What is ESG?

Environment, Social and Governance (hereafter “ESG”) are the main pillars of corporate sustainability in which it concerns organisations’ behaviour and non-financials, ranging from topics like carbon emissions and human rights. Effective from 1 January 2017, listed companies in Hong Kong are obliged to disclose their ESG information by following the Environmental, Social and Governance Reporting Guide issued by the Stock Exchange of Hong Kong (hereafter “HKEX”)[1].

[1] http://www.hkex.com.hk/listing/rules-and-guidance/other-resources/listed-issuers/environmental-social-and-governance?sc_lang=en

With the emergence of Corporate Social Responsibility (hereafter “CSR”) and Socially Responsible Investment (hereafter “SRI”), investors become increasingly socially and environmentally conscious and show an interest in ESG factors within investment selection [1].  This has created a driving force for small and medium-sized enterprises (hereafter “SMEs”) to integrate ESG factors into their business models and even extend this integration across supply chains.

Incorporating ESG practices into business operations and decisions assist SMEs in greening their operations and preventing tangible losses and intangible risks. ESG also benefit SMEs to create competitive advantages through differentiation of products/services and brand.  In many cases, ESG could help increase productivity and reduce operational costs. In the long run, it can be a tool for SMEs to enjoy business growth and pursue new market opportunities by attracting potential investors.

By contrast, companies with poor ESG practices may have higher business risks and poorer marketing reputation. These practices harm company’s relationship with clients and hinder their ease in accessing capital. These could result in a loss of marketing opportunities, investors’ confidence and finally lower the company’s value.

Although global corporations tend to dominate the business pages, SMEs can be seen as the backbone of the Hong Kong economy and the global supply chains.  As at March 2019, there were over 340,000 SMEs in Hong Kong, accounting for over 98% of the total business units [2]. Under Hong Kong’s regulatory regime, ESG is not a mandated practice for non-listed companies. Instead, it is seen as an extra step that SMEs do to help improve their local and global communities.  The concerted efforts of SMEs are crucial for the development of a more sustainable Hong Kong.         

[1] www.oxfam.org.hk/en/news_2830.aspx

[2] https://www.success.tid.gov.hk/english/aboutus/sme/service_detail_6863.html

Environmental sustainability is inseparable from business operations, it pertains to a range of actual or potential environmental impacts generated through business activities. These impacts can be categorised as direct (such as carbon emissions generated by company-owned vehicles) and indirect (such as GHG emissions resulting from generation of purchased electricity). 

Apart from optimising environmental performance, an integration of green initiatives into business practices can provide financial advantages to the company as well as various benefits to the society. For example the uptake of renewable energy can directly save costs on energy, minimise greenhouse gas emissions and eliminate air pollutants caused by combustion of fossil fuels.  Even the simplest measures, such as “Default double-sided printing for PCs and printing facilities” and “Unplug electrical appliances when not in use”, can generate savings and contribute positively to the environment.

With growing demands from the society, non-governmental organisations (hereafter “NGOs”), consumers and regulators, SMEs are desired to be more accountable for environmental management, such as regular monitoring on energy and water use, implementation of environmental management system and accessing sustainability performance of supply chains.  Environmentally responsible enterprises would be more effective and efficient in controlling environmental impacts, minimising unintended effects and reducing non-financial risks (e.g. damages on company’s reputation).

Products/services that are more environmentally sustainable would also lead the enterprise to new market opportunities by attracting more attention from business partners. 

This second pillar of ESG highlights a wide range of issues relating to employment, labour rights, diversity and equal opportunities, health and safety and liability etc.

Enterprises should endeavour to treat all employees fairly and equally. No tolerance should be given to any form of harassment or discrimination in workplaces on the basis of gender, religion, race, nationality or ethnic origin etc. In addition, enterprises should strive to maintain the highest levels of occupational health and safety to safeguard all employees, customers, contractors and the wider community. A strong ESG performance may reduce losses caused by safety-related accidents. Provision of benefits such as comprehensive and flexible employee benefits and learning opportunities, may incentivise employees and in turn, lower absenteeism and employee turnover.

Apart from operating responsibly and ethically, SMEs should consider allocating resources to benefit local communities.  For example, enterprises can promote a caring and inclusive culture by initiating community programmes or partnering with NGOs.   Enterprises that actively involved in social investment, may also reap the benefits, such as brand recognition, media coverage and staff loyalty towards the company.

Corporate governance concerns how a company is directed, managed and governed. Its purpose is to facilitate effective management of the company to ensure that the stakeholders’ best interests are served and deliver the long-term success of the company. A well-organised governance system ensures that the company’s strategic aims are executed and its progress is regularly reviewed and improved. 

With key stakeholder involvement in the decision-making process, enterprises will be more capable of achieving their targets, preventing internal risks and external forces from harming business operations.  Key stakeholder involvement also encourages two-way communication, this ensures stakeholders’ views are heard and necessary actions are taken. Moreover, disclosure of information regarding the policies and regulations of the company promotes transparency and allows stakeholders to bestow trust upon the company.