Harmonizing standards

Hong Kong also needs to harmonize existing ESG standards to guard against greenwashing — a communication and marketing strategy adopted by companies or organizations to forge an ecologically responsible image among the public. “When there’re no standards, we all claim to be green ourselves. Is it really green and no one knows about it? It doesn’t work! We don’t want Hong Kong to be a greenwashing center,” warns Serena Mak, board governor of Friends of the Earth (Hong Kong).

KPMG Partner and Global Co-Chair of Sustainable Finance Pat Woo said: “Market participants would like to see standardization of the methods for calculating carbon footprints and other ESG disclosure formats and guidance. Companies would like to see comparability of different ESG reporting formats even in one single industry for sector comparison purposes. Right now, that doesn’t exist. Comparability comes after standardization.”

Leung regards the concept of materiality as important in the process of standard harmonization. “What constitutes materiality in ESG disclosure? How can it be defined? What is it relevant to — climate materiality, financial materiality or time of horizon materiality?”

She said the standard of evaluating ESG assurances should also be unified when listed companies file their ESG information that’s verified by third-party auditor firms in their annual reports. The demand for ESG assurance services will rise as ESG report assurances may also be made mandatory in future.

The capacity-building of ESG talents is desperately needed. ESG professionals are predominately experts in the fields of engineering and climate sciences. Now these skill sets have to be integrated into the world of finance and data science. Besides lacking such expertise, Hong Kong is also not aggressive in recruiting ESG professionals. Financial regulators in Hong Kong do not come up with a clear strategy on recruiting ESG professionals.

According to Cheung, Hong Kong must develop structured upskilling programs that have international recognition. The Hong Kong government currently only grants subsidies for ESG-related courses designed by locally-based institutions, but the body of knowledge taught by these institutions is not up to international standard. This is a gap that needs to be addressed.

“Five years from now, ESG professionals should know how to find some other sources of alternative data, such as emissions, social media, water temperature, or atmospheric layers to perform ESG analysis. The ability to harness such data, for example by filtering and structuring, to make decisions useful, will be important,” said Leung.

Hong Kong financial regulators should encourage more innovative green financial products to attract global investors. Hong Kong is lagging behind in the development of green finance products although the Hong Kong Stock Exchange launched the Sustainable and Green Exchange — Asia’s first a central hub for data and information on sustainable and green-finance investments — last year. According to Cheung, the number of ESG-related exchange traded funds listed in Hong Kong is less than that in South Korea and Taiwan.

Hong Kong should brace for more green investment product innovations not only for the fixed-income market, but also for the equity market. Green mortgages, ESG-linked ETFs, green asset-backed securities, green REITs, funds or derivatives associated with green indices are some major lines for green financial product development.

The city’s financial regulators should also promote green finance literacy to sustain the city’s green financing business ecosystem. Universities and business schools are urged to explore the possibility of setting up academic programs of green finance. The Investor and Financial Education Council should take a more proactive role in promoting and educating the public on green finance.