financial institutions as essential for investment decisions. These issues are highly visible in the fast-growing supply chains of Southern Asia, where companies from a range of sectors increasingly provide services to prominent global brands in Europe and the United States. This paper reviews the issuance of public offering (ISO) documents of Asian companies listed on the Hong Kong stock exchange (HKEx), and assesses their disclosure of ESG risks. The study finds that public disclosure of ESG risks is limited in both coverage and content.

Key findings from the report include:

  • the scope of disclosures does not sufficiently cover potential material risks and in many instances the manner in which ESG issues and does not facilitate investor analysis
  • increasingly critical issues for companies operating in China such as cost of labour, sustainable supplies of water and energy are not given sufficient attention withsubstantive information often missing 
  • there is a consistent failure to map potential ESG risks to proposed new and expanded facilities 
  • the limited scope and manner of presentation suggest that intermediaries are not always conversant with the issues of concern and indeed repetitive statements across the prospectuses indicate information may be derived from inappropriate sources 
  • relevant information related to ESG performance is not available, which implies that these companies may not be systematically addressing ESG risks 
  • there has been some improvement in both coverage and clarity of issues in markets such as the apparel trade, where public scandals or legal issues have played a part in driving more candid disclosures on social issue..
The paper concludes that it appears that the process surrounding ESG disclosures are unsubstantiated, incomplete and often unclear. The paper concludes that these findings indicate an overall weakness in the Hong Kong stock exchange’s listing requirements.

The end of the report provides a list of ‘red flags’ for investors and relevant questions to ask in specific sectors.