ESG disclosure quality and consistency pose significant challenge to businesses, KPMG finds

Investors recognise ESG risks could result in foreseeable financial impacts including losses and liabilities and are seeking greater transparency

Investors recognise ESG risks could result in foreseeable financial impacts

  • Investors recognise ESG risks could result in foreseeable financial impacts including losses and liabilities and are seeking greater transparency.

  • Expanding scale and complexity of sustainability challenges requires deeper understanding of connection between ESG and financial performance.

15 April 2021, Hong Kong – The environmental, social and governance (ESG) space has continued to develop rapidly, with amplified ESG awareness and expectations among investors, regulators and consumers, according to a recent report published by KPMG. ESG-related investment is accelerating, even in the midst of the pandemic, driving investor demands for enhanced ESG related disclosure and data.

The report, Environmental, social and governance (ESG): A key approach to business resilience, examines recent key ESG market developments, reporting trends and requirements, and suggests good practices for companies to address these matters.

ESG practices can help corporates become more resilient by getting them ready for the impact of emerging issues and helping them maintain robust governance, risk management and controls. As part of a continued focus on providing climate solutions for KPMG firms, clients and society, KPMG has announced its intention to become a net-zero carbon organisation by 2030 and signed up to a series of new climate actions. 

Raymond Ng

Raymond Ng, Vice Chairman, KPMG China, says:

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We have made real strides in growing our business in a sustainable way and are sharing our own story while working with our clients on their ESG and sustainability agenda. We recognise that the climate crisis we all face globally means we must move further and take more aggressive efforts.

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Investors are more interested than ever before in how companies take into account changes in the economic, social and environmental landscape and how they manage the related risks and opportunities, as ESG risks, including climate risks, are likely to result in foreseeable financial impacts including losses and liabilities for many companies.  

From a regulatory perspective, HKEX also published the latest ESG Reporting Guide which focuses on issuers’ commitments and performance, rather than only “technical reporting”. Issuers have to determine KPIs and targets to measure and evaluate ESG performance, with an aim to improve ESG performance in the short, medium or long term. The new requirements cover the description of targets for emissions, waste, energy use and water efficiency, and the steps taken to achieve them. Companies need to report KPIs and ESG information in a consistent way to track performance, establish a standardised ESG data management system and set appropriate targets.

Patrick Chu

Patrick Chu, Partner, Head of Business Reporting and Sustainability, KPMG China, says:

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Back to the fundamentals, we should also challenge ourselves on how we engage our stakeholders by way of ESG reporting. We need to address challenges regarding comparability, reliability and the relevance of information shared with key stakeholders. Quality reporting would make it easier for key stakeholders to understand and evaluate companies’ ESG performance and provide valuable feedback.

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Pat Woo

Pat Woo, Partner, Business Reporting and Sustainability, KPMG China & Global Co-Chair, Sustainable Finance, KPMG IMPACT, points out that:

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There are greater market expectations for businesses to disclose a harmonised set of sustainability metrics in their mainstream reporting to more easily benchmark their performance, in particular within their industry sector. This demand will only accelerate in light of increased emphasis on climate change and the ongoing social and economic issues exacerbated by the COVID-19 pandemic affecting sustainable business performance.

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However, inconsistency, poor verification and a lack of standards remain common problems for ESG data management and disclosure. With the number of climate regulations and carbon reduction targets continuing to increase, this means businesses will have to navigate an increasingly fractured regulatory landscape and enhance their collective commitment to the global climate agenda with carbon reduction plans.

Companies choosing to report using multiple standards or metrics may risk limiting their reporting effectiveness and impact and increasing complexity and cost. The World Economic Forum, in collaboration with KPMG and the other Big Four accounting firms, released in September 2020 a set of universal ESG metrics and disclosures that companies can report on, regardless of industry or region – Toward Common Metrics and Consistent Reporting of Sustainable Value Creation. Following those metrics will provide comparability between businesses as well as the opportunity for companies to potentially get ahead and influence the development of emerging ESG regulations.

The ESG disclosure landscape is evolving rapidly. Development is likely towards harmonisation of ESG reporting frameworks and further coalescence towards a global corporate reporting system that considers the interconnectivity between non-financial information and financial reporting. It is time for companies' approach to reporting to evolve to provide a picture of how business value is being developed and protected. Increasingly, investors will push for better reporting, to see reports built around a company’s unique business model, addressing the unique factors that drive long-term value for that business.

Looking ahead, there will be greater need for companies to strengthen their leadership on social and environmental issues and enhance transparency to increase trust. Amid the disruptions and shifts in the business environment, the significance of ESG and opportunity for companies to build business resilience undoubtedly will continue to increase.

Irene Chu

Irene Chu, Partner, Head of New Economy and Life Sciences, Hong Kong, KPMG China, concludes:

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The effects of climate change have been accelerating and will start to affect businesses’ operations, financial performance and competitiveness. Understanding and proactively addressing climate risks will not only help companies reduce business risks making them more resilient against future shocks, but also create new market demand and opportunities.

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