What are the benefits of doing ESG? How do SMEs implement ESG in Hong Kong?

Being an international financial centre and a responsible member of the global community, Hong Kong pledges to become carbon neutral by 2050 under the Paris Agreement. Investors, corporations, and stakeholders in Hong Kong are increasingly focusing on embedding ESG elements into their core corporate strategies. They are spending substantial time, money and resources to become ESG compliant and manage the ESG risks in their businesses.

Before you prepare processes for ESG compliance, you must understand the basics of ESG and the benefits of doing it. Let’s get this show on the road.


Why do SMEs need to achieve ESG?

Here are some of the internal and external benefits of doing ESG:

Internal benefits

1. Prevents talent loss

ESG contributes to the creation of a positive corporate culture and prevents “brain drain”. The ESG focuses on employee relations and diversity, ensuring that both men and women have equal opportunities at work, and providing training courses to help employees develop their career paths. A company with an ESG mindset is concerned with its employees' health and well-being, which contributes to a sense of belonging and prevents talent loss.

2. Simplify workflow

ESG focuses on greenhouse gas emissions, such as managing documents in the cloud and automating all other paper-based tasks. Using a cloud-based solution not only save trees and reduce paper consumption, but also save time, improves productivity and mitigates human error risks. Paperless office solutions are more efficient than paper-based workflows.


External benefits

1. Attract potential investors

Due to the rising investor appetite for green and sustainable finance, SMEs should increasingly integrate ESG elements into their financial processes to outperform their peers. According to a joint survey conducted by HKTDC and PwCHK, 50% of respondents believed that if they neglect ESG factors, it would lead to missed opportunities to attract potential investors and client loss. Moreover, nearly 40% of respondents said that ESG factors could undermine their corporate reputation and long-term growth.

2. Reach target audience

ESG opens new business opportunities and provides greater competitiveness. Younger generations are more concerned about environmental sustainability. Young millennials and Gen Z are willing to pay 10% more for sustainable products. This means more chances to become the audience's favorite and attract Gen Z investors.



What is ESG?


ESG is an acronym for Environmental, Social, and Governance. These are three non-financial factors that today’s CFOs and Investors are increasingly considering as part of the business model. ESG-minded business practices help CFOs gain more traction from investors. Though ESG scoring is not mandatory for financial analysis, companies are increasingly making ESG reports as part of their annual financial report to demonstrate sustainable and responsible business practices.



What is ESG reporting?


ESG reporting refers to the disclosure of environmental, social and corporate governance data of a company. The below three key fundamental factors summarizes the qualitative and quantitative benefits of a company’s ESG activities, ESG metrics clearly demonstrate the company’s promise to environmental sustainability.


3 key fundamental factors:


1. Environmental aspect

ESG environmental criteria focus on a company's environmental impact and risk management practices. It includes:


  • Climate change and carbon emissions

  • Energy efficiency

  • Waste management

  • Pollution

  • Natural resource conservation

  • Treatment of animals

  • Biodiversity

  • Deforestation

2. Social aspect
ESG social criteria focus on the company’s relationships with suppliers, local community, employees, and other stakeholders. It includes:

  • Diversity and inclusion

  • Employee’s health and well-being

  • Customer satisfaction

  • Data protection and privacy

  • Community/Human rights

3. Governance aspect
ESG governance criteria encapsulates how an organization operates internally, its corporate cultures of transparency, accountability, compliance, political stances, and its relationship with stakeholders.
It includes:

  • Company’s leadership

  • Internal controls

  • Shareholder rights

  • Audit committee structure

  • Bribery and corruption

  • Political contributions

  • Whistleblower schemes


What is ESG scoring?

ESG scoring helps organizations (especially publicly traded companies) to attract financing from potential investors for their ESG efforts. Just like a credit score or a bond rating, ESG scores represent a company’s potential to bring off ESG goals as compared to their competitors.


What is a good ESG score?

There’s no standardized approach to calculating ESG metrics. Organizations are graded by third-party providers including Bloomberg ESG Data Services, Sustainalytics ESG Risk Ratings, Dow Jones Sustainability Indices, RepRisk, Global Reporting Initiative’s Sustainability Reporting Standards, ISO 26000 Guidance on Social Responsibility, and TCFD Recommendations, to name a few. 

Bloomberg and Corporate Knights grade organizations on a 100-point scale based on their Methodology, scope, and coverage. Thomson Reuters grades between 0 (worst) and 1 (best), and RepRisk measures on its own Index (0 to 100) and provides ESG ratings from AAA to D.

In Hong Kong, Hang Seng Indexes collaborates with Hong Kong Quality Assurance Agency (HKQAA) to provide ESG ratings for Hong Kong-listed companies by considering seven ESG aspects.