Issue 11 Volume 16 November 2020 DRIVING BUSINESS SUCCESS ESG REPORTING: STAYING AN OPEN BOOK PLUS: PROFILE Caroline Lee, incoming Deputy Chair of the International Ethics Standards Board for Accountants ACCOUNTANT PLUS Dr Artie Ng, Deputy Director of PolyU SPEED SECOND OPINIONS How can whistle-blowing policies and procedures in companies improve? Special report: The growing importance of accounting specialists in environmental, social and governance reporting HK$70.00
PRESIDENT’S MESSAGE APLUS November 2020 1 In view of the pandemic, the Institute had planned to change the Annual Dinner to a sit-down Annual Cocktail with a much smaller group, less formalities and shorter programme. However, the recent spread of the fourth wave of COVID-19 has made holding such an event untenable. To ensure the health and safety of our guests, members and colleagues, as well as to manage the Institute’s reputational risk, the Annual Cocktail had to be cancelled. Instead, some celebratory videos will be released in December to showcase our achievements this year. It is disappointing to face this fourth wave – particularly at a time of year when families and friends coming together for celebrations is the usual fare. Nonetheless, we must do all we can to maintain social distance, minimize interactions, and stay safe. Preparations to hold the Qualification Programme module examinations in late December continue. We are closely monitoring the situation in view of the new COVID-19 outbreak. The health of all those involved is of the utmost priority, and I am very pleased with the efforts the Institute’s management have put in to ensure safety. The Final Examination was successfully held in November, and I thank the Institute’s members and staff for their hard work. Qualifying new members is a major responsibility of the Institute and it is important we do this safely. Thanks to all the members who attended the two virtual Members’ Forums on 12 and 13 November. During the forums, the Chief Executive and Registrar and I discussed the latest developments of the Institute and answered questions from members. A recording of the presentations will soon be available for members who were unable to watch the live event. Please consider watching the presentation to learn more about our activities and how we will implement the Strategic Plan 2020-2022. The Young Members Conference, held in mid-November, was an exciting morning event. While virtual, the passion and energy of the speakers was real. I am glad to see that even while facing the disruption of the past year, our young members look forward to their careers as leaders of our community and as successful accountants in a wide range of specializations. I attended the Institute’s virtual 2020 SMP Symposium on 27 November. During my presentation, I discussed how the International Federation of Accountants’ Small and Medium Practices Advisory Group, of which I am a member, is helping small- and medium-sized practices (SMPs). Other speakers at the symposium discussed topics including the development of the Institute and our strategic plan, anti-money laundering, new financial reporting and auditing standards and taxation. This year has been a challenging one for accountants around the world, and it is important that the Institute supports all its members during the difficult time. Supporting our SMPs’ development is also vital for the long-term sustainability of the profession, and is something the Institute cares deeply about. I was a judge of the HKICPA Business Case Competition 2020 in Hong Kong on 28 November. The event was virtual, with teams delivering their presentations and question and answer sessions remotely, and it was exciting to see the enthusiasm and dedication towards the event. Again, this is another example of how it is possible to successfully hold face-to-face events, virtually. I was invited by the Hong Kong Trade Development Council to represent the Hong Kong accounting profession at the high profile 23rd Beijing-Hong Kong Economic Cooperation Symposium on 19 November. As is increasingly the way, the symposium was a combined physical and virtual event, held in Beijing and Hong Kong simultaneously and joined together virtually. The Mayor of Beijing and the Chief Executive of Hong Kong officiated the opening ceremony. I spoke about the Institute’s longstanding relations with Beijing, made suggestions on how to enhance economic cooperation and to collaborate on the future of our profession between Beijing and Hong Kong. The Independent Working Group for President and Vice-Presidents Election reported its proposed one member, one vote election framework at the October Council Meeting and also prepared a draft public consultation paper for the November meeting as planned. Council is now considering these, with the objective of holding the consultation in the first quarter of 2021. Finally, I urge members to vote in the Council election and, in view of the pandemic, to watch the annual general meeting (AGM) online on 10 December. Voting closes at 5:30 p.m. on 7 December, and you can vote either electronically or physically. You can register to watch the AGM and submit proxies on the agenda items by 8 December. Further information about voting and the AGM is available in the Members’ area of the Institute’s website. “ Even while facing the disruption of the past year, our young members look forward to their careers as leaders of our community and as successful accountants in a wide range of specializations.” Johnson Kong President Dear members,
a CONTENTS Issue 11 Volume 16 November 2020 NEWS 01 President’s message 04 Institute news 06 Business news FEATURES 08 Adding sustainable value A special report on the work and skills of environmental, social and governance reporting specialists 18 Second opinions How can whistle-blowing policies and procedures in companies improve? 20 Leadership: Caroline Lee The incoming Deputy Chair of the International Ethics Standards Board for Accountants, on her key focuses and background in audit 27 Thought leadership Key insights from the Institute’s survey on how the COVID-19 pandemic is affecting organizations and business operations 28 Accountant Plus: Dr Artie Ng The Deputy Director of PolyU SPEED on how he went from being a Big Four consultant to an academic specializing in ESG reporting and sustainability 35 How to Darryl Parrant and Pearl Yung at Mercer on how to transition to a hybrid work environment 37 Meet the speaker What to expect from an e-Series on behaviourial finance SOURCE 38 An overview of the OECD’s Base Erosion and Profit Shifting 2.0 Pillar One blueprint A look at the OECD’s BEPS 2.0 Pillar One blueprint 41 An overview of the OECD’s Base Erosion and Profit Shifting 2.0 Pillar Two blueprint A look at the OECD’s BEPS 2.0 Pillar Two blueprint 44 Technical news 20 08Adding sustainable value Leading with integrity Caroline Lee, incoming Deputy Chair of the International Ethics Standards Board for Accountants, on having the opportunity to bring an Asian perspective to ethical issues that accountants face
DRIVING BUSINESS SUCCESS About our name A Plus stands for Accounting Plus. It represents a profession that is rich in career options, stays relevant amid rapid changes, and adds value to business. This magazine strives to present the global mindset and varied expertise of Institute members – Accountants Plus. Editor Gerry Ho Email: gerry.ho@mandl.asia Copy Editor Jemelyn Yadao Junior Copy Editor Jeremy Chan Contributors Nicky Burridge, Louise Tam Registered Office 2/FWang Kee Building, 252 Hennessy Road, Wanchai, Hong Kong Advertising enquiries Advertising Director Derek Tsang Email: derektsang@mandl.asia President Johnson Kong Vice Presidents LamChi Yuen, Nelson, FongWan Huen, Loretta Chief Executive and Registrar Margaret W. S. Chan Director of Corporate Communications Dr Wendy Lam Head of Corporate Communications and Member Services Rachel So Editorial Manager Paul Smith Editorial Coordinator Maggie Tam Office Address 37/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Tel: (852) 2287-7228 Fax: (852) 2865-6603 Member and Student Services Counter 27/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Website: www.hkicpa.org.hk Email: hkicpa@hkicpa.org.hk A Plus is the official magazine of the Hong Kong Institute of Certified Public Accountants. The Institute retains copyright in all material published in the magazine. No part of this magazine may be reproduced without the permission of the Institute. The views expressed in the magazine are not necessarily shared by the Institute or the publisher. The Institute, the publisher and authors accept no responsibilities for loss resulting from any person acting, or refraining from acting, because of views expressed or advertisements appearing in the magazine. ©Hong Kong Institute of Certified Public Accountants November 2020. Print run: 7,330 copies The digital version is distributed to all 46,441 members, 18,080 students of the Institute and 2,358 business stakeholders every month. WORK-LIFE BALANCE 46 Going the distance CPA trail walkers share their love of teamwork and the great outdoors as they train for the Oxfam Trailwalker next year 52 Young member of the month Basy Li, Audit Manager at Mazars CPA Ltd. 54 Leisure Plus Spotlight on staycations; what members are currently reading and listening to 56 Let’s get fiscal The United States election should’ve left the votecounting to the accountants, says Nury Vittachi 54 46 Going the distance Leisure Plus 28 A new purpose Dr Artie Ng, Deputy Director of School of Professional Education and Executive Development of The Hong Kong Polytechnic University, on how he is enhancing sustainability reporting competency among his students
NEWS Institute members are encouraged to exercise their right by selecting seven candidates to join the Council. Votes can be casted either by e-voting or ballot paper, but not both, by 5:30 p.m. on 7 December. The Institute’s 48th annual general meeting (AGM) will take place on 10 December. This year, special arrangements with pre-registration and live streaming of the event have been made given the COVID-19 pandemic, and to ensure the safety of attendants. Visit the Institute’s website for more details on registration, submission of questions prior to the AGM, and the proxy form. The deadline for in-person attendance registration is 3 December, and the deadline for live webcast registration and submitting questions is 8 December. Membership renewal Members are required to file their annual return with continuing professional development (CPD) declaration by 15 December to renew their membership. This year, the Council has granted oneoff concessions, including waiving the capital levy. Members who joined the Institute before 1 December 2017 are required to complete 120 hours of CPD in the three years ending 30 November 2020, of which 60 hours must be verifiable. Members having difficulties in achieving the CPD requirements for their 2021 membership renewal may apply for an extension to make up for the shortfall in CPD hours. Mentorship Programme now open for applicants The Institute’s 2021-22 Mentorship Programme is now accepting applications from aspiring members who are interested in developing their careers as mentees, and experienced members looking to inspire future CPAs as mentors. Members with less than seven years of post-qualification experience may apply to become a mentee, while those with seven or more years, a mentor. Mentees’ applications are accepted on a first-comefirst-served basis, subject to a successful matching process. Mentors will be awarded up to five non-verifiable CPD hours on guiding a mentee during the one-year mentorship process and up to three verifiable CPD hours for attending mentorship related briefings. Those interested should complete the online application on www.hkicpa.org. hk/mentorship by 15 January 2021. Visit the dedicated Mentorship Programme webpage on the Institute’s website to learn more about the programme and how it has benefitted both mentees and mentors. Compliance department operations report now available The Institute’s Compliance Department has published its 2020 Operations Report, which outlines the department’s key activities for the 18 months ended 30 June 2020. The report also features the process reviews of the department’s operations carried out by the Regulatory Oversight Board. The report is available on the Institute’s website. Financial tips from CPAs In the Institute’s new video series, young members of the Institute share financial tips. The first episode offers three simple tips to curb overspending habits. Watch now and share its smart spending tips with your family and friends. COVID-19 PAIB survey report The Institute conducted a survey of professional accountants in business members, about the impact of the COVID-19 pandemic on their organizations, operations and business strategies. It is available to read on the Institute’s website. Read more about the key highlights of the report on page 27. Institute news Business news Council election and annual general meeting 4 November 2020
APLUS Resolutions by Agreement Lam Albert Man Sum, CPA (practising) Complaint: Failure or neglect to observe, maintain or otherwise apply the fundamental principle of Professional Competence and Due Care in the requirement R113.1 of the Code of Ethics for Professional Accountants. Lam issued an accountant’s report for a solicitors’ firmunder the Accountant’s Report Rules (Cap. 159A). In conducting the reporting engagement, Lam failed to comply with the Institute’s Practice Note (PN) 840 (Revised) Reporting on Solicitors’ Accounts under the Solicitors’ Accounts Rules and the Accountant’s Report Rules. The deficiencies related to lack of procedures for accepting and planning the engagement, agreeing the terms of the engagement in the form of an engagement letter, and lack of tests or procedures to evaluate if the solicitors’ firmhad complied with the requirements under the Solicitors’ Accounts Rules (Cap. 159F). Regulatory action: In lieu of further proceedings, the Council concluded the following action should resolve the complaint: 1. L am acknowledges the facts of the case and his noncompliance with professional standards; 2. Lambe reprimanded; and 3. L ampays an administrative penalty of HK$40,000 and costs of the Institute of HK$15,000. Lui Tin Nang, CPA (practising) Complaint: Failure or neglect to observe, maintain or otherwise apply the fundamental principle of Professional Competence and Due Care in sections 110.1 A1(c) and R113.1 under Chapter A of the Code of Ethics for Professional Accountants. Lui issued an accountant’s report for a solicitor’s firm under the Accountant’s Report Rules (Cap. 159A). In conducting the reporting engagement, he failed to comply with the rules and the Institute’s PN 840 (Revised) Reporting on Solicitors’ Accounts under the Solicitors’ Accounts Rules and the Accountant’s Report Rules. Lui did not adequately inquire into the reasons for certain long outstanding client account balances and unpresented cheques made out to clients. He also failed to resolve an inconsistency in the results of client account circularization. Lastly, he failed to document a number of procedures he carried out in support of the accountant’s statement in the accountant’s report. Regulatory action: In lieu of further proceedings, the Council concluded the following action should resolve the complaint: 1. L ui acknowledges the facts of the case and his noncompliance with professional standards; 2. Lui be reprimanded; and 3. L ui pays an administrative penalty of HK$25,000 and costs of the Institute of HK$15,000. Wong Ka Chung, CPA (practising) and Pondus (CPA) Limited Complaint: Failure or neglect to observe, maintain or otherwise apply Hong Kong Standard on Auditing (HKSA) 230 Audit Documentation, HKSA 500 Audit Evidence and HKSA 520 Analytical Procedures. Ponduswas the auditor of a private company and issued an unmodified auditor’s opinion on each of the company’s financial statements for the years ended31March2016 to 2019.Wong was the engagement director and signed the auditor’s reports on behalf of Pondus. In the performance of the audits, the respondents failed to prepare adequate documentation andperformadequate procedures on the company’s bank accounts,membership fee income, ongoing litigations and certain expense items. Regulatory action: In lieu of further proceedings, theCouncil concluded the following should resolve the complaint: 1. T he respondents acknowledge the facts of the case and their non-compliancewithprofessional standards; 2. They be reprimanded; and 3. E ach of the respondents pays an administrative penalty of HK$30,000, and they jointly pay the Institute’s costs of HK$15,000. Disciplinary finding WongMan Ki, CPA (practising) Complaint: Failure or neglect, without reasonable excuse, to complywith a direction issuedby thePracticeReviewCommittee (PRC) under section32F(2)(b) of theProfessional Accountants Ordinance. Wonghadbeenpractising inher ownname on a part-time basis andwas subject to a practice review. The practice reviewer made numerous attempts to obtain information fromWong for the purpose of the review. However,Wong refused to provide the information requested. Subsequently, thePRC issued a directionunder section32F(2) (b) of the ordinance toWong requiringher to cooperatewith the Institute to facilitate a practice reviewandprovide certain information for the review.Wongdidnot complywith the direction. Decisions and reasons: Wongwas reprimanded, her practising certificatewas cancelled and her namewas removed from the register of CPAs for three yearswith effect from28 October 2020. In addition, Wongwas ordered to pay a penalty of HK$30,000 and costs of the disciplinary proceedings of HK$55,105. Whenmaking its decision, the Disciplinary Committee took into consideration the particulars of the breaches committed in this case andWong’s conduct throughout the proceedings. Details of theResolutions byAgreement anddisciplinary finding are available at the Institute’swebsite. November 2020 5
NEWS Business SINGAPORE CLAMPS DOWN ON MONEY LAUNDERING The Monetary Authority of Singapore (MAS) will crackdown on financial institutions that lack rigorous systems and processes to combat money laundering and terrorism financing to secure its status as a regional financial hub. In a report issued on 4 November, the regulator said it will clamp down on disclosure breaches, the misselling of financial products and money laundering. It will also seek to increase its focus on senior management accountability for breaches. The MAS imposed US$6.4 million in civil penalties and US$2.5 billion for money laundering-related control breaches in the 18 months to June 2020, according to another report. “Investigations and enforcement against financial misconduct will only become more challenging as technology rapidly evolves, financial products grow in complexity and cases become increasingly multi-jurisdictional in nature,” said Peggy Pao, Executive Director of Enforcement at the MAS. SONY UNDER PRESSURE OVER JAPAN’S ENERGY POLICY The International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) announced on 25 November plans to merge to create the Value Reporting Foundation next year. The unified group will provide investors and corporations a comprehensive corporate reporting framework with standards aimed at improving environmental, social and governance reporting and global sustainability performance. The IIRC and SASB, along with other standard setters, have come under increasing calls from financial regulators to combine existing standards and frameworks to simplify the corporate reporting landscape. The Value Reporting Foundation will maintain the IIRC’s Integrated Reporting Framework. “The framework and the SASB standards are complementary. Integrated reporting describes all relevant value creation topics and the approach to integrating them in corporate thought and reporting,” said Barry Melancon, Chair of the IIRC Board. IIRC AND SASB ANNOUNCE MERGER IN 2021 KPMG announced plans to become a net-zero carbon neutral organization by 2030. The announcement, made on 9 November, will see the firm commit to a series of actions, including all firms within its network switching to 100 percent renewable energy by 2030. KPMG will track its progress by measuring and reporting data to the Carbon Disclosure Project and the Science Based Targets initiative. The new plans build upon the firm’s Impact programme, which launched earlier this year. The programme supports KPMG’s clients in addressing challenges facing the planet using the United Nation’s Sustainable Development Goals. “With this new set of global commitments across KPMG, I am confident that we are making the right decisions today to make a difference tomorrow,” Bill Thomas, Chief Executive Officer of KPMG International, said in a statement. The record-breaking profit, compared with HK$2.2 billion in the same period a year ago, came amid rising market turnover, increased stock connect revenue and a wave of Mainland Chinese companies listed in the United States seeking listing in Hong Kong as political tensions rise between the U.S. and Mainland China. The record number also exceeded analyst’s forecasts of HK$3.23 billion and its previous quarterly record profit of HK$2.97 billion in the April to June period. Nongfu Spring’s initial public offering in September is one of the largest in Hong Kong this year. The bottled water giant’s shares soared as much as 85 percent on its debut after the company’s HK$8.3 billion IPO attracted a record level of retail orders. HK$3.34 BILLION HONG KONG EXCHANGES AND CLEARING ANNOUNCES KPMG PLEDGES TO GO CARBON NEUTRAL BY 2030 PROFIT IN THE THIRD QUARTER Sony has warned the Japanese government it may have to move its manufacturing operations out of the country unless rules on renewable energy are relaxed. The warning, which came from Sony Chief Executive Officer Kenichiro Yoshida, highlights the pressures Japanese businesses are facing to eliminate the carbon footprint of their manufacturing facilities. It comes as tech giants such as Apple and Facebook seek to shift their global supply chains to 100 percent renewable energy, a target that Sony is trying to meet, reported the Financial Times. Sony produces image sensors used in Apple’s iPhones, which requires highly stable energy sources, making the shift to green energy challenging. Sony pledged to have its global operations running on green energy by 2040, but is being called on by Apple, its manufacturing partner, to bring the target forward to 2030. 6 November 2020
Two sets of raids related to accounting fraud were carried out in Hong Kong in the space of one week in November. In the first raid, an ex-chairman and four former senior executives of two listed companies were among eight people arrested in connection with an HK$8.5 billion false accounting case. The second involved former managers of a commodity trading company listed in Hong Kong who were among seven people arrested on suspicion of conspiring to provide false accounting involving a sum of HK$11.88 billion. Detectives from the Commercial Crime Bureau and the Securities and Futures Commission raided the company’s offices and those of its business partners on 24 November. The suspects are suspected of fabricating multiple false trades to inf late revenue during the financial years of 2016 and 2017. APLUS The International Accounting Standards Board (IASB) has appointed Dr Andreas Barckow to serve as Chair, effective July 2021. Barckow, who has served as President of the Accounting Standards Committee of Germany since 2015, will succeed Hans Hoogervorst, who will complete his second five-year term in June 2021. Barckow has also been an active participant in numerous advisory bodies to the International Financial Reporting Standards (IFRS) Foundation and the IASB, where he is a member of both the IASB’s Accounting Standards Advisory Forum and the IFRS Advisory Council. “His skills and experience will be invaluable to the IASB as it begins the next stage in its evolution as a global accounting standard-setter,” said Erkki Liikanen, Chair of the IFRS Foundation Trustees. IASB APPOINTS NEW CHAIR MANAGERS OF HONG KONG-LISTED COMPANY ARRESTED OVER FALSE ACCOUNTING SCHEME EY FACES £1 BILLION LAWSUIT FOR FLAWED NMC HEALTH AUDIT The administrators of NMC Health are preparing to sue EY for more than £1 billion over claims that the firmwas remiss when it signed off the group’s accounts during a multibillion-dollar fraud. NMC Health, a United Arab Emirates-based healthcare group that was listed on the FTSE 100 and has operations spanning fromAbu Dhabi to London, went into administration this year after more than £4 billion was found to be missing from its balance sheet. The firm, which has audited NMC’s accounts since the healthcare group’s 2012 listing in London, has had its audits questioned, and eyebrows have been raised as the healthcare group’s board consists of former EY partners. Turnaround company Alvarez &Marsal hired law firmQuinn Emanuel to make a claim against EY. “The investigation is complex given the well organized and long term nature of the fraud,” said Alvarez &Marsal in a progress report to creditors. China Resources Mixc Lifestyle has launched an initial public offering in Hong Kong that could raise more than HK$12 billion, the latest in a list of Chinese companies hoping to raise capital on the city’s bourse. The company, a property management division of Mainland Chinese developer China Resources Land, says it will use the proceeds for strategic investments and acquisitions to expand its property management and commercial business. It was ranked fifthlargest by revenue among property management companies in Mainland China last year. The company is offering 550 million shares at a maximum price of HK$22.30 each, according to the company’s prospectus issued on 25 November. It will also offer an over-allotment option of 82.5 million shares to meet excess demand. The share offering is expected to end on 1 December and start trading on 9 December. CHINESE PROPERTY MANAGEMENT COMPANY LAUNCHES HONG KONG IPO The last-minute suspension of Ant Group’s initial public offering (IPO) is likely to cause investment banks to lose out on nearly US$400 million in collective fees. The two dozen banks include joint sponsors of the IPO Citigroup, JPMorgan Chase, Morgan Stanley and CICC. The banks were expected to share 1 percent of the underwriting commission on the listing, which was forecast to raise as much as US$39.67 billion. Ant Group’s debut, which would have been the world’s largest listing ever, was called off 48 hours before it was scheduled to go live on 5 November. The dual listing, on the Hong Kong and Shanghai exchanges, was suspended a day after Beijing announced draft regulations that observers said would force the payments company to rethink its business model, especially its lending business, which drove about 40 percent of the company’s revenue in the first half of the year. BANKS TO LOSE OUT ON ALMOST US$400 MILLION FROM SUSPENDED ANT GROUP LISTING The Securities and Exchange Commission (SEC) is pressing ahead to introduce a regulation that could delist Chinese companies from stock exchanges in the United States for not complying with U.S. auditing rules. The move could fuel tensions between U.S. andMainland China as the Trump administration comes to a close. The regulation, according to Bloomberg, stems fromChina’s refusal to allow inspectors from the Public Company Accounting Oversight Board to review audits of Alibaba Group Holding, Baidu and other Chinese companies trading on U.S. markets. The delisting of coffeehouse chain Luckin Coffee in June, which was found to have fabricated US$310 million in sales, has added urgency to the planned move. If passed, the rules will come into effect in January 2022, according the a report issued by the President’sWorking Group on Financial Markets, a group that includes SECChairman Jay Clayton and Treasury Secretary StevenMnuchin. U.S. REGULATOR PUSHES TO DELIST CHINESE COMPANIES November 2020 7
SPECIALISMS ESG reporting SPECIAL REPORT: ADDING SUSTAINABLE VALUE 8 November 2020
APLUS Environmental, social and governance reporting is no longer something businesses can turn a blind eye to. Disclosures are key to attracting investors, while also serve as an impetus for companies to improve their operations, and benefit society and the environment. Jeremy Chan speaks to professionals who are driving these changes across organizations, and finds out how they lend their expertise and knowledge to help companies traverse the complex and evolving landscape Illustrations by Gianfranco Bonadies T here is more to environmental, social and governance (ESG) reporting than some companies are aware of. For some, it refers to another mandatory report to issue every year about their contribution to the environment and society. But for others, it’s a valuable attribute to not only integrate into the organization, but a way to run a sustainable and successful business. But when it comes to making those landmark changes, many organizations don’t know where to begin. Some companies form sustainability teams to do all the work, and though these individuals may have the relevant knowledge in ESG and sustainable business practices, they may lack the financial knowledge to meaningfully connect those practices to the company’s finances and operations to effectively initiate change. This is where accountants who specialize in ESG can come in. They have the financial know-how, business acumen and knowledge in sustainability reporting frameworks and best practices to help companies get a head start in meeting and even going beyond their sustainability goals. They can help companies set the right ESG targets, advise on what reporting frameworks to use for preparing ESG reports, provide independent assurance of such reports and provide ongoing advisory to bring businesses towards their vision. This special report speaks to experts within the ESG specialization – preparers of ESG reports and assurance providers – to find out how they work with businesses, how their role is key to companies issuing an accurate ESG report, the growing need for better ESG reporting and assurance in Hong Kong, and how professionals can equip themselves with the necessary skills to succeed in the field. November 2020 9
SPECIALISMS ESG reporting Within the last five years, ESG has seen considerable growth in Asia, especially in Hong Kong, as companies understand that their success is not only contingent upon their financial performance but also their relationship with society and the planet. Investors are also expressing more interest in socially-responsible companies, and using their ESG reporting in their investment decision-making. A 2019 study conducted by corporate and investment bank Natixis, Looking for the Best of Both Worlds, found that seven in 10 investors believe it is important to make a positive social impact through their investments. It also found that more than half of investors surveyed would avoid investments that conflict with their personal values. Growing concerns about climate change risk have bolstered responsible investment, with socially conscious investments increasing globally by 34 percent to US$40.5 trillion in 2020, up by 27.5 percent compared to 2019. Data from the United States Global Change Research Programme indicates that global surface temperatures have risen by 0.9 degrees Celsius within the last 100 years, while the United Nations Intergovernmental Panel on Climate Change warned back in 2018 that the planet only has a decade to prevent the worst impact of climate change. The Paris Agreement, an agreement signed in December 2015, aims to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above preindustrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius. All of this has piled pressure on companies to do their part and focus on ESG reporting. An ESG report is an assessment issued by companies every year detailing their ESG performance. In general, the environmental aspect of ESG looks at a company’s energy emissions, waste management systems or resource consumption, for example. The social facet examines how a company manages its relationships with employers, suppliers, customers and the community, while the element of governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights. There is no one-way-fits-all approach to reporting ESG. It is up to companies to review their operations and industry to decide which of the many reporting frameworks available to use in disclosing their ESG performance. “We began tracking how we recycled plastic bottles, conserved water and reduced energy usage, to name a few, and set goals for each.” SETTING THE RIGHT TARGETS Helping a company to put together their first-ever ESG report was no small task for Kitty Fung when she was chief financial officer of Vitasoy. It was 2016 and the Hong Kong Stock Exchange (HKEX) had just issued new ESG reporting guidelines, along with a reporting framework for listed companies to make ESG disclosures. “I had to do it from scratch. All listed companies had to, especially after the requirements were announced,” says Fung, now the CFO of the West Kowloon Cultural District Authority, and a member of the Hong Kong Institute of CPAs. Working with a consultant, she familiarized herself with the framework issued by the Global Reporting Initiative (GRI) – her previous company’s reporting framework of choice – and began leading her team. “We employed an ESG consultant to guide us with the ESG reporting and in understanding GRI requirements,” she says. “When it comes to ESG reporting, one needs to set targets first. The right key performance indicators (KPIs) help to present our actuals against targets and detail what we have done to save energy.” By setting precise, feasible and meaningful sustainability goals that articulate the company’s vision and strategy, organizations are able to work towards a goal, while garnering more interest and trust from existing and potential customers, investors and stakeholders. Fung made sure KPIs were put in place to track all three aspects of ESG. As a beverage company, KPIs to measure Vitasoy’s carbon footprint were especially important, she notes. “Vitasoy is a manufacturer and bottler, so we began tracking how we recycled plastic bottles, conserved water and reduced energy usage, to name a few, and set goals for each,” she says. KPIs were also set to measure hours of staff training, staff composition, board diversity and the company’s corporate social responsibility, such as how it helped the community and underprivileged through volunteer work and donations. “We wanted to ensure that we have a safe working environment and diversity in our workforce. So in deciding what KPIs to track, I had to make sure they were meaningful and relevant to the company,” adds Fung. “My role was to initiate these changes and bring the board to a consensus. We all went through the parameters to measure and track, and determined that they were vital to the strategy of the company.” Eddie Ng, Partner, Business WHAT IS ESG? 10 November 2020
APLUS Reporting and Sustainability, KPMG China and an Institute member, says KPIs provide companies with direction. “It’s very important for companies to set a vision. A vision is like the goal – where the company wants to go,” she says. “KPIs measure how a company is performing against the journey to achieving the vision, whether the strategy works and whether they need to adjust their strategy.” ESG goals vary from company to company. Many of these goals require time and effort to reach, prompting companies to set goals years or even decades into the future. For example, Unilever and Apple both pledged to reach net-zero carbon emissions in their manufacturing of goods by 2030. United Kingdom-headquartered groceries and merchandise retailer Tesco committed to using 100 percent renewable electricity within the next decade. Companies that aren’t sure what KPIs to set could conduct materiality assessments. “This process helps to identify which ESG issues are most important to the company,” says Herbert Yung, Director, Risk and ESG Advisory at Deloitte and an Institute member. This is first achieved by gathering insights, usually through surveys, from within and outside the company. “Companies need to engage with stakeholders to understand their expectations, concerns and collect their opinions,” he says. Once a company receives feedback, Yung adds, they will have a better understanding of which ESG factors are most important and relevant to the company, and the areas in which resources must be allocated and prioritized. Companies will also have a clearer idea of what will eventually be reported. Another way for companies to set KPIs, Ng adds, is to look at their competitors within the industry. “Companies can look at other industry players’ KPIs as benchmarks to help them set their own KPIs and compare their performance with their peers. However, the KPIs others use may not be entirely suitable as they may be pursuing different business directions. What is more important is for a company to determine its vision and set benchmarks to measure its relevant performance,” she says. As Gigi Lee, a former senior manager of sustainability at a listed property developer and an Institute member, notes, it’s important for companies to understand which KPIs to set – and to set them with purpose. “Property developers would set energy reduction targets as buildings consume a lot of electricity during their operations. In contrast, companies operating, say, e-commerce platforms would better focus more cybersecurity and data privacy,” says Lee. Following materiality assessments, Lee’s previous company set a group-wide energy and carbon target. “We set these goals for 2030,” she says. “So, this required us to translate these long-term targets into annual targets.” In doing so, her company brought in a consultant to put forth recommendations. Lee says the next step involved using those recommendations to garner supporting from management and also different departments within the company. The right internal controls must be put in place to track KPIs, says Brian Ho, Partner, Climate Change and Sustainability Services, EY and a member of the Institute’s Sustainability Committee. “ESG is a cross-departmental issue. You can’t rely on only one department,” he says. If a company wants to set up reduction targets for their greenhouse gas emissions, which often come from different sources, each department must be trained on how to track and monitor performance, he says. “Stakeholders require or expect management targets for these KPIs, so the roles and responsibilities of those managing them is essential.” Ng says that companies should November 2020 11
SPECIALISMS ESG reporting MORE MEANINGFUL REPORTS On 18 December 2019, the HKEX announced enhanced ESG reporting requirements, which apply to financial years commencing on or after 1 July 2020. They require a company’s board to disclose its oversight of ESG issues, its ESG management approach and strategy, and how it reviews progress on ESG related issues. The board must have a formal ESG governance structure, sufficient knowledge and expertise in ESG, internal risk management processes that connect to ESG risk management, an overall ESG strategy with clear goals and targets. The new requirements also have a shortened reporting deadline of five months for the end of listed companies’ financial years. The revised requirements are a step in the right direction, notes Sammie Leung, Climate & Sustainability Leader PwC Mainland China and Hong Kong. “The revision of the ESG disclosures have made waves in the market and led to many positive changes in the last couples of months,” she says. “Many C-suites have taken the changes seriously and the board of directors are now more aware of their expected responsibilities in ESG and climate-related topics. A number of my clients have renewed their governance structure, redefined their mandates of ESG, risks, corporate governance and added clarity to how each person would play a role in supporting the board of directors to oversee ESG matters for the listed company.” Before the HKEX updated its ESG reporting requirements, companies had been following its “comply or explain” requirements, which made it compulsory for listed companies to disclose their ESG policies and plans, and if not, explain why they are not able to. Prior to the release of the HKEX’s ESG Reporting Guide, most listed companies in Hong Kong chose to disclose their ESG policies using the GRI reporting framework. As of February this year, 75 percent of the world’s largest 250 corporations use GRI Standards to report on their sustainability performance. While it is the most widely used reporting framework globally, there are other frameworks companies can use to disclose ESG-related information (see sidebar on page 13). Organizations also have the choice of disclosing using reporting frameworks by the Task Force on Climate-related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB) and the Carbon Disclosure Project (CDP) and the International Integrated Reporting Council (IIRC). But the long list of reporting frameworks initially dissuaded companies, Leung notes, prompting the HKEX to release its ESG Reporting Guide in 2015. “In a way, the HKEX did the homework for companies to make everything more digestible and easy to understand,” she says. “By understanding the needs of international investors, looking through international set realistic KPIs, as setting the bar too low might bring more harm than good. “One way that companies ‘greenwash’ their reports is by setting KPIs that are easy to achieve to show that they are ‘achieving’ something to boost their image. This isn’t meaningful in any way,” she says. Greenwashing refers to the practice of companies marketing themselves or their products as more environmentally friendly than in reality. “So I always encourage companies to be honest with themselves, not only for the sake of meeting disclosure requirements, but do it properly and meaningfully to understand how their company is performing.” ESG-related tasks and ESG reporting is usually taken on by a company secretary, investor relations or even a sustainability department. However, as Yung notes, the finance department now plays a role in helping companies with their ESG-related tasks. “Setting KPIs involves a lot of data collection and analysis,” he says. “Accountants can help companies develop accounting policies for KPIs, such as setting a proper formula for a company’s energy intensity or staff turnover rate. We could also help determine with the board whether the correct internal controls are put in place to measure all this data.” Yung, who helps clients to set ESG goals and develop their ESG strategies, notes that some companies may at first opt to only disclose KPIs that look the best on paper. “We see this quite a bit, so it’s our job to advise them on this,” he says. “I tell them: ‘ultimately, the level of your company’s ESG performance isn’t quite as important as the level of your transparency. It’s always better to disclose bad news first, before the media or a non-governmental organization publicly criticizes you for non-disclosure.’” This, he adds, is even more important when it concerns listed companies, as a tarnished company image could deteriorate the trust of investors and stakeholders. To prevent this, clear lines of communications must be in place, notes Yung. “A more robust reporting system and regular communication needs to be established between a company’s operations and management regarding ESG issues. This will help management to be aware of red flags and issues that the company as a whole needs to respond to and report,” he says. “Incorporating ESG into a company’s risk management system will ensure that all risks, processes and controls will be properly monitored at corporate level.” “In a way, the HKEX did the homework for companies to make everything more digestible and easy to understand.” 12 November 2020
APLUS A multitude of frameworks The multiple non-financial reporting frameworks that are currently available can make it challenging for companies to decide which one to use for disclosing their environmental, social and governance performance. As no two companies are the same, it is crucial for organizations to choose a framework that reflects their industry, accurately discloses the nature of their operations and also meets the requirements of regulators, investors, stakeholders and customers. The Global Reporting Initiative (GRI) Standards is the most widely used ESG framework globally – it is used by more than 5,000 organizations worldwide. The first version of what was then the GRI Guidelines was published in 2000, providing the first global framework for sustainability reporting. It discloses a range of impacts, including climate change, human rights, governance and social well-being. It is used by companies in almost every sector and is favoured for its broader scope and specific disclosure guidelines. The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board in December 2015 to develop a set of voluntary, consistent disclosure recommendations for use by companies in providing information to investors, lenders and insurance underwriters about their climate-related financial risks. The framework primarily focuses on a company’s impact on climate change and discloses how organizations identify, assess, and manage their climate-related risks. Over 1,500 organizations disclose using TCFD recommendations. The Carbon Disclosures Project (CDP) has a global disclosure system for measuring and managing environmental impacts and the world’s largest database of primary corporate climate change information. Its disclosures cover climate change, supply chains, water usage and forestry management. The Sustainability Accounting Standards Board (SASB) was founded in 2011. In November 2018, it published 77 industry-specific reporting standards for companies to disclose material environmental risks. To date, over 100 companies disclose their ESG performance using SASB guidelines across industries such as consumer goods, finance, food and beverage, healthcare and infrastructure. SASB guidelines are mainly used by companies to communicate with their investors. The International Integrated Reporting Council (IIRC) first released its Integrated Reporting <IR> Framework in 2013. Integrated reporting focuses on the value companies can create beyond its financials – something critical to long-term success. This includes building strong relationships with stakeholders, building a loyal customer base, developing intellectual capital and managing environmental risks. Instead of a detailed disclosure and measurement standard, it is a principles-based framework enabling companies to set out their own report instead of adopting a checklist approach. On 25 November, SASB and the IIRC announced that they would merge to become the Value Reporting Foundation in mid-2021 in a move to push for the harmonization of existing ESG reporting frameworks. An increasing number of observers are calling out for an alignment of the slew of frameworks to move away from the current fragmented approach. Recent developments signify a strong drive towards achieving this. For example in September, the International Federation of Accountants published Enhancing Corporate Reporting: The Way Forward, a roadmap for the creation of an international sustainability standards board alongside the International Accounting Standards Board. frameworks and many market consultations over several years, they came up with a shorter list for Hong Kong-listed companies.” Though the list of ESG reporting requirements is shorter than that for other stock exchanges, Yung believes it was a step in the right direction for the progression of ESG in Hong Kong. “ESG is still relatively new in Hong Kong,” Yung says. He notes that following the launch of the HKEX’s reporting guide in 2015, the number of ESG reports and the quality of those reports increased in Hong Kong. “There were more strategic and action plans put in place, and companies also became more transparent about their ESG disclosures.” The obligatory nature of the ESG reporting requirements stipulated by the HKEX also served as a wake up call for company management. “More company board members started taking it more seriously – it wasn’t something they would do just for public relations purposes anymore,” he says. THE ROLE OF ACCOUNTANTS Accountants play a key role in helping companies with their ESG reporting and can help a company improve its ESG performance in the long run. From the start, they can advise companies that aren’t familiar with the HKEX’s ESG Reporting Guide, what materiality assessments to conduct, what specific KPIs and goals to get and how to bring businesses closer towards those goals. Accountants can also advise the board on mitigating any ESG-related risks before they happen. “To be honest, many companies are still in the starting stage in terms of their ESG journey,” notes Ng at KPMG. “They don’t expect to tackle something sophisticated at the beginning and don’t know what they need.” As some companies may already have dedicated departments to work on ESG matters and reporting, they may require only consulting at the beginning. Other companies may need advisory for their ESG report annually. Accountants like Ng help as consultants getting businesses up to speed. “First, we need to speak with companies to understand their expectations and vision – what they want to achieve,” she says. For the first few years, she adds, businesses simply want to meet the HKEX’s ESG requirements, though other more competitive companies may aim higher to attain better score from rating agencies. Ng says it’s crucial for consultants to speak with management, key November 2020 13
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