breaking the silence on environmental risk

Breaking the silence on environmental risk

THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES i

The Hong Kong Institute of Chartered Secretaries

(Incorporated in Hong Kong and limited by guarantee)

GOOD GOVERNANCE COMES WITH MEMBERSHIP

The Hong Kong Institute of Chartered Secretaries is an independent professional body with approximately 4,900 members

and 2,600 students. It is dedicated to the promotion of its members’ role in the formulation and effective implementation of

good corporate governance policies in Hong Kong and throughout China as well as the development of the profession of

Chartered Secretary.

The Institute was first established in 1949 as an association of Hong Kong members of the Institute of Chartered Secretaries

and Administrators (ICSA) of London. It became a branch of ICSA in 1990 before gaining local status in 1994.

HKICS issues two sets of post nominals to its Members who qualify locally. One set on behalf of HKICS: FCS for Fellows and

ACS for Associates, and one set on behalf of the international body ICSA: FCIS for Fellows and ACIS for Associates.


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THE HONG KONG INSTITUTE OF CHARTERED SECRETARIESii

There are few who would argue that the state of Hong Kong’s environment is now a source of disquiet for its residents. Theair that we breathe, the water we drink and very earth on which we walk seems to be deteriorating on a daily basis if somereports are to be believed. And so it is timely that The Hong Kong Institute of Chartered Secretaries (Institute) publishes thisresearch paper on Environmental Reporting.

The world of business has not traditionally been held in high regard by environmentalists in terms of the concern it showsfor Mother Nature. This research paper shows that while every company has an impact on the environment regardless ofsector and type, few senior managers and directors have an idea of why Environmental Reporting is necessary or whatfunctions or benefits such reporting can bring. This is despite the fact that 80% of those surveyed as part of the Institute’sresearch into the subject acknowledge that pollution is a serious matter for Hong Kong.

The Institute believes that Environmental Reporting can help stakeholders make informed decisions as to the relationshipthey want with a company. That might be as an investor, customer, supplier, and employee or perhaps even a regulator. Bybeing open on their policies on recycling, waste disposal, travel and so on companies can give a positive message that theycare about the environment. This can be a very attractive position to take in today’s competitive business environment.Environmental Reporting also forces companies to face the reality that they have a real and measurable impact on theenvironment and, hopefully, will also force senior management’s hand on how best to minimise the negative impact andmaximise the positive through creative solutions and risk management - an often overlooked benefit of environmentalreporting.

As President of the Institute I would like to urge all companies to adopt environmentally friendly practices whereverpossible and include Environmental Reporting in your statutory reports. We also urge the government to take a similarstance in encouraging particularly the listed companies to take a proactive approach to Environmental Reporting. Thecorporation is an ‘artificial person’ created by law and so bears a social responsibility to the environment no different from anatural person. If the business world does not take the initiative to pay attention to environmental issues and voluntarilyinclude certain Environmental Reports in their statutory reports such as Annual Reports, in future they might find themselvesin a situation where the government forces their hand by making the reporting of such matters mandatory.

The environment matters. The business world should take a lead and prove that it cares. A first good step would be theinclusion of an Environmental Report in the next tranche of Annual Reports. We are at a critical stage in terms of decidingwhat to do about the high levels of pollution in Hong Kong, consequently this timely research paper makes for interestingand sometimes worrying reading.

All research reports are a collaborative effort but ultimately there is one person who leads. In this case it was Loretta Chanthe Institute’s Director, Technical and Research. On behalf of Council and indeed all members I offer my sincere thanks toLoretta and the rest of the team at the secretariat which included part time research assistants Mandy Lee, Iris Fung andElton Ma.

I would also like to thank fellow Council member Dr Brian Lo who, together with Professor Vanessa Stott of The Hong KongPolytechnic University, School of Accounting and Finance, took the role of outside consultants. Your contributions wereinvaluable. Special thanks should go to Kieran Colvert, Editor of CSJ, the Institute’s official journal, who stepped in at thelast moment to add a final polish and edit to the research paper. To all those who helped but are not mentioned this is dueto space constraints, your contributions are appreciated and valued and on behalf of the Institute I thank you all.

Richard LeungPresident,HKICS 2005-6

F O R E W O R D

THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES iii

Concerns have been rising recently over the quality of our air. The environment we live in, pollution and the depletion of

the world’s natural resources not only affect us but also the generations to come. Needless to say, they also have an impact

on our attractiveness as an international financial centre.

At Hong Kong Exchanges and Clearing (HKEx), we recognise our duty to minimise the environmental impact arising from

our operations and seek opportunities to reduce and recycle the resources we consume. Our environmental management

procedures include the eIPO system, where applications for shares in an IPO can be made online, recycling paper waste

and IT equipment, and using energy saving office equipment. We also hope to work to reduce the size of prospectuses and

hence decrease the use of paper. This follows our earlier efforts to encourage listed companies and their shareholders to opt

for electronic copies of company reports.

We are committed to environmental improvement and pollution prevention and call on companies to do the same. Indeed,

this Environmental Reporting Research Report is a timely reminder to us all of our responsibility to sustainable development

and of the increasing relevance of social, environmental and governance factors in a firm’s financial performance.

This report contains valuable information from our listed companies and their views on environmental issues and whether

environmental reporting should be made mandatory. I believe the report contributes meaningfully to informed discussion

and debate about our environment and the role companies should play, and I commend it to you. Greater awareness is the

first step on any journey of improvement.

I thank The Hong Kong Institute of Chartered Secretaries for their work in preparing the report and also for their

recommendations on the way forward for us all to consider. HKEx believes there is value for companies to strive to enhance

their social accountability and improve their corporate governance practices, and we will continue to carefully monitor

market views on this and other matters.

Ronald Arculli

Chairman

Hong Kong Exchanges and Clearing Limited

P R E F A C E

1. Introduction 1The HKICS view 2

The survey 3Summary of the findings 3

Summary of the recommendations 4

2. Background 4What is environmental reporting? 4

What are the functions and benefits of environmental reporting? 5Recent developments in other jurisdictions 14

Should environmental reporting be made mandatory in Hong Kong? 18How to get started? 19

What distinguishes a good environmental report from a mediocre one? 20

3. Survey Findings 23Response rate and profile of the respondents 23

Key findings 24General opinions of the respondents 34

Respondents’ comments on environmental reporting issues 40Additional observations 42

4. The Way Forward for Hong Kong — Recommendations 43Regulatory incentives 43

Market Indices 44

5. Conclusions 46Annex 1 Questionnaire 47

Annex 2 Extracts of the Interviews 53Annex 3 Drivers for Change 62

Bibliography 66

Acknowledgements 68

THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES 01

ENVIRONMENTAL REPORTING1. INTRODUCTION

In April and May 2006, The Hong Kong Institute of Chartered Secretaries (“HKICS”) carried out a survey of all 961

companies listed on the Main Board of The Stock Exchange of Hong Kong Limited (“Exchange”) to find out the extent

of environmental reporting (“ER”) in Hong Kong. There has been an increasing trend overseas for mandatory reporting

on companies’ environmental risks and impacts (see “Recent developments in other jurisdictions” below). Since

1999 it has been mandatory for all government bureaux and departments and government-owned organisations in

Hong Kong to publish yearly environmental reports. The government hopes that this mandatory adoption of ER in the

public sector will encourage the private sector to follow suit. However, over the past six years, though the number of

corporations engaging in ER is growing, ER is still at a nascent stage in Hong Kong when compared with countries

such the UK, Australia and Japan.

This HKICS survey confirms the view that very few Hong Kong companies are engaged in ER. The survey comprised

two parts. The primary data came from a questionnaire sent in May this year to all 961 Main Board listed companies

soliciting information on, among other things, whether they are currently reporting on their environmental risks and

impacts, and, if not, whether they have the intention to do so in the coming three years. This questionnaire-based

survey found that 16 out of the 48 respondent companies (or 33.3%) are engaged in ER. This does not, of course,

reflect the actual percentage of Main Board listed companies engaged in ER since only 5% of the companies

approached responded to the questionnaire. This disappointing response rate per se is evidence of the lack of interest

in, and knowledge of, ER. A survey conducted by the Hong Kong Environmental Protection Department (“EPD”) in

2005 found that 10% of Main Board listed companies were engaged in ER in some form.

Supplementing the data from the questionnaire-based survey, publicly available information (such as annual reports,

sustainability reports, corporate social responsibility reports and corporate websites) of the 201 Main Board listed

companies which were the constituent stocks of the Hang Seng Composite Index (“HSCI”) were analysed in April this

year. This HSCI survey found that 10 of the 201 companies surveyed had published standalone environmental

reports, or corporate social responsibility (“CSR”) or sustainability reports of which environmental reports form a

part, while 42 had disclosed to a certain extent their environmental performance through other channels, such as

their annual reports or corporate websites. In other words, it showed that about 26% of HSCI constituent stocks were

engaged in ER.

ER is clearly a low priority for most listed companies in Hong Kong. The questionnaire also asked questions probing

attitudes to ER among respondents, and the dominant attitude seems to be that ER has little to do with their business.

This perception is probably rather deep-rooted since about 87.5% of those surveyed companies which are not

currently engaging in ER indicated that they have no plan to do so in the coming three years. This shows that they do

not believe that they can gain much out of this exercise. It is unlikely, therefore, that there will be a sharp increase in

the uptake of ER by listed companies in Hong Kong in the next few years.

The companies engaged in ER tend to have relatively large market capitalisations, or have a potentially great

environmental impact, such as power and aviation companies. Many respondents sought to explain the absence of

environmental data in their reports by suggesting that since their businesses have nothing to do with the environment

ER is irrelevant to them. Such an opinion reflects a lack of understanding of the fact that every company, by its

operations, services or products, has an impact on the environment.

THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES02

ENVIRONMENTAL REPORTINGSimilarly, few of the surveyed companies appear to include environmental risks as part of their risk management

systems. Even for those companies engaged in ER, the three main drivers cited were: “consistency with corporate

values or ethics”, “reputation/brand building” and “promotion of the employees’ awareness of environmental

protection”. Few chose “risk reduction” as a driver. It seems that the effectiveness of ER as a tool to identify and

control potential risks faced by a company is not fully understood or accepted by the business community in Hong

Kong.

It also seems that few companies have made the association between environmental risk and the financial performance

or the competitiveness of a company. Improvement of financial performance and the competitiveness of a company

can be achieved through increasing its efficiency and reducing operational costs, which in most cases can be

facilitated by efficient use of raw materials, energy saving and the reduction of waste. Of those 16 surveyed

companies which have been engaged in ER, only two chose “cost reduction” as a driver.

The HKICS view

The HKICS believes that a wider uptake of ER in Hong Kong will bring substantial benefits, not only to the companies

involved, but also to the reputation of the Hong Kong market. Since international standards in this area have risen

dramatically in the last decade as the dire potential consequences of climate change, pollution and resource depletion

have started to be taken more seriously, Hong Kong needs to consider the damage that is being done to Hong Kong’s

reputation in the investment community on account of its low environmental reporting standards (see “Drivers for

Change” in Annex 3).

This research paper analyses the benefits of ER (see “What are the functions and benefits of ER?” below). It argues

that, apart from being a communication tool between a company and its various groups of stakeholders, it is also an

effective tool for managing environmental and operational risks. In addition, it can enhance the competitiveness and

the shareholder value of the company in the long run. The HKICS survey indicates that the lack of understanding of

ER and its benefits within the Hong Kong business community has generated the prevailing misconception that it is

irrelevant to them and is a burden on companies rather than a potential benefit. The HKICS intends this research

paper to argue the case for the benefits of ER, and also to provide practical guidance for companies on how to start

reporting on their environmental risks and impacts (see “How to get started” below).

The HKICS survey also shows that a majority of respondents consider that there is insufficient regulatory incentive for

listed companies to engage in ER, with 62.5% of those which are not engaging in ER citing the fact that it is not a

legal requirement as the main reason for not reporting. When asked what would encourage them to take up ER,

65.6% cited “regulatory incentive”. Moreover, 68.1% of all respondents agreed (6.4% of them strongly agreed) that

there are currently not enough regulatory incentives for listed companies to engage in ER in Hong Kong. However,

51.1% of the respondents agreed (with 6.4% strongly agreeing) that ER should remain voluntary. When the question

was put the other way around, that is, when respondents were asked if they agreed that it should be made mandatory,

only 29.8% of them agreed.


ENVIRONMENTAL REPORTINGThe HKICS does not support the view that ER should be a mandatory requirement. Given the lack of understanding of

ER in Hong Kong, making it a mandatory requirement runs the risk of a high rate of non-compliance, and the

encouragement of a “checklist mentality” towards environmental disclosure. There are, however, a number of ways

to motivate the less committed companies to take up ER as soon as practicable. This research paper therefore

recommends that the Exchange should introduce ER as a Recommended Best Practice in the Code on Corporate

Governance Practices (“CG Code”) as soon as practicable, and issue guidelines to listed companies to help them start

engaging in ER. The establishment of a Hang Seng Environment Index, and a CSR Index or Sustainability Index, in the

long run is also recommended as a way to promote ER and CSR in Hong Kong.

The survey

A questionnaire (see Annex 1) was sent to all 961 companies (as at 12 May 2006) listed on the Main Board of the

Exchange. Respondents were asked, among other things, to indicate if they undertake ER, what are their main drivers

and barriers for ER, and for those which are not engaged in ER, whether they have the intention to do so in the

coming three years. Their comments were also solicited on various issues including whether ER should be a mandatory

practice in Hong Kong. The findings of this questionnaire-based survey will be discussed later in this research paper.

Apart from the questionnaire-based survey, all 201 Main Board listed companies which were the constituent stocks

of the Hang Seng Composite Index as at 10 April 2006 have been taken as samples for another survey (“HSCI

Survey”). Information was obtained from publicly available sources such as their latest annual reports, sustainability

reports, CSR reports and corporate websites. The main purpose of this exercise was to find out how many of the

surveyed companies were engaged in ER in any form.

Face to face interviews were also conducted with seven individuals involved in relevant areas, such as environmental

protection, social responsibility investment, research in corporate environmental management and the preparation of

environmental reports (see Annex 2 for the identities of the interviewees and extracts from the interviews). The

interviewees were asked to comment on various issues relating to ER and environmental protection.

Summary of the findings

Sample Size:

Questionnaire respondents: 48

HSCI companies surveyed: 201

• 16 (33.3%) of the questionnaire respondents are engaged in ER.

• 52 (26%) of the HSCI companies surveyed are engaged in ER.

• 10 (5%) of the HSCI companies surveyed publish standalone environmental reports.

• 25 (52.1%) of the questionnaire respondents indicated that they have an environmental policy.


ENVIRONMENTAL REPORTING• 20 (62.5%) of the questionnaire respondents which are not engaged in ER cited the fact that it is not a legal

requirement as the reason for not doing it.

• 28 (87.5%) of the questionnaire respondents which are not engaged in ER indicated that they have no plan to

do so in the coming three years.

• 21 (65.6%) of the questionnaire respondents which are not engaged in ER cited “regulatory incentive” as the

primary driver which would influence their future adoption of ER.

• 24 (51.1%) of 47 questionnaire respondents believe that ER should remain voluntary in Hong Kong.

Summary of the recommendations

• The Exchange should introduce ER as a Recommended Best Practice in the CG Code.

• The Exchange should issue guidelines to listed companies detailing what it expects of them as regards ER.

• Seminars or workshops relating to ER should be organised by regulators jointly with the EPD.

• The environmental reports, CSR or sustainability reports published by listed companies should be made

accessible on the websites of the Exchange and the EPD (subject to the consent of the relevant companies).

• The establishment of a Hang Seng Environment Index, and a CSR Index or Sustainability Index, should be

considered as a long-term goal.

2. BACKGROUND

What is environmental reporting?

An environmental report is a communication document describing the link between a company and the environment.

It is usually produced with the objective of establishing a dialogue concerning environmental issues with stakeholders

of the reporting company. It relates closely to the wider concept of “sustainable development” which according to

the most widely used definition, known as the Brundtland definition1, means “a form of development that meets the

needs of the present without compromising the ability of future generations to meet their own needs”.

ER is also closely related to the concept of CSR which does not have a fixed meaning but can generally be taken to

mean the integration of social and environmental concerns with business operations and in the interactions with the

stakeholders of a corporation on a voluntary basis2.

1 The Brundtland Report, representing the growing global awareness of the enormous environmental problems facing the planet, is the report made by

the World Commission on Environment and Development in 1987. It is often called the Brundtland Report after the chairperson of the commission, the

then Minister of Norway, Mrs Gro Harlem Brundtland.2 p.6 of European Union Green Paper — “Promoting a European Framework for Corporate Social Responsibility” (2001)


ENVIRONMENTAL REPORTINGThe interlinking of these three concepts explains why some corporations now report on their environmental impacts3

in sustainability reports, or CSR reports, which also incorporate the social and economic dimensions of a company.

This HKICS research paper will, however, focus on environmental reports, while references will also be made to CSR

reports and sustainability reports from time to time in view of their close connection with ER.

ER is commonly seen as a form of non-financial reporting by the business world. To categorise ER as non-financial

reporting is not necessarily wrong, but it would be a fallacy to assume that the information disclosed in environmental

reports does not have any financial implications for the reporting company. On the contrary, data on a company’s

energy consumption, waste production and any hazardous emissions have obvious financial implications. Environmental

information can be translated into financial terms by the development of environmental accounting techniques

which help assess accurately and consistently how well the environmental costs and liabilities are incorporated into

the financial statements of a company.

Financial reporting, having evolved over a longer period of time, has become well established in terms of its

framework and standards. ER however, is a new concept for most companies, investors and the general public. It

may take some time for people to recognise the fact that the financial performance of a company is affected by many

factors left outside the scope of its financial statements, and ER, sustainability or CSR reports can help close this gap.

The combination of disclosures in the non-financial reports and the financial data disclosed in the traditional

financial reports can provide a fuller picture of the company.

What are the functions and benefits of environmental reporting?

1. Social accountability

With the emergence of CSR, the demand for more transparency and accountability for the environmental and

social impacts of corporate conduct has increased. The principle of “shareholder primacy” which advocates

that directors’ rights should be exercised only for maximising shareholders’ wealth has faced great challenges

and become less and less tenable as the belief that corporations have broader social responsibilities becomes

more prevalent. There has been a lot of debate in this area. An argument advanced to support this broader

view is that since the act of incorporation confers a lot of privileges such as limited liability, society is entitled

to expect that a corporation will act in the interests of the general public and not just for self-interest.

In the UK, the concept of “enlightened shareholder value” was introduced in the Companies Bill 20054. The

Bill requires directors to take a balanced view of the implications of decisions over time and take due account

of both long-term, short-term and wider factors such as the need of the company to maintain an effective

relationship with its employees, customers and suppliers. While the primary duty of directors is to “promote

the success of the company for the benefit of its members as a whole”, they must in fulfilling such duty, have

regard to various things including “the impact of the company’s operations on the community and the

environment”5.

3 According to the Sustainability Reporting Guidelines of the Global Reporting Initiative, “environmental impacts” mean an organisation’s impact on

living and non-living natural systems, including eco-systems, land, air and water.4 The Bill was introduced to the House of Lords on 1 November 2005. The title of the Bill was changed from “Company Law Reform Bill” to “Companies

Bill” during the committee stage in the House of Commons in July 2006.5 Clause173(1) of the Companies Bill.


ENVIRONMENTAL REPORTINGBusiness operations can generate considerable impacts on the environment. The public, being co-owners of

the environment, is getting more conscious of its right to know more about the social and environmental

impact created by a company in its business operations. ER is an effective channel for a company to disclose

to the public its environmental performance and impact.

2. Communication with stakeholders

The notion of “stakeholders” reflects the idea that the conduct of corporations can affect a broader range of

people other than shareholders. The term does not refer to a homogeneous group and does not have a precise

definition, but it can be interpreted as “groups vital to the success and survival of a corporation”6. According

to the Corporate Social Responsibility Discussion Paper issued by Corporations and Markets Advisory Committee

of the Australian Government, published in November 2005 (“Australian CSR Discussion Paper”), the term

can include:

• shareholders, who unlike other stakeholders, have a direct equity interest in the company;

• other persons with a financial interest in the company such as financiers, suppliers, creditors or

business partners;

• persons who are involved in the wealth creation of the company, e.g. employees and consumers;

• anyone otherwise directly affected by a company’s conduct e.g. the local community; and

• pressure groups or NGOs usually defined as public interest bodies that espouse social goals relevant to

the activities of a company.

It is in the best interest of a company to take into account the views, legitimate needs and expectations of its

stakeholders. The long-term shareholder value and profitability of a company always depends on meeting the

fair expectations of its stakeholders. The OECD Principles of Corporate Governance (2004) states that:

“The governance framework should recognise that the interests of the corporation are served by recognising

the interests of the shareholders [including employees and creditors] and their contribution to the long-term

success of the corporation”.

Effective communication with its stakeholders is therefore crucial for the success of a corporation. Traditionally,

financial reports used to be the only communication document issued by companies and financial information

was the only important information which the company had to disclose to its stakeholders. Nowadays, there is

growing acceptance that the way a corporation discloses and deals with its environmental, social and other

non-financial risks does have a bearing on its financial viability. The importance of ER has therefore been

growing rapidly.

6 p.27 of Corporate Social Responsibility Discussion Paper published in November 2005 by Corporations and Markets Advisory Committee of the

Australian Government.


ENVIRONMENTAL REPORTINGBelow we look at companies’ potential stakeholders and their interests in ER.

a. Shareholders

Shareholders are a major group of stakeholders to whom the directors of a corporation are directly

accountable. Unlike the other groups of stakeholders, shareholders can exert influence on the corporate

decisions through the exercise of voting rights in the shareholders’ meetings. In recent years, shareholders

worldwide are generally more conscious of their rights to information. The increase in the awareness

of shareholders’ rights has generated greater demand for transparency and accountability from

corporations. ER is an effective tool for the communication of environmental policies and efforts of the

corporations with their shareholders.

b. Customers and employees

Customers may make their choices about products or services based on the production method or

environmental impact of a corporation. Eco-labelling nowadays plays an important role in the marketing

of goods and services in some countries such as Japan and the European Union (“EU”). The EU eco-

label “flower” can be found in some 300 products and services from all EU countries which have

reached certain criteria in respect of the raw material extraction, manufacture, distribution and final

disposal. Customers have more confidence in products or services with eco-labels which will be of

particular importance to those customers who are more environmentally conscious. The commitment

of a corporation to social and environmental values may also enhance its reputation and motivate

talented people to work for it. It can also increase the environmental awareness of the staff of the

corporation and boost their morale.

c. Lenders

The growing importance of environmental management to the financial community is also evident.

Lenders, investors and insurers are paying more attention to the environmental risks and performance

of corporations when they evaluate their financial risks.

The Equator Principles, a voluntary set of guidelines initially developed by a small group of banks

together with the World Bank Group’s International Finance Corporation in 2003 for managing social

and environmental issues relating to financing of projects, have been adopted by over 40 financial

institutions7 around the world as an important step in promoting responsible project financing. Through

the Equator Principles, financial institutions undertake to provide loans only to those projects which

can be developed in a socially responsible manner and reflect sound environmental management

practices. The Principles were revised in July 20068 and the revision “underscores how far the financial

sector has progressed in embedding in the project finance arena a common set of best practices to

manage social and environmental risks related to project financing”. The threshold for application of

the Equator Principles has been lowered from US$50 million to US$10 million and they now also

apply to project finance advisory activities.

7 As of June 2006, there were 41 financial institutions which have adopted the Equator Principles and it is estimated that they cover approximately 80%

of global project lending.8 See the press release issued by the Equator Principles Financial Institutions on 6 July 2006.


ENVIRONMENTAL REPORTINGThe Hong Kong and Shanghai Banking Corporation Limited (“HSBC”) adopted the Equator Principles in

2003 as a “wider approach to managing sustainability risks in lending and investment”. According to

the HSBC Corporate Social Responsibility Report 2005, the Equator Principles have been implemented

across the group and training has been extended beyond its project finance teams to include staff

responsible for managing relationships in industries with potentially high environmental and social

risks. Decision support tool is also being developed for assessing environmental and social risks in a

consistent and structured manner. The Standard Chartered Bank also adopted the Equator Principles in

2003. In its publication, Sustainable Lending and the Equator Principles 2005, it is stated that it is the

bank’s policy “for all lending proposals to consider environmental and social issues, taking into

account all recognised standards or local laws” and “there is no monetary threshold to the policy,

which covers all transactions where there is a clear link between the purpose of the funding and an

environmental or social consideration”. Sustainable lending training is also given as part of its overall

risk training programme.

Banks and financial institutions play a key role in bringing natural resources to the market. Adoption of

the Equator Principles will increasingly be recognised as a good governance and risk management

practice on the part of the lenders. ER by the borrowing companies is hence an effective way to help

lenders understand their environmental performance and management. Further, it can facilitate the

grant of loans.

d. Investors

In making investment decisions, investors may consider whether the target corporations have met

certain environmental, social and ethical standards. This approach is usually referred to as “Socially

Responsible Investment” or “Sustainable and Responsible Investment” (“SRI”). The development of SRI

worldwide has been facilitated by the establishment of various corporate responsibility market indices

such as the Dow Jones Sustainability Index in the US, the FTSE4Good in the UK, the SRI Index in South

Africa and the RepuTex SRI Index in Australia. These indices have been designed for measuring the

performance of companies which meet globally recognised corporate responsibility standards and

facilitating investment in these companies.

The concept of SRI is still new to Hong Kong and there is no local SRI Index. However, in some

countries, SRI has been developing rapidly. In Australia, product issuers which offer a financial product

with an investment component are required to disclose in their product disclosure statements the

extent to which they take into account environmental, social or ethical considerations in their selection

of investment. They should expressly state that they do not take these considerations into account if

that is the case9.

9 Section 1013DA, Disclosure Guidelines, Australian Securities and Investments Commission.


ENVIRONMENTAL REPORTINGIn the UK, starting from July 2000, pension fund trustees have to disclose the extent to which social,

environmental and ethical considerations enter into their investments10. In the light of such requirement,

major fund managers in the UK in turn also require companies to publish comprehensive environmental

reports. Thus, identifying environmental risks and opportunities is becoming increasingly important for

institutional investors11. Likewise, in other European countries, such as France, Germany, Sweden and

Belgium, there are similar disclosure requirements for the pension fund managers.

e. Business partners

Many large corporations are greatly concerned about green procurement and have implemented CSR

strategies in their supply chain and management of supplier risk. Suppliers of these corporations are

required to set out their environmental or social practices in the tenders or to comply with the code of

conduct compiled by the corporations. To incorporate environmental concerns into the supply chain is

an effective way to transfer best practice and achieve environmental targets through collaboration. In

view of globalisation, supply chain management has become more and more critical. Hence, ER of the

suppliers which communicate their environmental performance to the purchasers is getting more

important.

f. Other stakeholders

The above groups are the major stakeholders that corporations have to engage in the course of their

business. Other stakeholders such as credit rating agencies and other interest groups may also require

information about the environmental practices and performance of corporations for compiling the

rating or benchmarking tools. Such tools are useful for providing peer comparisons and measurement

of the progress of environmental performance of corporations.

ER is a form of stakeholder engagement which in simple terms means “the various mechanisms that

have been used by organisations to listen to, and account for, the views of stakeholders as well as

involving them in the provision of solutions” to the corporations12. As it has been pointed out in the

Global Reporting Initiative’s Sustainability Reporting Guidelines13, “a primary goal of reporting is to

contribute to an ongoing stakeholder dialogue. Reports alone provide little value if they fail to inform

stakeholders or support a dialogue that influences the decisions and behaviour of both the reporting

organisation and its stakeholders”. ER is thus the beginning of a dialogue between a corporation and its

stakeholders on environmental issues. It should be kept going by continuous interaction and efforts on

both sides. On another level, ER also assists the stakeholders to make their decisions regarding the

reporting companies, be it an investment decision, purchasing decision or lending decision. In short,

ER being part of the stakeholders engagement process, enables the reporting company to find solutions

with the input of its stakeholders. On the other hand, it helps its stakeholders make informed decisions

regarding the company.

10 Pursuant to an amendment to the UK Pension Act which came into force in July 2000.11 According to a survey released by Just Pensions and the Trades Union Congress in February 2003 on the attitudes of UK pension fund trustees toward

socially responsible investing, 69% of the surveyed pension fund trustees practiced stock selection that took into account social, environmental andethical issues specified in their Statement of Investment Principles.

12 p.34 of Australian CSR Discussion Paper.13 p.9 of 2002 version of the Guidelines.


ENVIRONMENTAL REPORTING3. Risk management and competitive edge

For the corporations undertaking ER, the collection and disclosure of data and information concerning

environmental issues will yield scope for improved management practices and can therefore lead to increased

competitiveness.

a. Pledge and review

In an environmental report, the reporting company will always state its environmental policy, objectives

and efforts towards strategic management of environmental issues. By disclosing its targets and the

state of its environmental activities, the company is motivated to evaluate its own performance on a

regular basis, an effect known as “pledge and review”. It drives the company to identify its own

shortcomings and methods for improvements.

b. Risk management

A well-managed company should have regard to a wide variety of risk factors including non-financial

risks which are likely to impinge on its operations. Identifying and assessing potential risks facing a

company and taking measures to avoid or manage the risks is therefore extremely important for the

management of a company. Risk management is an integral part of good corporate governance. There

is no requirement in the Rules Governing the Listing of Securities on the Exchange (“Listing Rules”)

that a Main Board listed company should establish a risk management system.

However, in Code Provision C.2.1 of the Code on Corporate Governance Practices (Appendix 14 to the

Listing Rules), it is provided that:

“The Directors should at least annually conduct a review of the effectiveness of the system of internal

control of the issuer and its subsidiaries and report to the shareholders that they have done so in their

Corporate Governance Report. The review should cover all material controls, including financial,

operational and compliance controls and risk management functions”.

Though there is no express reference to social and environmental risks, the management of environmental

risks should clearly come within the scope of the above Code Provision C.2.1. Management of non-

financial risks may not be able to help a company maximise profits in the short term. However, the

failure to do so may result in an increase in its operating costs, an increased risk of litigation, regulatory

intervention, damage to its reputation and brand, and loss of community support. These risks are all

detrimental to the business performance and financial position of a company.

The emergence of the concept of “corporate environmental management” (“CEM”) and “corporate

environmental governance” (“CEG”) is evidence of increasing awareness of the need of companies to

manage their environmental risks.

ENVIRONMENTAL REPORTING


CEM is defined as “values, norms, processes and institutions through which companies attempt to

ensure that they operate in a safe and environmentally sustainable manner” and it extends beyond

compliance with environmental legislation14. It requires incorporation of environmental systems and

tools in business strategic planning to ensure that environmental issues are integrated into the overall

corporate objectives.

CEG is defined as “the policies, procedures, and practices developed by companies to reduce the risk

of their operations causing damage to the environment, to help them use resources more effectively,

and to demonstrate to stakeholders and the public that they operate in an environmentally friendly

way. More specifically, it involves setting out the responsibilities of directors and establishing the

accountability of the board to the company’s stated environmental objectives, as well as their

effectiveness in meeting those requirements. These may include mechanisms for corporate environmental

reporting, the adoption of in-house environmental management and auditing systems, certification

under the ISO 14000 series of standards, “greening” the supply chain, and product stewardship.”15

From the above definitions, it is clear that the successful implementation of CEM and CEG will require

environmental knowledge, the combined efforts and involvement of the senior management level of a

company. As these are new concepts to most companies in Hong Kong and given the low awareness of

environmental issues within the business community as shown in the questionnaire-based survey

(which will be discussed in detail later), it seems that few companies in Hong Kong have adopted

them. In fact, it is found that most small to medium enterprises (“SMEs”)16 are still in the phase of

compliance with environmental regulations17.

ISO 14001 is an element of CEG as defined above. It is an internationally accepted specification

developed by the International Organization for Standardization (ISO) for an environmental management

system (“EMS”). In effect, it is a set of cohesive elements which an organisation may use to minimise

its impact on the environment. The growing importance of EMS as a practical tool to reduce the

environmental impact and support continuous environmental improvement was stressed in the

“Government Position Statement on EMS” issued by the UK Government in September 2005. In the

statement, the UK government strongly supports the use by corporations of a robust EMS and the use of

international standards such as ISO 14001, EU Eco Management and Audit Scheme (“EMAS”) and BS

8555 which is a recent addition to the EMS family.

14 p.7 of Working Paper “Drivers and Barriers to Engaging Small and Medium-Sized Companies in Voluntary Environmental Initiatives” by Sonja Studer,

Richard Welford and Peter Hills (November 2005).15 p.1 of Project Report 1 “In-house Environmental Knowledge Capital and Corporate Environmental Governance in Hong Kong Business” by Margaret Lo,

Joyce Tsoi, Richard Welford, Peter Hills and Jon Hills (January 2003)16 The Hong Kong government defines SMEs as manufacturing businesses with less than 100 employees, or non-manufacturing businesses with less than

50 employees.17 p.2 of the Project Report 1 “In-house Environmental Knowledge Capital and Corporate Environmental Governance in Hong Kong Business” by Margaret

Lo, Joyce Tsoi, Richard Welford, Peter Hills and Jon Hills (January 2003).


ENVIRONMENTAL REPORTINGA revision to the ISO 14001 was made in 2004. The revision has shifted the emphasis in the standard

to a clearer focus on transparency of processes, continuous improvement of performance and periodic

evaluation of legal compliance. Some of the perceived benefits of obtaining an ISO 14001 certification

include the improved perception of the key environmental issues by the employees, better public

image of the corporation, increase in the efficiency in energy and raw materials use and improved

ability to meet compliance with environmental regulations.

Though ISO 14001 is recognised as an important tool in achieving CEG, it is not meant to be an

absolute standard or a guarantee of high level of environmental performance. In particular, it is worth

noting that a company does not have to be in compliance with all environmental regulations to be

certified to ISO 14001. It does, however, need to have a system in place which can help them towards

compliance. Besides, the integrity of the ISO 14001 certification depends very much on the credibility

of the certification bodies which are themselves subject to annual audits by the accreditation bodies18.

As of April 2005, there were a total of 88,800 ISO 14001 certifications in the world. In December

2005, there were 396 ISO 14001 certified bodies in Hong Kong which includes government departments

and public bodies19. The growing trend of ISO 14001 certification in Hong Kong is shown in the chart

below. And the attributes of the certified bodies are summarised in the table below.20

0

50

100

150

200

250

300

350

400

450

3/00 6/00 9/00 12/00 3/01 6/01 9/01 12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03 3/04 6/04 9/04 12/04 3/05 6/05 9/05 12/05

Certificate by companies = 357

Certificate still valid Certificate withdrawn

Local Trend of ISO 14001 Certificates in HK

74 8091

105118

136146

165175

196206

223

251265 273

288307

328345

355366

383 385396

3 3 3 5 5 6 7 7 10 11 19 22 24 28 31 33 38 40 41 49 51 5364 72

Fig. 1

18 “ISO14001: 2004 What do investors need to know?” published by Association For Sustainable & Responsible Investment in Asia (2005).19 Figures provided by the Hong Kong Environmental Protection Department.20 Chart and table were compiled by the Hong Kong Environmental Protection Department



Fig. 2: Distribution of ISO 14001 Certificates (by Industrial Sectors)

By Industrial Sectors (EAC Code) No.

Construction (28) 86

Electrical & optical equipment (19) 66

Other services (35) 38

Financial intermediation, real estate, 28

rental (32)

Wholesale & retail trade, repairs of 24

motor vehicles, motorcycles &

personal & household goods (29)

Transport, storage & communication (31) 23

Public administration (36) 22

Engineering services (34) 19

Other social services (39) 14

Basic metal & fabricated metal products (17) 11

Machinery & equipment (18) 9

Electricity supply (25) 8

Manufacturing not elsewhere classified (23) 7

Rubber & rubber products (14) 6

Concrete, cement, lime, plaster, etc. (16) 6

By Industrial Sectors (EAC Code) No.

Hotels & restaurants (30) 5

Food products, beverage & tobacco (3) 4

Printing companies (9) 3

Textiles & textile products (4) 3

Recycling (24) 2

Agriculture, fishing (1) 2

Education (37) 2

Mining & quarrying (2) 1

Pulp, paper & paper products (7) 1

Publishing companies (8) 1

Chemicals, chemical products & fibers (12) 1

Pharmaceuticals (13) 1

Gas supply (26) 1

Health & social work (38) 2

Total 396

It should be made clear that an ISO 14001 certified company or a company which has incorporated

the CEM or CEG into its business systems is not necessarily engaged in ER. On the other hand, a

company which is engaged in ER may not be an ISO 14001 certified company though it is likely to be

one which has set up a system which measures the impact of its operations on the environment.

However, the ISO 14001 certification and the engagement in ER do have a correlation as found in the

questionnaire-based survey which shall be discussed in detail later. Nevertheless, ISO 14001 certification,

CEM, CEG, EMS and ER all form an integral part of a risk management system which is instrumental in

the identification and management of the environmental risks faced by a company.

c. Enhancement of competitiveness

ER has often been perceived by the business community as a burden on a company which entails

additional costs and resources. Some even believe that it creates competitive disadvantage. There is no

doubt that ER requires additional resources and in-house knowledge of environmental issues. A company

engaged in ER, however, can through the regular evaluation, early identification and proper management

of environmental risks, enhance its operational efficiency and overall financial performance in the

following ways:

• reduction of operating costs as a result of more efficient use of raw materials, reduction of

waste and energy saving;

• increase of business opportunities and expansion of international markets;


ENVIRONMENTAL REPORTING• avoidance or reduction of liability resulting from adverse litigation or penalty or fine imposed

on the company for breach of environmental laws and regulations;

• prevention and mitigation of operational and business risks;

• reduction of insurance costs;

• enhancement of corporate reputation as an environmentally responsible corporation and good

corporate citizen; and

• increase in the environmental awareness and morale of the staff.

ER can help increase the business opportunities of a company since green procurement has become a

common corporate policy of many large corporations both locally and worldwide. Suppliers are

frequently required to provide their environmental policies and reports for assessment by the large

corporations. Some corporations also require their suppliers to comply with their ethical or environmental

code of conduct. Some even take the further step of auditing or monitoring their suppliers’ environmental

practices to ensure such compliance21. In a global economy where more companies are relocating part

of their production to the low cost countries, the allocation of responsibilities within the supply chain

has become an important issue and ER by suppliers is increasingly becoming a common supply chain

requirement.

Based on the above benefits, there is growing acceptance of the view that ER is an effective tool for

managing environmental risks as well as improving the overall operational efficiency of a company

which consequentially helps increase its competitiveness. In the long run, the adoption of socially and

environmentally responsible business practices is also conducive to the enhancement of shareholder

value of a company, which to a large extent is built upon the investors’ perception of the business.

Recent developments in other jurisdictions

There has been an increasing trend overseas for tougher requirements on corporate environmental disclosure.

1. European Union

In May 2001, the European Commission issued a recommendation on the recognition, measurement and

disclosure of environmental matters in the annual reports and accounts of the EU companies. It further

commented that the quantity, transparency and comparability of environmental data flowing through the

annual accounts and annual reports of companies must be increased22.

21 p.24 of the HSBC Corporate Social Responsibility Report 2005.22 EU Commission Recommendation 30 May 2001 (2001/453/EC).



This recommendation paved the way for the subsequent EU Accounts Modernisation Directive issued in June

2003 (“EU Accounts Modernisation Directive”) which provided, among other things, that EU corporations

should include in their annual reports “analysis of environmental and social aspects necessary for an

understanding of the company’s development, performance or position”.

2. The UK

In 2000, the UK Prime Minister challenged the FTSE 350 leading companies to report on their environmental

performance. As of January 2006, 140 of the top 250 companies in UK report on their environmental

performance23.

The EU Accounts Modernisation Directive which applies to over 36,000 large and medium companies in UK24

(including over 1,200 quoted companies)25 introduces requirements for companies to include a balanced and

comprehensive analysis of the development and performance of the business in their Directors’ Report. The

analysis should “include both financial and, where appropriate, non-financial key performance indicators

relevant to the particular business, including information relating to environmental and employee matters”

(“Business Review”).

This requirement on the Business Review in the Directors’ Report became effective for financial years beginning

on or after 1 April 200526. Only those non-quoted companies which satisfy the statutory definition of “small

company”27 will be exempted from this requirement.

In January 2006, the UK Department for Environment Food and Rural Affairs (“DEFRA”) issued a set of new

voluntary environmental reporting guidelines titled “Environmental Key Performance Indicators - Reporting

Guidelines for UK Business” to give clear guidance to companies on how to report on their environmental

performance using environmental Key Performance Indicators (“KPI”). The guidelines are relevant to both

mandatory reports such as the Business Review and other voluntary environmental reports. The guidelines set

out 22 environmental KPIs that are significant to UK businesses and describe which KPIs are most significant

to which business sectors. The majority of sectors have five or fewer relevant KPIs and for most companies,

greenhouse gas emission is the most significant KPI28.

23 News release dated 24 January 2006 of UK Department for Environment, Food and Rural Affairs.24 “Medium company” is defined as a company with turnover not more than £22.8 million, balance sheet not more than £11.4 million and employees not

more than 250 employees (p.9 of Environmental Key Performance Indicators-Reporting Guidelines for UK Business published by UK Department forEnvironment, Food and Rural Affairs in January 2006).

25 “Quoted company” is a company whose shares are listed in the UK or the EEA, or admitted to dealing on the New York Stock Exchange or Nasdaq(Guidance on the changes to the Directors’ Report Requirements in the Companies Act 1985-April and December 2005).

26 The requirement to produce a statutory Operating and Financial Review was abolished in January 2006.27 “Small company” is a company which satisfies two of the following criteria: turnover not more than £5.6million, balance sheet total not more than

£2.8million, and not more than 50 employees.28 According to the initial findings of a survey commissioned by the UK Environment Agency in 2006 on FTSE All Shares companies, 96% of the 79 FTSE

All-Share companies that have published their Annual Report and Accounts and have discussed their interaction with the environment and thedisclosures regarding climate change dramatically increased to 51% from 17% in 2004. However, the quantification of environmental impacts remainslow with less than 20% of companies reporting on greenhouse gas emissions. A full study of the survey is due in the autumn of 2007.


ENVIRONMENTAL REPORTING3. The US

The Securities and Exchange Commission (“SEC”) reporting obligations under Items 101, 103 and 303 of

Regulation S-K include environmental disclosure requirements which are applicable to all companies subject

to SEC rules. However, only information considered as “material” has to be disclosed. In the SEC rules,

“material” is defined as “those matters to which there is a substantial likelihood that a reasonable investor

would attach importance in determining whether to buy or sell the securities registered”.

Item 101 requires filing of a general description of the business which must include information about the

material impact that the environmental regulations will have on the registrant’s capital expenditures, corporate

earnings, and general competitive position. Item 103 requires disclosure of information relating to legal

proceedings (including those relating to environmental regulations) which are material to the business or

financial condition of the registrant. And according to Item 303, disclosure, in the form of a management

discussion and analysis, of any known trends or uncertainties that have or will have a material impact on the

revenue from continuing operation of the registrant, has to be made.

4. France

Since 2001, France has gone beyond the EU Accounts Modernisation Directive by mandating social and

environmental reporting for listed companies which are required to include in their annual reports “information

on how the company takes into account the social and environmental consequences of its activities”.

5. South Africa

In South Africa, companies listed on the Johannesburg Stock Exchange have been required since 2003 to

report annually on their social and environmental performance using Global Reporting Initiatives (“GRI”)29.

6. Australia

The Corporations Act 2001 requires that the director’s report in an annual report of a company which is

“subject to any particular and significant environmental regulation” should give details of the company’s

performance in relation to environmental regulation30. For a listed company, the director’s report should also

include information that members of the company would reasonably require to make an informed assessment

of the operation of the company, its financial position and the company’s business strategies and its prospects

for future financial years31.

29 GRI’s vision is that reporting on economic, environmental, and social performance by all organisations will be as routine and comparable as financial

reporting. Organisations seeking to report using GRI framework should use the Sustainability Reporting Guidelines developed by GRI as the basis for

their reports.30 Section 299(1)(f) of Corporations Act.31 Section 299A of Corporations Act.



Under Rule 4.10.17 of the ASX Listing Rules, a listed company should include a review of operations and

activities for the reporting period. The review does not have to follow any particular format. Reference can,

however, be made to the Group of 100 Inc publication “Guide to the Review of Operations and Financial

Condition” (“Review Guide”) which is reproduced in Guidance Note 10 of the ASX Listing Rules.

The Review Guide makes specific reference to social and environmental factors and states that the review

should include an analysis of key financial and non-financial performance indicators (“KPIs”) used by the

management in their assessment of the company and its performance and where practical, KPIs should

include multiple perspective such as sustainability measures including social and environmental performance

measures.

The Australian government has recently suggested to the ASX Corporate Governance Council that the

sustainability reporting requirement should be incorporated into the “Principles of Good Corporate Governance

and Best Practice Recommendations” which shall be applied to the listed companies on a “comply or explain”

basis32.

7. Japan

In 2004, there were about 700 companies (out of 6,000 organisations which were either listed or employ

more than 500 employees) which were engaged in ER in Japan. Japan and Australia have mainly been

responsible for the increase in the uptake of ER in the Asia Pacific region since late 1990s. The Ministry of

Environment in Japan has published several sets of very comprehensive guidelines which can be adopted by

corporations on a voluntary basis33.

Starting from April 2005, “specified corporations” as defined in the Ministerial Ordinance must prepare and

publish environmental reports for every financial year in accordance with “Law Concerning the Promotion of

Business Activities with Environmental Consideration by Specified Corporations, etc., by Facilitating Access to

Environmental Information, and Other Measures”, failing which a civil fine of up to 200,000 yen shall be

imposed on their executive officers. Large corporations other than “specified corporations” are also encouraged

to publish environmental reports.

8. PRC

Since its accession to the WTO, China has been actively tightening its environmental regulations and trying

hard to combat pollution by businesses. Exporters in China have also been suffering from “green barriers” —

the international trade standards designed to protect the environment, health and safety of the people of the

importing countries34.

32 See Australian CSR Discussion Paper (November 2005)33 Environmental Reporting Guidelines, Environmental Performance Indicators Guidelines, Environmental Accounting Guidelines & Eco-Action 21

Environmental Management Systems Environmental Activities Reports Guidelines.34 p.14 of Project Report 1 “In-house Environmental Knowledge Capital and Corporate Environmental Governance in Hong Kong Business” by Margaret

Lo, Joyce Tsoi, Richard Welford, Peter Hills and Jon Hills (January 2003).


ENVIRONMENTAL REPORTINGThe Law on the Environmental Impact Assessment (“EIA”) came into operation in September 2003. The EIA

requires the planning activities of central and local governments to be subject to the requirements of the

environmental impact assessment and in some cases, subject to public consultation. In addition, private

sector construction activities are also subject to mandatory environmental impact assessment under the EIA.

In January 2005, the State Environmental Protection Administration (“SEPA”), an organisation directly under

the State Council and responsible for the overall supervision and management of China’s environmental work,

ordered the cessation of 30 major projects (totalling over US$14 billion in investment) on the ground that they

have failed to conduct proper environmental assessments and obtain approvals from environmental authorities

before commencing construction35.

The environmental law has been further strengthened in February 2006 by the promulgation of the

Interim Provisions on Punishment of Acts Violating Laws and Disciplines on Environmental Protection, under

which stringent disciplinary measures will be imposed on the government staff who fail to administer the

environmental law.

On 5 June 2006, a White Paper titled “Environmental Protection in China” was published by the State Council

Information Office. It is a very comprehensive document which summarises the efforts made by China in

environmental protection over the past 10 years. It is indicated in the paper that there will be a change in

China “from mainly employing administrative measures in environmental protection to comprehensive use of

legal, economic, technical and necessary administrative measures to solve environmental problems”.

Despite the commitment of the government, CSR reporting which covers ER is presently almost non-existent

in China36, but a change is expected as China continues to expand its foreign trade, seek overseas listings and

as overseas companies increase their sourcing of products from suppliers in China.

Should environmental reporting be mandatory in Hong Kong?

Pressure for greater transparency and disclosure about environmental and social practices has led many countries to

introduce new disclosure regulations in recent years. As noted above, many countries have introduced environmental

information disclosure requirements. In light of the above international developments, should Hong Kong consider

mandating ER? Before Hong Kong follows the international trend, a careful study of the situation in Hong Kong

looking at the environmental awareness of the general public and the business community has to be conducted.

There is no doubt that mandating ER would at least level the playing field for companies and improve disclosure of

environmental risks, but it could also have certain disadvantages. Making ER a mandatory requirement too early —

when most of the companies are not truly convinced that it is something worth doing, or have very little knowledge

of its functions or benefits, runs the risk of developing a “checklist mentality” in the business community. Companies

may pay lip service to the requirement by including irrelevant performance indicators in their reports but make no

real change to their corporate practices. The reports may also tend to be prescriptive, lacking in depth and diversity

when the reporting companies produce them without conviction and commitment merely in response to the legal

requirement. Further, if ER is made mandatory prematurely before building up a business culture in general support

of the practice, there is likely to be a high percentage of breach of the mandatory requirement.

35 Masons (2006) March Update.36 KPMG International Survey of Corporate Social Reporting 2005.



Most of the interviewees for this research paper (see Annex 2) take the view that Hong Kong is not yet ready to make

ER a mandatory requirement. They argue that most of the companies have not yet acquired a basic level of

understanding of ER, including how to do it, or what benefits they can get out of it. It was suggested by some

interviewees that the more effective way to boost the uptake of ER would be to encourage large and influential

companies to set a good example by taking the lead. As more companies take up ER, the peer group pressure will

become a driving force for the others which will find themselves lagging far behind unless they also adopt the

prevailing practice.

How to get started

ER is relatively new to Hong Kong and most of the companies in Hong Kong have little knowledge and experience of

preparing environmental reports or CSR/sustainability reports. However, it is an emerging trend to which Hong Kong

cannot turn a blind eye if it is going to catch up with the major markets in the world. All the interviewees contacted

for this research paper (see Annex 2) are in support of ER by companies in Hong Kong. They are all positive that ER

can to a certain extent promote environmental awareness and help control the pollution problem in Hong Kong. As

expressed by several of the interviewees, ER is not as complicated as it seems and the most important thing is to get

started.

The GRI Guidelines, published to promote sustainability reporting after a multi-stakeholder consultative process

around the world, have been the most widely adopted guidelines for CSR/sustainability reporting. In view of the

width of its scope, some starters of ER or sustainability reports may find it too complicated, or some parts of it

irrelevant to them. Countries like the UK and Japan which are highly supportive of ER have published comprehensive

guidelines through their respective governmental departments which serve similar functions of EPD.

Back in Hong Kong, the EPD published A Guide to Corporate Environmental Performance Reporting (“EPD Guide”)

in 2001 in the hope that it will “contribute towards a growing acceptance among private sector organisations to

produce good quality environmental performance reports”37. The EPD Guide gives a very concise overview of key

steps of preparing an environmental report by way of a flow chart which is reproduced as follows:

Decide on Your Organizations Objectives of

Reporting

Appoint Responsible

Persons

Identify Your Target Audiences, their Needs and

Expectations

Decide on Report Format

and Style

Decide on the Timing of

Publication

Plan Report Framework and

Contents

Gather Information

and DataWrite Report Obtain Internal

ApprovalObtain Third-Party

Verification

Decide on Distribution

Strategy

Print and Release Report

Invite Feedback

Design Report

Review and Evaluate in Preparation of Next Year’s Cycle

Fig. 3

37 A Guide to Environmental Reporting for Controlling Officers was published by the EPD in February 1999 to assist Controlling Officers within the Hong

Kong Special Administrative Region Government in preparing their environmental reports.


ENVIRONMENTAL REPORTINGThe EPD Guide has also suggested the following general report framework of an environmental report:

Organization’s Profile

Describes the organization’s main business areas, and the facilities being operated and managed as well as their

locations and activities.

Environmental Goal, Policy, Objectives and Targets/Milestones

Identifies the extents to which environmental issues are being considered and addressed in the operations, services

and products of the organization.

Environmental Management Analysis

Discusses how the organization is to manage its operations and services to achieve its environmental objectives and

targets.

Environmental Performance Analysis

Shows where the organization stands now on its environmental performance in relation to its operations, services

and products by analyzing and presenting the key environmental indicators and measurements against the

corresponding policy, objectives, targets/milestones as benchmarks.

Environmental Actions Requiring Special Attention

Highlights the views of the top management on how their organization has performed during the reporting year and

which areas the management will focus on in the coming year.

Fig. 4

Reference can be made to the EPD Guide for further details and examples. For starters of ER, the guidelines set out

therein should be sufficient. For those who have been doing ER for some time and are planning to switch to CSR or

sustainability reports, the GRI Guidelines are a very good reference and basis for reporting. It should, however, be

noted that the GRI Guidelines are being updated and a third generation of the GRI Guidelines known as G3 is

expected to be released in October 2006.

What distinguishes a good environmental report from a mediocre one?

A good quality environmental report should meet certain essential criteria embodied in a widely adopted benchmarking

system. The EPD engaged Deloitte Touche Tohmatsu in 2001 to develop a benchmarking system called “A Benchmark

for Environmental Performance Reports” (“EPR Benchmark”) which intends to serve as a tool for improving the

quality of ER and a practical guidance for self-assessment of the quality of a report. Though the EPR Benchmark was

developed with the purpose of assisting approximately 80 government bureaux and departments to improve the

quality of their environmental reports which became mandatory since 2000, they are equally applicable to the

private sector.



According to the EPR Benchmark, there are five essential criteria for a good environmental report which are summarised

as follows:

a. Communicate effectively

• Reports must be readable and understood by the intended readers

b. Show relevance

• Reports must meet the needs and experiences of their readers

c. Demonstrate commitment and management quality

• Readers must believe in the commitment of top management to carry out the organisation’s vision and

strategy

d. Quantify performance

• To see if progress has been achieved, performance must be measured

e. Achieve credibility

• Readers want to be assured that the report is realistic, complete and balanced, and that the information

has been verified

Based on the above criteria, a score card has also been designed for self-assessment of the reporting organisations.

Details of the criteria and score card can be found in the EPR Benchmark.

Competition can always serve as an incentive to promote a worthy cause. Yearly awards have been presented to

companies or organisations for their good ER and sustainability reporting by the ACCA for more than 10 years. The

competition is organised for promoting the transparency in reporting by organisations of the impact of their business

activities on sustainable development. The judging criteria are based on completeness (40%), credibility (35%) and

communication (25%). The following are a few examples of the criteria indicators:

a. Completeness

• Corporate context (including major products/and or services, financial performance, geographical

locations)

• Key economic, social and environmental impacts of business (in the case of sustainability report)

• Rationale behind choice of indicators used in the report

• Reporting and accounting policies

b. Credibility

• Environmental financial statements and full cost accounting

• ISO accreditation/certification

• Adoption of reporting best practice e.g. GRI Guidelines

• Compliance/non-compliance record

• Environmental/sustainability impact data with appropriate cross linkages

• Third party verification statement


ENVIRONMENTAL REPORTINGc. Communication

• Understandability, accessibility and appropriate length

• Layout and appearance

• Use of internet

• Comprehensive navigation through report

• Appropriateness of graphs, illustrations and photos

• Integration with financial statements

Reference can be made to the Report of the Judges 2005 for full details of the criteria. The judges of the 2005 Award

have also made some very insightful comments and recommendations (summarised below) for improvement of the

quality of the environmental or sustainability reports:

a. All reports should include elementary components

• Identification of target audience

• Identification of the key sustainability issues facing the business and significant sustainability impacts

• Presentation of high quality hard data - both absolute figures and normalised data

• Explanation of how the key indicators, issues and impacts have been identified: has the reporter

involved stakeholders?

b. Increase stakeholder involvement and disclosures which are found to be particularly weak in the reports

• Disclose key stakeholders and explain how they are identified

• Identify the stakeholder group which the report is targeted to

• Include and involve the stakeholders throughout the reporting process

• Explain how stakeholder feedback is used

c. Include sector benchmarks

• Comparing data between organisations within the same industry sector provides a more relevant

comparison of performance

d. Reporting on organisation’s key impact still weak

• The key sustainability impacts should be identified so that the performance data and policies become

more relevant

• The initiatives and targets set should demonstrate what the reporting organization is doing in order to

reduce the impacts

e. Target should be set and quantified

• Achievement status should be disclosed in the subsequent reports

The judges found that a few reports in Hong Kong are comparable to others on a regional basis. But when compared

to the international standard, it seems that businesses in Hong Kong are not producing reports on a par with

international best practice. It seems that there is much room for improvement in Hong Kong in terms of both the

number of uptake as well as the quality of ER and sustainability reports.



3. SURVEY FINDINGS

A. Response rate and profile of the respondents

The response rate of the questionnaire-based survey was low despite repeated email reminders and follow up

phone calls. Out of 961 listed companies, only 48 have responded, representing a response rate of approximately

5%. Apart from a possible reflection of survey fatigue, the poor response rate reflects the lack of interest in or

knowledge of ER on the part of the general business community in Hong Kong. It may be inferred from the

low response rate that the majority of the non-responding companies are not engaged in ER.

This inference echoes with a finding of a survey made by the EPD in July 2005 on all the then 920 Main

Board listed companies. The EPD survey revealed that only 10% of the surveyed companies were engaged in

ER which included environmental information disclosure in all forms. Such inference is reasonable taking into

account the findings of our HSCI survey conducted to supplement the questionnaire-based survey. The HSCI

survey reflects that out of the 201 HSCI constituent stocks, only 10 have published standalone environmental

reports, or CSR or sustainability reports, of which environmental reports form a part, while 42 have disclosed

to a certain extent their environmental performance through other channels, such as their annual reports or

corporate websites. In other words, it shows that about 74% of HSCI constituent stocks are not engaged in ER

in any way. If the engagement rate among the HSCI constituent stocks is so low, the rate among all the Main

Board listed companies is expected to be even lower.

Twenty-six (26) representing 54.2% of the respondents are constituent stocks of the HSCI as at 10 April 2006.

Seventeen (17) of the respondents (35.4%) have less than 100 employees in Hong Kong, while 16 of them

(33.3%) have more than 2,000 employees in Hong Kong. Sixteen (16) of the respondents (33.3%) are companies

with ISO 14001 certification. The respondents come from a wide spectrum of businesses. Adopting the

categorisation of the Hang Seng Composite Industry Indexes (“HSCII”) (which consists of nine industries) and

based on the information provided by the respondents, there are representatives from each of the nine

industries. For the avoidance of doubt, it does not mean that all the respondents are constituent stocks of the

HSCII. The correlation between the engagement in ER and the profile of the respondents will be elaborated in

paragraph E of this section under “Additional Observations”.

Overview of the respondents by industry sector

0% 5% 10% 15% 20% 25% 30% 35%

Conglomerates

Information Technology

Properties & Construction

Financials

Utilities

Services

Consumer Goods

Industrial Goods

Oil Resources

8.7%

Industry Sector

Percentage of Respondents

6.5%

8.7%

8.7%

8.7%

2.2%

10.9%

32.6%

13.0%

Fig. 5


ENVIRONMENTAL REPORTINGB. Key findings

a. Companies having environmental policy

Does your company have any environmental policy?

47.9% 52.1%Yes

No

Fig. 6

The data shows that 25, representing 52.1% of the respondents, indicated that they have an

environmental policy. Having an environmental policy in place is a prerequisite for ER. However, as it

will be shown in the next section, not all those having an environmental policy have taken the further

step to publish an environmental report.

b. Companies engaged in ER

Does your company perform environmental reporting?

66.7%

33.3%Yes

No

Fig. 7

For the purpose of this questionnaire-based survey, ER is defined as “reporting by a company of the

impact of its businesses, operations, products and services on the environment” which can take different

forms, ranging from standalone environmental reports to incorporation into CSR/sustainability reports

or annual reports.

Sixteen (16) representing 33.3% of the respondents, are engaged in ER. Of those companies that have

an environmental policy, 64% are engaged in ER. Of these 16 companies which are engaged in ER, 12

(75%) are HSCI constituent stocks and 10 (62.5%) have ISO 14001 certification. Such findings indicate

that companies with a fairly large market capitalisation and/or those which have in place an EMS, are

more prepared to undertake ER.

There are a few possible explanations for this phenomenon. The larger the company, the greater the

impact their operations will have on the environment. Large companies are inevitably facing more

pressure to be transparent and accountable to the community. And it is all the more important for large

and reputable companies to maintain and enhance their reputation and brands. In addition, the larger



companies undoubtedly have more resources, which is definitely an advantage though by no means a

condition for ER. ISO 14001 certified companies, having already put in place an EMS certified to an

international standard, seem to be more communicative in their environmental performance. However,

as the respondents were only asked to indicate whether they have got ISO 14001 certification, it is

possible that the other six companies are certified to other international standards such as EMAS or BS

8555.

c. Forms, length of ER and accessibility

How does your company perform environmental reporting?

1 By issuing a standalone environmental report which is separate from the corporate social

responsibility report, sustainability report and annual report

2 By incorporating it into the corporate social responsibility report or sustainability report

3 By incorporating it into the annual report

4 By issuing other documents such as newsletter or brochure

0% 10% 20% 30% 40% 50% 60%

1

2

3

4


50.0%

25.0%

25.0%

12.5%

Fig. 8

Those companies engaged in ER were asked to indicate the way in which they do so. Eight (8) out of

the 16 companies engaged in ER published a standalone environmental report, while four (25%)

incorporated it into their CSR or sustainability report. Four (25%) incorporated it into their annual

reports and two (12.5%) engaged in ER through corporate newsletter or brochure. It should be noted

that the ways are not mutually exclusive and some of the 16 companies have chosen more than one

option.

There seems to be a trend that companies usually start by publishing their environmental reports and

then after a few years will start publishing CSR or sustainability reports which cover the economic,

environmental and social performance of the company, this is the so-called “triple-bottom line reporting”.

One example is Cathay Pacific Airways Limited which, as expressed in the “Chairman’s Message” of its

Environmental Report 2005, will begin to publish its first social and environmental report in its next

financial year.


ENVIRONMENTAL REPORTINGOf those 16 which are engaged in ER, nine indicated that their environmental reports are more than 10

pages long (which mostly take the form of standalone reports) with four between two to four pages

long. There are two which are less than one page. While length of a document is not conclusive of its

quality, it may be an indicator of its comprehensiveness or completeness.

Of those 16 which are engaged in ER, 12 (75%) uploaded their environmental reports to their corporate

websites. With electronic means of communication becoming more popular, it is anticipated that there

will be more companies making use of their corporate websites to disseminate information about their

environmental performance or conduct environmental communication with their stakeholders while

continuing to print more concise environmental reports as a roadmap for the readers. Another advantage

of online dissemination is that it is able to reach out to a wider audience with less cost.

d. Drivers for ER

What is/are the main driver(s) for your company to perform environmental reporting? (Please choose a

maximum of 3)

1 Cost reduction

2 Risk reduction

3 Reputation/Brand building

4 Supply chain requirements

5 Provides competitive advantage

6 Consistent with corporate values or ethics

7 Raise employees’ awareness of environmental protection

8 Stakeholders’ demands

9 Government Encouragement

10 Other reasons

0% 20% 40% 60% 80% 100%

1

2

3

4

5

6

7

8

9

10


12.5%

25.0%

56.3%

6.3%

18.8%

81.3%

62.5%

25.0%

18.8%

18.8%

Fig. 9

The findings show that the main driver for ER is that it is a practice “consistent with corporate values

or ethics”. Of those 16 which are engaged in ER, 13 (81.3%) chose it as a driver while 10 (62.5%)

chose “raising employees’ awareness of environmental protection” and nine (56.3%) chose “reputation/

brand building” as the drivers.



It is encouraging to note that “consistency with corporate values or ethics” is chosen as the main driver

as it indicates that companies have integrated environmental concerns and social responsibility into

their corporate values and objectives. “Raising employees’ awareness” is another major driver probably

because the importance of staff as a principal stakeholder of a company has been growing. Further,

staff are primarily responsible for implementing the corporate environmental policies and directly

related to the success of the company in achieving its environmental targets. “Reputation and brand

building” is also an important driver since the reputation of a company, being a good corporate citizen

and having its products recognised as environmentally friendly, can put a company in an advantageous

position in terms of recruitment of high-calibre staff, expansion of markets and fostering support of the

public.

Four (25%) indicated that “stakeholders’ demand” is one of their drivers. “Stakeholders” cover a broad

range of people including investors, customers and pressure groups. At the present stage, shareholders

in Hong Kong are not yet a strong driving force for ER as the general environmental awareness within

the community is still low. According to the elaboration made by companies which chose this driver,

their stakeholders are mainly institutional investors or pressure groups which closely monitor the

operation of large companies especially those which have great environmental impact such as utilities

and energy industry. Only four companies (25)% chose “risk reduction” as a driver. It probably reflects

that few companies recognise ER as a risk management tool for identification of operational risks. The

fact that only three companies (18.8)% chose “competitive advantage” and two (12.5)% chose “cost

reduction” as a driver shows that few companies believe that ER can improve their operational efficiency.

“Government encouragement” was chosen by three (18.8%) companies as a driver. Though it is not yet

a strong driver, it does show that the support and motivation of the government are important to some

companies, especially those of medium size to which provision of technical support or resources by

the government will be important. Although only one (6.3%) chose “supply chain” as a driver, it

however is of great relevance to companies in the business of exporting goods to European countries

which impose “green barriers” on the importers.

Some of the respondents cited “transparency”, “concern about the negative impact of climate change”

and “improvement of the environment” as additional drivers. These are all very positive ideas which

show that some companies do have high level of environmental awareness or corporate governance

standard.

e. Scope of an environmental report

Which of the followings are included in your environmental report?

1 Environmental policy

2 Environmental management system

3 Responsible employees

4 Risks assessment and management techniques

5 Areas of main environmental impact

6 Quantified environmental targets


ENVIRONMENTAL REPORTING7 Independent verification of the report

8 Data on release to the environment (e.g. emissions to air, discharges to water, solid wastes

produced)

9 Data on use of resources (e.g. energy, non-renewable resources, raw material, water consumption)

10 Performance indicators (e.g. quantified environmental impact, causes of significant environmental

impact, benchmarking with others)

11 Disclosure of legal compliance (e.g. prosecutions, fines)

12 Environmental-friendly product design/stewardship

13 Financial information (e.g. environmental budget and expenditure)

14 Environmental reporting guidelines (e.g. Global Reporting Initiative)

15 Others

0% 10% 20% 30% 40% 50% 60% 70% 80%

123456789

101112131415


68.8%68.8%

62.5%37.5%

75.0%50.0%

37.5%68.8%

62.5%37.5%

43.8%37.5%

25.0%37.5%

23.5%

Fig. 10

The six major areas which companies include in their environmental reports are “areas of main

environmental impact” (75%), “data on release to the environment” (68.8%), “environmental

management system” (68.8%), “environmental policy” (68.8%), “responsible employees” (62.5%) and

“data on use of resources” (62.5%). These can be described as the basic and factual items which

should be covered by an environmental report. For those which strive for higher quality reports, further

information or analysis of the data may have to be included.

Eight (50%) have set out the quantified environmental targets in their environmental reports. It is

always a good practice to set milestones and targets. Companies can measure their performance of the

year against the targets set for the previous year. It facilitates regular evaluation and improvement.

The disclosure of legal compliance relating to environmental issues, such as whether the company has

been fined or prosecuted for breach of environmental regulations in the past year, is essential for

assessing the environmental performance of a company. However, only seven (43.8%) have made such

disclosure.



Six (37.5%) have disclosed the performance indicators in their environmental reports. “Performance

Indicators” are parameters used to quantify and track environmental performance of the companies.

They are tools for measurement. Examples of performance indicators are amount of energy consumption

per year or per head, total weight of discharges per unit of production and percentage of supplier

having a written environmental policy.

“Risk assessment and management techniques” have been disclosed by six companies (37.5%). The

low disclosure rate is a reflection that ER is not yet widely accepted as a part of the risk management

system.

Six (37.5%) disclosed what ER guidelines they have adopted for preparation of their environmental

reports. The Global Reporting Initiative — 2002 Sustainability Reporting Guidelines (“GRI Guidelines”)

are the most widely adopted guidelines for CSR or sustainability reports which covers ER. According to

the HSCI Survey, all the 10 HSCI companies which published standalone reports have adopted either

wholly or partially the GRI Guidelines.

Independent third party verification of environmental reports is a growing trend internationally though

it is not yet a widely adopted practice in Hong Kong. Six (37.5%) indicated that they have included in

their environmental reports a third party verification statement. Our HSCI survey shows that of those

10 HSCI companies which published standalone reports, only four have their reports verified by an

independent third party. Independent third party verification is a good practice which can increase the

credibility of a report. It should however be noted that how much credibility has been added by the

third party verification depends on several factors such as the integrity of the verifier, scope of verification

and whether any qualification has been made etc.

Six (37.5%) have provided information about their environmentally-friendly product design/stewardship.

This area may not be relevant to all companies. Only four companies (25%) have disclosed financial

data such as the environmental budget and expenditure in their environmental reports. As shown in the

HSCI Survey, of those 10 HSCI companies which published standalone reports, only one has published

the data regarding its environmental expenditure. Reasons for the low disclosure are probably because

few companies have set an environmental budget and it is a sensitive issue which they might feel

reluctant to disclose.


ENVIRONMENTAL REPORTINGf. People involved in ER

Which unit(s) has/have participated in the preparation of the environmental report?

0 10 20 30 40 50 60

Others

Legal/Compliance/Risk Management

Audit Department

Finance/Treasury

Public Relations

Environmental Department

Company Secretary

Board of Directors

Score

29

11

5

10

34

50

20

26

Fig. 11

Respondents were asked to indicate the five departments of their companies which are most involved

in the preparation of their environmental reports. A score of five was allocated to the department/

division chosen as the most involved. A score of one was given to the one chosen as the least

involved, and the others were scored accordingly. The one with the highest scores was defined as the

most involved department/ division for the purposes of this question. The departments/ divisions (in the

order of their scores) which are involved in the preparation of environmental reports were: the

Environmental Department (50), Public Relations (34), Others (such as Human Resources Department,

Environment Steering Group, Sustainability Section, Operation Section and Corporate Real Estate etc.)

(29), Board of Directors (26), Company Secretary (20), Legal/Compliance/Risk Management (11), Finance/

Treasury (10) and Audit Department (5).

The “Environmental Department”, which is set up with the objective of handling the environmental

issues of a company, is naturally most involved in the preparation of its environmental report. The

“Public Relations” department is also greatly involved in ER since the environmental report, like the

annual report, is a communication tool of a company with its stakeholders although the annual report

focuses more on the financial aspects of the company while ER puts more emphasis on its non-

financial data. The third most involved department/ division covers various divisions or departments

named by the surveyed companies. As the names of these departments/ divisions imply, some of them

are set up for the purpose of improving the environmental performance of the company, or promoting

environmental or sustainable practices. The “Board of Directors” is the fourth most involved division

according to our findings. This is an encouraging sign since it shows that the environmental initiatives

of the company have a high level support and participation. It ensures that such initiatives are compatible

with the corporate strategies and objectives formulated by the board.

“Company Secretary” is the fifth most involved department according to our findings. In most listed

companies, company secretaries assume a very important role in the preparation of their annual

reports and the promotion of good corporate governance of the company. In view of such an important

role, it is suggested that the involvement of the company secretary in ER can be further enhanced

taking into account that ER is an integral part of risk management systems and good corporate governance

practice.



According to our HSCI survey, all the 10 HSCI companies which published standalone reports have set

up a committee or team for purpose of handling the environmental or sustainability affairs of the

company. Examples include the Environment Office of Cathay Pacific Airways Limited; the Social,

Environmental and Ethics Committee of the Board of CLP Holdings Limited; and the Environmental

Protection and Independent Safety Department of HAECO.

g. Reasons for not engaging in ER

What is/are the main reason(s) for your company not performing environmental reporting? (Please

choose a maximum of 3)

1 Not cost-effective

2 Lack of regulatory incentive

3 Not a legal requirement

4 Corporate inertia

5 No demands from stakeholders

6 Business totally not involved in environmental matters

7 Lack of resources

8 Lack of in-house expertise

9 Not seen as a priority of the company

10 Creates competitive disadvantages

11 Other reasons

0% 10% 20% 30% 40% 50% 60% 70%

1

2

3

4

5

6

7

8

9

10

11


12.5%

31.3%

62.5%

3.1%

3.1%

3.1%

18.8%

18.8%

18.8%

25.0%

37.5%

Fig. 12

Among the 48 Respondents, 32 (66.7%) are not engaged in ER. They were asked to give reasons for not

doing so.

“Not a legal requirement” was chosen by 20 companies (62.5%) as the reason for not undertaking ER.

This indicates that these companies are unlikely to be motivated by anything other than mandatory

requirement.


ENVIRONMENTAL REPORTING12 (37.5%) chose “business totally not involved in environmental matters” as a reason. It is worth

noting that these companies seem to have the concept that ER is only applicable to companies which

“are involved in environmental matters”. It reflects their lack of knowledge that every company through

its business activities will to a certain extent create an impact on the environment.

“Lack of regulatory incentive” was also cited as a reason by 10 (31.3%). It shows that the business

sector expects regulators such as the Exchange to do something to promote ER.

Eight (25%) indicated that ER is “not seen as a priority of the company”. It is not surprising and is

probably quite indicative of the general mentality of the business community.

“No demands from stakeholders” was cited by six (18.8%) as a reason for not engaging in ER. This

shows that some companies undertake ER in response to the demand or expectation of their stakeholders

which include a wide range of people as mentioned in the previous sections of this research paper. In

particular, for very large corporations, or those which are generally regarded as having greater

environmental impact e.g. oil, utilities and aviation industries, the demands of their stakeholders

especially the environmental groups will be a strong driving force to them since their operations are

inevitably subject to close scrutiny of such bodies.

“Lack of resources” and “lack of in-house expertise” were chosen by six (18.8%) as a reason for not

engaging in ER. While it is undeniable that ER will require resources and in-house expertise, to what

extent they are justified as barriers to ER has to be further studied.

Four (12.5%) cited “not cost-effective” and one (3.1%) chose “competitive disadvantage” as barriers

most probably on the same ground that preparation of environmental reports will incur additional

costs. “Corporate inertia” was cited by one (3.1%) as the reason. It seems to be a frank admission that

most companies not undertaking ER would find embarrassing to make.

h. Any future plan to undertake ER?

Does your company currently have any plan to perform environmental reporting in the coming 3 years?

87.5%

12.5%

Yes

No

Fig. 13

Of those 32 companies which have not yet started ER, 28 (87.5%) indicated that they have no plan to

do so in the coming three years. This is a very clear gesture which reveals the “inertia” and resistance

of the business community towards ER. Based on this finding, a drastic increase in the uptake of ER

should not be expected in the near future in the absence of any mandatory requirement.



i. Drivers which encourage uptake of ER

What drivers would encourage your company to perform environmental reporting? (Please choose a

maximum of 3)

1 Regulatory incentive

2 Evidence of enhanced reputation/image

3 Evidence of risk reduction

4 Evidence of cost reduction

5 Demand from customers

6 Demand from Shareholders

7 Awards/labelling schemes

8 External financial support

9 External technical support

10 Evidence of effectiveness of environmental reporting in pollution control

11 More public awareness of environmental reporting

12 Demand from other stakeholders

0% 10% 20% 30% 40% 50% 60% 70%

1

2

3

4

5

6

7

8

9

10

11

12


65.6%

21.9%

21.9%

21.9%

15.6%

6.3%

6.3%

6.3%

25.0%

3.1%

3.1%

3.1%

Fig. 14

Those 32 companies which are not engaged in ER were asked to indicate what they would consider as

drivers for the uptake of ER. Twenty-one (21) (65.6%) chose “regulatory incentive” as a driver. This

indicates clearly that they are looking to the regulators for motivation and support. These companies

are probably somewhat indecisive concerning this issue and waiting for a boost from the regulators.

The other possibility is that they are not sure about what is expected from them or how to get started.

In short, the high percentage indicates that these companies are very much in need of the guidance or

encouragement from the regulators.

“More public awareness of environmental reporting” was chosen by eight (25%) as the driver. It shows

that these companies will be prepared to start ER when the public pays more attention or gives more

recognition to ER.


ENVIRONMENTAL REPORTING“Evidence of enhanced reputation/image”, “evidence of cost reduction” and “demand from customers”

were chosen by seven (21.9%) respectively as drivers. These are all factors which will directly or

indirectly affect the revenue of the companies.

The other drivers including “evidence of risk reduction”, “demand from shareholders”, “award/labelling

schemes”, “external financial support”, “external technical support”, “evidence of effectiveness of

environmental reporting in pollution control” and “demand from other stakeholders” seem to be less

influential to these companies according to the findings.

C. General opinions of the respondents

The respondents were asked to indicate to what extent they agree to several statements. 47 have responded to

this part.

a. The pollution problem is serious in Hong Kong

Thirty-eight (38) companies (80.8%) agreed with this statement, with 22 (46.8%) strongly agreeing and

16 (34%) agreeing. Only two companies (4.3%) disagreed with this statement.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Strongly disagree

Disagree

Neutral

Agree

Strongly agree


4.3%

0.0%

14.9%

34.0%

46.8%

Fig. 15



b. Among all types of pollution, air pollution is the most serious one in Hong Kong

Again, the majority (83%) agreed with this statement, while seven (14.9%) remained neutral. Only one

strongly disagreed.

The responses to the above two statements show that the majority of the respondents acknowledged

the seriousness of pollution, in particular, air pollution in Hong Kong.

0% 10% 20% 30% 40% 50%

Strongly disagree

Disagree

Neutral

Agree

Strongly agree


2.1%

0.0%

14.9%

40.4%

42.6%

Fig. 16

c. Environmental reporting can help control pollution in Hong Kong

Eighteen (18) companies (38.3%) remained neutral while 16 (34%) agreed and three (6.4%) strongly

agreed. Eight (17%) disagreed and two (4.3%) strongly disagreed. The number of companies which are

positive about the use of ER and those which remain neutral is similar. Those remaining neutral

probably do not have enough understanding of ER to reach a conclusion on its usefulness and

effectiveness as a solution to pollution.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Strongly disagree

Disagree

Neutral

Agree

Strongly agree


4.3%

17.0%

38.3%

34.0%

6.4%

Fig. 17


ENVIRONMENTAL REPORTINGd. Environmental reporting can raise the environmental awareness of a company

Thirty-three (33) (70.2%) companies agreed with this statement, with ten (21.3%) strongly agreeing and

23 (48.9%) agreeing. Ten remained neutral. Only four disagreed with one of them strongly disagreeing.

It shows that a majority of the respondents are positive about the function of ER in promoting

environmental awareness.

0% 10% 20% 30% 40% 50% 60%

Strongly disagree

Disagree

Neutral

Agree

Strongly agree


2.1%

6.4%

21.3%

48.9%

21.3%

Fig. 18

e. A separate environmental report can remarkably enhance the reporting quality

Nineteen (19) companies (40.4%) remained neutral, while 18 (38.3%) agreed, with three of them

strongly agreeing. Ten (21.3%) disagreed, with two of them strongly disagreeing. One possible reason

for the agreement is that a separate report can be more focused and comprehensive. The high percentage

of neutrality may indicate that many of them do not have the requisite experience of ER to comment.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Strongly disagree

Disagree

Neutral

Agree

Strongly agree


4.3%

17.0%

40.4%

31.9%

6.4%

Fig. 19



f. Environmental reporting should be a statutory/mandatory practice in Hong Kong

This finding shows that this is a controversial proposal. Fourteen (14) companies (29.8%) disagreed,

with three of them strongly disagreeing. Similarly, 14 (29.8%) agreed, with three of them strongly

agreeing. Nineteen (19) companies (40.4%) remained neutral. The response of the respondents suggests

that the business community is quite divided on this issue. And the high percentage of neutrality may

indicate that a lot of them have reservations about this proposal.

It is, however, interesting to note that among those 14 companies which support mandatory practice,

eight are not presently engaged in ER. It indicates that these companies, which for whatever reasons,

most probably “corporate inertia”, do not undertake ER, are actually quite receptive to the idea of

adopting ER as a corporate practice.

0% 10% 20% 30% 40% 50%

Strongly disagree

Disagree

Neutral

Agree

Strongly agree


6.4%

23.4%

40.4%

23.4%

6.4%

Fig. 20

g. Environmental reporting shall remain voluntary in Hong Kong

Twenty-four (24) companies (51.1%) agreed with this statement, with three of them strongly agreeing.

Eleven (11) companies (23.4%) were against this suggestion with four strongly disagreeing. Twelve (12)

companies (25.5%) remained neutral. It seems that some of those which indicated neutrality above on

the proposal of making ER mandatory are positive about its remaining voluntary.


ENVIRONMENTAL REPORTINGThe responses to the above two statements suggest that the business community in Hong Kong is not

yet ready for the introduction of ER as a mandatory practice.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Strongly disagree

Disagree

Neutral

Agree

Strongly agree


8.5%

14.9%

25.5%

44.7%

6.4%

Fig. 21

h. Environmental reports should be verified by an independent third party

There is no strong support for this proposal though it is actually an international trend. Ten (10)

companies (21.2%) agreed with one of them (2.1%) strongly agreeing. Eighteen (18) companies (38.3%)

remained neutral. Nineteen (19) companies (40.4%) disagreed, with four of them (8.3%) strongly

disagreeing. This is consistent with the finding of our HSCI survey which shows that only four out of

those ten which published standalone reports have their reports verified by an independent third party.

0% 10% 20% 30% 40% 50%

Strongly disagree

Disagree

Neutral

Agree

Strongly agree


8.5%

31.9%

38.3%

19.1%

2.1%

Fig. 22



i. There are currently not enough regulatory incentives for listed companies to perform environmental

reporting in Hong Kong

Thirty-two (32) companies (68.1%) supported this statement with three of them (6.4%) strongly agreeing.

Thirteen (13) companies (27.7%) remained neutral. Only two (4.3%) disagreed with this statement. The

high percentage of support for this statement with only two opposing it echoes the finding under

Section B (i) above that the business community is expecting the regulators to do more to promote ER.

0% 10% 20% 30% 40% 50% 60% 70%

Strongly disagree

Disagree

Neutral

Agree

Strongly agree


0.0%

4.3%

27.7%

61.7%

6.4%

Fig. 23

j. Shareholders pay much attention to the environmental impact (impact of the businesses, operations,

products and services on the environment) of listed companies in Hong Kong

Nine (9) companies (19.2%) agreed with this statement, with two of them (4.3%) strongly agreeing.

Sixteen (16) companies (34%) remained neutral. Twenty-two (22) companies (46.8%) disagreed, with

one of them (2.1%) strongly disagreeing. Those remaining neutral are probably not certain about the

stance of their shareholders on ER. Those disagreeing with this statement seem to believe that their

shareholders do not care too much about their environmental impact.

0% 10% 20% 30% 40% 50%

Strongly disagree

Disagree

Neutral

Agree

Strongly agree


2.1%

44.7%

34.0%

14.9%

4.3%

Fig. 24


ENVIRONMENTAL REPORTINGk. Hong Kong companies lag behind competitor cities in South East Asia on environmental issues

Thirteen (13) companies (27.6%) agreed, with one of them (2.1%) strongly agreeing. Twenty-three (23)

companies (48.9%) remained neutral. Eleven (11) companies (23.4%) disagreed, with two of them

(4.3%) strongly disagreeing. A large number of respondents remained neutral probably because they

do not know the practices of their counterparts in other places or because of the generality of the

statement.

0% 10% 20% 30% 40% 50% 60%

Strongly disagree

Disagree

Neutral

Agree

Strongly agree


4.3%

19.1%

48.9%

25.5%

2.1%

Fig. 25

D. Respondents’ comments on environmental reporting issues

In the last section of the questionnaire, the respondents were asked to answer four questions, devised to

encourage them to give more thought to ER.

a. What incentives or other drivers would encourage companies in Hong Kong to do more in ER?

The respondents have come up with the following proposals:

• Making ER a legal requirement.

• More regulatory incentives.

• More support from the government, both financial such as subsidy and technical support.

• Tax incentive.

• Establishing a Hang Seng Sustainability Index.

• Raising the environmental awareness through education e.g. structured courses on MBA level

and different media.

• More recognition for ER through organization of more competitions for ER.

• More participation of the chambers of commerce of different industries such as provision of

training and organization of seminars to their members.

• More demands from different groups of stakeholders e.g. shareholders, customers and the public.



b. Do you have any other comments concerning ER in Hong Kong?

The comments of the respondents are summarised as follows:

• Making it compulsory only for certain types of companies with more environmental impact or

higher environmental risk.

• There should be more promotion and support from the government and the statutory bodies.

• There should be more competitions and campaigns for ER.

• More guidance should be provided and standards should be set for ER.

• ER is not well understood by the business community especially the SMEs.

• The government has taken the lead in requiring all governmental departments to publish

environmental reports but there is little visibility of the result.

• The NGOs only target at companies with high transparency and ignore other companies which

do not perform ER. And the media deliberately publishes ill-founded statements concerning air

pollution.

c. If public voice about air pollution in Hong Kong becomes stronger, how would your company

respond?

The replies of the respondents are summarised as follows:

• Continue to explore environmentally friendly methods of production, operation and maintenance.

• Take whatever resources it requires to reduce the pollution on the condition that it will not

hinder the company’s development.

• No comment because the production base of the company is in PRC.

• Respond positively.

• Will more widely publicise the environmental protection activities of the company.

• Will join forces with others to promote clean air in Pearl River Delta and further review the

emissions to the environment and improve accordingly.

• Will perform review and impact analysis before deciding on the further reduction plans.

d. Does your board regularly review or does it plan to regularly review the environmental impact or

performance of the company?

Sixteen (16) companies answered this question and eight of them gave a positive answer. One confirmed

that the review is conducted on a quarterly basis and one confirmed that it is done annually in

connection with the approval of the sustainability report. Some indicated that their reviews are conducted

as part of the operations review. Eight indicated that their boards are not currently doing such kind of

reviews with one of them confirmed that review by the board will be done when they publish an

environmental report which is forthcoming within the next three years.


ENVIRONMENTAL REPORTINGE. Additional observations

Respondents (except one) have provided information about their size (in terms of the number of employees in

Hong Kong), business sector and whether they have got ISO 14001 certification.

Profile of respondents in terms of size:

Number of employees Number of companies

<100 17

100-500 5

501-1,000 4

1,000 - 2,000 5

>2,000 16

According to the findings of the questionnaire-based survey, of those 16 companies which are engaged in ER,

12 (75%) have more than 1,000 employees in Hong Kong (and ten of them have more than 2,000 employees).

It seems that the larger companies are more likely to engage in ER while SMEs are not yet too receptive to this

practice. This finding is reinforced by our HSCI survey, which shows that out of those ten HSCI companies

which have published standalone environmental reports (including CSR/sustainability reports), eight are from

the Hang Seng HK Large Cap Index which comprises the top 15 stocks by market capitalisation in the Hang

Seng Hong Kong Composite Index.

About one third of the respondents (32.6%) are from the “services” sector which is probably because there are

more companies in the services industry. On the contrary, the low percentage in a particular industry, such as

oil & resources, does not necessarily represent a low participating rate of the industry in the survey. Rather, it

is due to the fact that there are only a few players in that industry. In any event, in the questionnaire-based

survey, there are representatives from each of the nine business sectors. It was found that major companies

from the oil and utilities sectors are all engaged in ER. Major companies providing public transportation or in

the aviation industry are also engaged in ER. Other than those companies which are generally perceived as

having great environmental impact, no strong correlation between the business sector and the publication of

environmental reports was found.

Of those 16 companies which are engaged in ER, ten of them have ISO 14001 certification. It seems that a

company having an EMS in place is more likely to engage in ER. There is, however, no information on

whether the others have set up an EMS certified to other internationally recognised standards. Our HSCI

survey also shows that of those 10 HSCI companies which have published standalone reports, eight have got

ISO 14001 certification (for several of them, in addition to some other kinds of EMS certification).



4. THE WAY FORWARD FOR HONG KONG — RECOMMENDATIONS

Based on the findings of the questionnaire-based survey and the views of the interviewees, it seems appropriate for

ER to remain voluntary in Hong Kong in the near future. Ways, however, have to be found for motivating the less

committed companies to take up ER as soon as practicable. As noted above, “regulatory incentive” is probably the

most effective driving force which is considered as inadequate and highly desirable by the majority of the respondents.

As the main focus of this research paper is the listed companies in Hong Kong, the recommendations regarding

promotion of ER are made in such context.

A. Regulatory incentives

As a regulator, the Exchange should consider promoting ER as a good corporate governance practice. One of

the options is to introduce it as a requirement under the Listing Rules. Unless a listing rule has got statutory

backing, a proposal which is presently under consideration of the Exchange and the Securities and Futures

Commission (“SFC”), it in theory only imposes a contractual obligation on the issuers. Despite this, a listing

rule is generally perceived by the issuers as mandatory. As noted above, mandating ER in Hong Kong appears

to be an idea lacking wide support at this stage and thus introducing ER as a listing rule is likely to be met

with great resistance from the listed companies.

It is our recommendation that ER, being part of a risk management system and a good corporate governance

practice, should be incorporated into the Code on Corporate Governance Practices (“CG Code”) which sets

out principles of good corporate governance practices. If ER is made a Code Provision, the issuers are

required to comply or explain if they choose to deviate. If it is incorporated as a Recommended Best Practice,

it is supposed to be guidance for the issuers only.

Australia is considering to introduce sustainability reporting into the Principles of Good Corporate Governance

and Best Practice Recommendations (“Principles”), a set of voluntary standards of corporate behaviour compiled

by ASX Corporate Governance Council for the Australian listed companies which have the flexibility not to

adopt them subject to explanation i.e. “comply or explain” basis.

Unlike Australia which has already introduced statutory reporting requirements which go beyond financial

reporting i.e. Section 299 and Section 299A of the Corporation Act 2001, Hong Kong has given little recognition

of non-financial reporting until now. As most of the listed companies do not seem to have sufficient

understanding of non-financial reporting, to introduce ER as a Code Provision may put most of the issuers in a

difficult position as it is foreseeable that a majority of them will have great difficulty in complying with the

requirement. It is thus advisable for the Exchange to incorporate ER into the CG Code as a Recommended Best

Practice at the present stage. Though it has less force than a Code Provision, it would at least be a

recommendation which encouraged listed companies to take it up as a good corporate governance practice

on a voluntary basis.


ENVIRONMENTAL REPORTINGAs noted earlier, ER can take various forms — such as the form of a standalone environmental report, a

section of the annual report, or part of a CSR or sustainability report. Maximum flexibility in this regard is

recommended in order to encourage the highest possible uptake. Besides, starters and those which have been

engaged in ER for some time may have different preferences and considerations. The former group tends to

start off by incorporating ER into their annual reports, while the latter is likely to publish standalone

environmental reports, or CSR/ sustainability reports, which have a much wider scope. It is therefore our

recommendation that no particular form should be specified by the Exchange.

It is suggested that the Exchange, apart from introducing ER as a Recommended Best Practice, should jointly

with the SFC and EPD issue guidelines on ER to listed companies. Guidance should be given on issues such as

how to prepare environmental reports, what information should be included in the report and what constitutes

a good report. Seminars or workshops relating to ER should also be organised by the regulators jointly with

the EPD, or the various business associations, not only to educate the audience but also to update them on

the latest development of ER on a regular basis. In compiling ER guidelines and organising training activities

for the listed companies, it is important for the regulators to enlist the assistance and participation of the

business associations, NGOs or academics who advocate environmental protection or socially responsible

practices, in order to gain greater support of the business community as well as widen the consultation base

on environmental issues.

The environmental reports, CSR or sustainability reports published by listed companies may also be uploaded

to the websites of the Exchange and EPD (subject to the consent of the relevant companies). This could serve

as a central library open to the general public who would then be able to easily find out the environmental

information and performance of the relevant listed company. It could also help increase the public awareness

of environmental issues and ER. As noted in the questionnaire-based survey, the increase of public awareness

will have a causative effect on the engagement in ER. When the public becomes more environmentally

sensitive, more demand for ER will come from the shareholders and other stakeholders to which the business

community will respond positively, by taking into account the environmental and social concerns in doing

business.

Other than promoting ER by introducing the requirement into the CG Code and providing more support to the

listed companies, it is recommended that the regulators should, in the long run, also keep track of the latest

rules and measures regarding ER, CSR or sustainability reports which their counterparts in other countries

have introduced so as to keep up with the international practice.

B. Market Indices

There are several major market indices which have been designed to track the financial performance of the

leading sustainability-driven companies worldwide.

In the US, the Dow Jones Sustainability Group Index was launched in 1999 which provides an index to

benchmark the performance of investments in companies which are striving to be more sustainable. It comprises

around 200 global companies representing the top 10% of leading companies committed to sustainable

practices which satisfy certain criteria on environmental protection, sustainability, social issues, stakeholder

relations and human rights.



Business in the Community, an independent business led charity in the UK which aimed at inspiring, engaging,

supporting and challenging companies to improve their impact on society, launched the Environment Index in

1996. It is a voluntary exercise that benchmarks businesses against their sector peers and other companies

participating in the Index, on the basis of their environmental management and performance in key impact

areas. Through the Environment Index, companies are challenged to identify and report publicly on how they

are managing their impact on climate change, biodiversity, use of resources and reduction of waste etc. In

2001, the FTSE4Good Index was established in the UK to measure the performance of companies that meet

globally recognized environmental and social standards, and to facilitate investment in those companies.

In Australia, the Australian Corporate Responsibility Index was launched as a voluntary self-assessment

managerial tool to encourage companies to develop and communicate socially and environmentally responsible

conduct. It has been adopted by some Australian listed companies. The participating companies have to

identify their corporate values in relation to community, environment, workplace and marketplace and show

how they are linked to their corporate strategy, risk management and policies. Other Australian indices

include SAM Sustainability Index and RepuTex SRI Index.

In 2004, the Johannesburg Securities Exchange launched the SRI Index as a means of identifying companies

that integrate the triple bottom line (social, economic and environmental sustainability) into their business

activities, and to facilitate investment in such companies. The constituents of the FTSE/JSE All Share Index (the

top 160 companies by market capitalisation listed on the exchange) are invited annually to voluntarily submit

information to be assessed against the SRI Index Criteria. The SRI Index has been seen by many to have put

sustainability reporting as a business issue and be influencing the corporate behaviour in South Africa in

terms of risk management.

Market indices are very practical benchmarking tools which can measure the environmental and social

performance of companies. They are also a stimulus for healthy competition among companies, challenging

them to adopt socially and environmentally responsible practices and strive for improvement. Further, a high

ranking definitely increases a company’s reputation which is a competitive edge. Last but not least, market

indices are useful in facilitating the flow of capital to companies with high transparency and good ranking.

It seems that many of the international markets have already recognised the importance of integrating

sustainability practices into business activities as evidenced by the establishment of various kinds of CSR or

Sustainability Indices. In keeping up with the international practices, it is recommended that Hong Kong

should in the near future establish a Hang Seng Environment Index similar to the Environment Index launched

by the Business in the Community in the UK and aim at launching a CSR or Sustainability Index in the long

run when the public and in particular the business community has more understanding of the concept of CSR.

The launch of an Environment Index will provide a strong motivation for companies to communicate their

environmental performance to their stakeholders through ER. Setting up a market index is not an easy task. It

involves the design of detailed rules and criteria which can be a very complicated process. However, Hong

Kong is in an advantageous position as it can benefit from the experience of other international markets which

have already been operating similar market indices for some time.

For those leading security houses which have already developed their own CSR or Sustainability Indices, it is

recommended that they should also incorporate ER, CSR or sustainability reports into the criteria of such

Indices so as to encourage environmental information disclosure by companies.


ENVIRONMENTAL REPORTING5. CONCLUSIONS

Companies, like all individuals, have an impact on the environment and usually the larger their operations, the

greater the impact will be. While it is not necessarily true that non-listed companies in Hong Kong have smaller

operations (in fact the SMEs, though most of them are not listed, are pillars of the Hong Kong economy), listed

companies in Hong Kong do always tend to have sizeable business operations locally and in many cases, also in the

PRC, such as the Pearl River Delta. By focusing on the ER requirement of listed companies in Hong Kong, we are not

arguing that the non-listed companies have less social and environmental impact, nor are we in any way suggesting

that they have a lesser need to engage in ER. In fact, many of the benefits of ER mentioned in this research paper are

applicable to companies of different sizes and corporate categorisations.

In some countries like the UK, the requirement to publish environmental information applies to companies reaching

a certain size irrespective of whether they have got listing status, while in others such as France and South Africa, the

reporting requirements focus primarily on listed companies.

Our questionnaire-based survey has identified, among other things, the main reasons for the low uptake of ER by

listed companies in Hong Kong, the major driving force for ER and the manner of implementation of ER which the

respondents consider as most appropriate for Hong Kong at the present stage. Based on the findings of our surveys

and the interviews, it is our conclusion that the lack of understanding of ER and its benefits within the Hong Kong

business community has generated the prevailing misconception that it is irrelevant to and is a burden on companies.

In this research paper, the benefits of ER have been analysed. It is argued that apart from being a communication tool

between a company and its various groups of stakeholders, it is also an effective tool for managing companies’

environmental and operational risks. In addition, it can enhance the competitiveness and the shareholder value of

companies in the long run.

Our survey shows that the majority of respondents consider that there is insufficient regulatory incentive for listed

companies to engage in ER, and that it should remain voluntary for the time being. It is thus our recommendation

that the Exchange should introduce ER as a Recommended Best Practice in the CG Code as soon as practicable and

issue guidelines to issuers to help them start engaging in ER. The establishment of a Hang Seng Environment Index

and a CSR Index or Sustainability Index in the long run is also recommended as an indirect way to promote ER and

CSR in Hong Kong. It is argued in this research paper that, though the Hong Kong business community may not yet

be ready for mandatory ER, it is in the interests of companies themselves to take up ER on a voluntary basis as soon

as possible. Such a move would partly be a response to the increasing public demand for more socially and

environmentally responsible corporate practices. It is also a means to strengthen their own risk management systems

and corporate governance practices which are conducive to the development of their business and the enhancement

of shareholder value. By enhancing the transparency and accountability of a company, as well as strengthening its

risk management system, ER should be considered as an attribute of good corporate governance practices. On a

macro-level, ER by companies can also help control the pollution problem in Hong Kong which, unless it is tackled

properly and seriously, is capable of eroding its competitiveness as a leading commercial centre and a business

services hub for the mainland, a plight that the business community would not want to see and should make joint

efforts to avoid without further delay.



Annex 1

Questionnaire — Environmental Reporting




Questionnaire — Environmental Reporting

May 2006

Purpose: HKICS is working on a research project relating to Environmental Reporting. The purpose of this survey is to collect your

views and comments on this issue. All data and information collected will be kept strictly confidential for analysis by

HKICS only. Views and information of individual companies will not be identified.


ENVIRONMENTAL REPORTINGDoes your company have any environmental policy?

Yes No

Does your company perform environmental reporting (i.e. reporting by a company of the impact of its businesses, operations,

products and services on the environment)?

Yes (Please move to Part A)

No (Please move to Part B and skip Part A)

Part A — (For companies performing environmental reporting)

A1. How does your company perform environmental reporting?

By issuing a standalone environmental report which is separate from the corporate social responsibility report,

sustainability report and annual report

By incorporating it into the corporate social responsibility report or sustainability report

By incorporating it into the annual report

By issuing other documents such as newsletter or brochure:

Please specify:

(Please skip Question A2 if your company has performed environmental reporting in any of the forms stipulated

above)

A2. Is your company currently preparing an environmental report (in any of the forms as stated in A1 above)?

Yes, please specify the exact form

No

A3. What is/are the main driver(s) for your company to perform environmental reporting? (Please choose a maximum

of 3)

Cost reduction Risk reduction

Reputation/Brand building Supply chain requirements

Provides competitive advantage Consistent with corporate values or ethics

Raise employees’ awareness of environmental protection

Stakeholders’ demands (Please Specify stakeholder category: )

Government Encouragement

Other reasons:

A4. What is the length of your environmental report (in any of the forms as stated in A1 above)?

More than 10 pages 5 to 10 pages 2 to 4 pages

Half to one full page Less than half a page

A5. Does your company make the environmental report accessible online?

Yes No


ENVIRONMENTAL REPORTINGA6. Which of the followings are included in your environmental report?

(Please tick as appropriate)

Environmental policy

Environmental management system

Responsible employees

Risks assessment and management techniques

Areas of main environmental impact

Quantified environmental targets

Independent verification of the report

Data on release to the environment (e.g. emissions to air, discharges to water, solid wastes produced)

Data on use of resources (e.g. energy, non-renewable resources, raw material, water consumption)

Performance indicators (e.g. quantified environmental impact, causes of significant environmental impact,

benchmarking with others)

Disclosure of legal compliance (e.g. prosecutions, fines)

Environmental-friendly product design/stewardship

Financial information (e.g. environmental budget and expenditure)

Environmental reporting guidelines (e.g. Global Reporting Initiative)

Others, please specify:

A7. Which unit(s) has/have participated in the preparation of the environmental report?

(Please choose 1 to 5, with 1as the most involved and 5 as the least involved)

Board of Directors Company Secretary

Environmental Department Public Relations

Finance/Treasury Audit Department

Legal/Compliance/Risk Management

Others, please specify:

Part B — (For companies not performing environmental reporting)

B1. What is/are the main reason(s) for your company not performing environmental reporting? (Please choose a

maximum of 3)

Not cost-effective Lack of regulatory incentive

Not a legal requirement Corporate inertia

No demands from stakeholders matters Business totally not involved in environmental

Lack of resources Lack of in-house expertise

Not seen as a priority of the company Creates competitive disadvantages

Other reasons:

B2. Does your company currently have any plan to perform environmental reporting in the coming 3 years?

Yes (Please skip B3) No


ENVIRONMENTAL REPORTINGB3. What drivers would encourage your company to perform environmental reporting? (Please choose a maximum of 3)

Regulatory incentive Evidence of enhanced reputation/image

Evidence of risk reduction Evidence of cost reduction

Demand from customers Demand from Shareholders

Awards/labeling schemes External financial support

External technical support

Evidence of effectiveness of environmental reporting in pollution control

More public awareness of environmental reporting

Demand from other stakeholders, please specify:

Part C — General Opinions

Please circle the most appropriate number

(1 = Strongly agree, 2 = Agree, 3 = Neutral, 4 = Disagree, 5 = Strongly Disagree)

a. The pollution problem is serious nowadays in Hong Kong

1 2 3 4 5

b. Among all types of pollution, air pollution is the most serious one in Hong Kong

1 2 3 4 5

c. Environmental reporting can help control pollution in Hong Kong

1 2 3 4 5

d. Environmental reporting can raise the environmental awareness of a company

1 2 3 4 5

e. A separate environmental report can remarkably enhance the reporting quality

1 2 3 4 5

f. Environmental reporting should be a statutory/mandatory practice in Hong Kong

1 2 3 4 5

g. Environmental reporting should remain voluntary in Hong Kong

1 2 3 4 5

h. Environmental reports should be verified by an independent third party

1 2 3 4 5

i. There are currently not enough regulatory incentives for listed companies to perform environmental reporting in

Hong Kong

1 2 3 4 5

j. Shareholders pay much attention to the environmental impact (impact of the businesses, operations, products and

services on the environment) of listed companies in Hong Kong

1 2 3 4 5

k. Hong Kong companies lag behind competitor cities in South East Asia on environmental issues.

1 2 3 4 5


ENVIRONMENTAL REPORTINGl. What incentives or other drivers would encourage companies in Hong Kong to do more in environmental reporting?

m. Do you have any other comments concerning environmental reporting in Hong Kong?

n. If public voice about air pollution in Hong Kong becomes stronger, how would your company respond?

o. Does your board regularly review or does it plan to regularly review the environmental impact or performance ofthe company?

Part D — Company General Information

Company Name:

Sector:

Number of employees (in Hong Kong) <100 100 — 500 501 — 1,000 1,000 — 2,000 >2,000

Interviewee (Position):

Contact Details: (Tel) (email)

Does your company have ISO 14001 Certification? Yes No

End of questionnaire

Thank you for your participation

Please return by 9th June, 2006 the completed questionnaire by post to HKICS (3/F Hong Kong Diamond Exchange Building,

8 Duddell Street, Central, Hong Kong) or by fax (852-28815050) or by email ([email protected])



Annex 2

Extracts of the Interviews(Reprint of an article publishedin the September edition of CSJ,

the monthly official publication of HKICS)


ENVIRONMENTAL REPORTINGEnvironmentalReporting

Some of the most serious risks faced by businesses

in Hong Kong relate to the environment — these

include rising energy costs, tougher environmental

regulation, and the threats related to pollution. Very

few businesses, however, are reporting on these risks

with potentially disastrous consequences for Hong

Kong’s international competitiveness.

The new research paper of The

Hong Kong Institute of Chartered

Secretaries (HKICS) published in

Sep tember 2006 i s devo ted to

environmental reporting (ER). The

re sea rch pape r i s ba sed on a

questionnaire sent to all main board

listed companies in Hong Kong in May

2006 seeking to gauge how many of

them are reporting to investors on their

environmental risks and impacts. In

addition to the questionnaire, the

research paper is based on interviews

with seven experts on ER. This article

highlights the main issues raised by the

interviewees.

EXTENT OF ENVIRONMENTAL

REPORTING

The interviewees confirm the picture

that emerges from the questionnaire

data — very few Hong Kong companies

are reporting on their environmental

risks. A small group of Hong Kong’s

blue chips are producing impressive

s t a n d a l o n e e n v i r o n m e n t a l o r

sustainability reports, and a number of

other listed companies include some

information on their environmental

policies or performance in their

corporate reports. Richard Wong,

Senior Environmental Protect ion

Officer, Corporate Environmental

Management (CEM), Environmental

Protection Department (EPD), cites a

recent study of listed companies in

Hong Kong commissioned by the EPD.

‘Of the some 900 listed companies

surveyed in 2005, about ten per cent

have p roduced env i r onmen ta l

information either in the form of a

standalone report, incorporated into

their annual reports, or a brief section

on their websites. However, if you look

only at the Hang Seng Index companies,

about 50 per cent of them produce

s o m e f o r m o f e n v i r o n m e n t a l

information.’


ENVIRONMENTAL REPORTINGIf you look at Hong Kong’s estimated

300,000 smal l to medium-s ized

enterprises (SMEs), the picture gets a

lot worse — very few of them make

any mention of environmental risks in

their corporate reports. Richard Wong’s

CEM team is now switching its attention

to SMEs since he believes very few have

even heard of ER. ‘They lack knowledge

[about environmental issues], there is

often a shortage of resources and often

they tend not to think sufficiently about

the environment. We are exploring

ways to help them.

THE CONSEQUENCES FOR HONG

KONG

H o w s e r i o u s i s t h i s l a c k o f

environmental information in Hong

Kong ’ s co rpo ra te r epor t s ? The

interviewees for the HKICS research

paper suggest a number of reasons why

it could be disastrous for Hong Kong’s

future prospects.

POOR TRANSPARENCY

The primary losers are, of course,

investors. ‘If you were left to rely on

most prospectuses it would be very

difficult to find useful information

confirming the nature of a company’s

potential environmental liabilities,’ says

Melissa Brown, Executive Director,

Associat ion for Sus ta inable and

Responsible Investment in Asia (ASrIA).

Even something as basic as information

on energy consumption and rising

energy costs is absent in the vast

major i ty o f repor t s . Clear ly a l l

companies are vulnerable on this score

and investors need to be able to assess

which companies are likely to be able

to survive and thrive in an a higher

fuel cost environment. ‘We have a very

large number of companies who are

now paying much more for their

electricity and their fuel than they were

two years ago,’ says Brown, ‘and yet

few Hong Kong listed companies

systematically report on how much they

pay for electricity or fuel. The issue of

energy efficiency and how well a

company is operating in a rising fuel

cost environment is regarded as a key

element of competitive management, so

if a company doesn’t break out those

costs, how can investors know how well

they are managing this key problem?’

International standards in this area have

risen dramatically in the last decade as

the dire potential consequences of

climate change, pollution and resource

depletion have started to be taken more

seriously. While it is extremely difficult

to assess the damage that is being done

to Hong Kong ’s reputation in the

investment community on account of

its low ER standards, it is clearly not

conducive to the government’s aim to

nurture a world-class securities market

in Hong Kong . Seve ra l o f t he

interviewees suggest that Hong Kong

has fallen far behind its competitors.

‘Hong Kong is very far behind in this

area,’ says Eric Bohm, Chief Executive

Officer, WWF. Peter Hills, Director and

Chair Professor, The Centre of Urban

P l a n n i n g a n d E n v i r o n m e n t a l

Management, University of Hong Kong,

agrees. He suggests that this is not only

true when compared to jurisdictions in

the West, but also in comparison to

other jurisdictions in Asia, with Hong

Kong lagging far behind Japan, Korea

and Australia in terms of its track record

on ER.

T O U G H E R E N V I R O N M E N T A L

REGULATION

As mentioned above, there has been a

lot more concern globally about

companies’ environmental impacts and

governments have become a lot more

serious about environmental regulations

and their enforcement. This, Eric Bohm

warns , w i l l i nev i t ab l y impac t

companies in Hong Kong. ‘Frankly, if

companies don’t do something now the

government will put in measures and

regulations causing their operational


ENVIRONMENTAL REPORTINGcosts to rise dramatically,’ he says.

Melissa Brown agrees. ‘Investors are

trained to spot trends,’ she says, ‘and

one of the easiest trends to bet on in

Asia today, and I mean dead easy, is

that over the next five to ten years the

tone of environmental regulations and

enforcement is going to get significantly

tougher.’

She cites as evidence of this the recent

moves by the Guangdong government

to force polluters to clean up or shut

down . ‘ I nc r ea s ing l y t he l oca l

government officials [in Guangdong]

are seeing badly polluted ground water

and they realise that these liabilities are

going to accrue to them. Before their

priority was to encourage job growth,

but increasingly they are beginning to

realise that they have to manage

environmental problems that will make

the communities impossible to live in.’

Tougher environmental regulation has

already had a direct impact, of course,

on companies in high-risk industries

such as those of aviation and power

generation, which tend to be early

adopters of ER. This does not mean,

however, that other companies can

safely ignore the rising environmental

regulatory risk.

Hong Kong ’ s

economy is now

a s e r v i c e

economy with

manufactur ing

only accounting

for 4-5% of its

GDP, while this

might mean that the majori ty of

businesses are less vulnerable in terms

of increasing regulations on emissions,

tougher international environmental

regulations on traded goods are already

having an impact. Peter Hills points out,

for example, that there are a great

number of new European Directives

relating to environmental requirements

fo r goods expor ted to the EU.

Businesses involved in trade with the

EU now have to ensure compliance

with these environmental requirements.

POLLUTION

Many of the interviewees for the HKICS

report feel that the main obstacle to a

higher adoption rate of ER in Hong

Kong is the low importance attached

to environmental issues generally.

Andrew Thomson, CEO, Business

Environment Council, laments the fact

that the general attitude of the business

community towards ER is that it is

irrelevant to them. Peter Hills suggests

that Hong Kong is still very focused on

economic growth, opting for high

‘the environment isan investment anddoes give a return’Eric Bohm,

Chief Executive

Officer, WWF

‘one of the easiest trends to bet on in Asia today, and I meandead easy, is that over the next five to 10 years the tone of

environmental regulations and enforcement isgoing to get significantly tougher’

Melissa Brown, Executive Director,

Association for Sustainable and Responsible

Investment in Asia (ASrIA)



economic growth (particularly higher

incomes) a t the expense o f the

environment. ‘Some people say we will

have significant change in ten years,

but environmental problems incur costs

— hospital costs, losses in productivity

and so on — so whether we can wait

ten years is the question. We need to

think about our priorities,’ he says.

He adds that tougher environmental

protection measures do not necessarily

lead to lower economic growth but to

a different kind of economic growth,

one that is more sensit ive to the

importance of the environment as an

economic resource. He also points out

that a better environment in Hong Kong

will be the key to retaining talented

people. ‘If we maintain our current

ways, a lot of people from overseas will

not want to work here. People don’t

want to live somewhere that affects

their health.’

Awareness of the importance of

environmental protection is, however,

mounting in Hong Kong. Certainly the

worsening air pollution has led to

greater pressure from both the public

a n d b u s i n e s s e s f o r a c t i o n o n

environmental protection. ‘When I first

came here,’ Peter Hills says, ‘the major

opponents to environmental regulation

were the bus ines smen (ma in ly

manufacturers), because they said it

would affect their competitiveness. But

now, some of the most vocal advocates

of a bet ter environment are the

b u s i n e s s m e n , e s p e c i a l l y t h e

international ones. They want a world-

class city as well as a world-class

environment.’

E r ic Bohm po in t s ou t tha t the

government needs to recognise that

public opinion on the environment has

shifted massively over the last decade.

‘My own view is that there is a

misperception about the intelligence of

the Hong Kong public. The Hong Kong

public is willing to pay more to pollute

less, but the government’s aim is still

to keep down the cos ts for the

consumer.’

He adds that businesses should also

recognise their own vulnerability to

pollution. He cites the issue of water

quality. ‘Industrial processes require

large amounts of fresh water, if we use

it all up those processes will stop. In

China, 60 per cent of water resources

are category three, that is, unfit for

human consumption. Sof t dr inks

companies need very pure water, so

unless they get into recycling, and

improve consumer awareness of water

conservation, the higher their costs will

be.’

Melissa Brown cites another example.

‘There are a number of companies that

on a three- to five-year view are going

to be paying higher fees for water

pollution and will be paying for water

use that they currently don’t have to

pay for. The Nine Dragons pulp and

paper company that listed a few months

ago, for example, uses I think something

like 65,000 tonnes of water every day.

They don’t pay for the water they take

from the river, and they hope to double

operations on their present site. Given

the problems China has with water

resources, this might be an issue they

need to look at.’

Several of the interviewees for the

HKICS Report also point out that

environmental problems on a global

scale — such as climate change,

dwindling natural resources and

‘financial institutions see air travelas their biggest indirect contributor

to climate change’Linden Coppell,

Environmental Manager,

Cathay Pacific


ENVIRONMENTAL REPORTINGpollution — are now so serious that

the survival of the entire global

economic system could be in jeopardy.

‘Climate change is a bigger issue than

energy costs, and I don’t think people

have even begun to realise what it is

going to mean to them,’ says Glenn

Frommer, Sustainability Development

Manager, MTRC. He feels that the

outbreak of SARS in 2002 was in many

ways a foretaste of what is to come in

a world of rising temperatures. ‘You are

going to get more incidences of

mosquito borne illnesses, and you are

going to have to deal with health issues

that you didn ’ t have to deal with

before.’

This for a mass transit system is clearly

an important risk to consider. Frommer

points to the predictions of the Rome

Group, who recently updated their

1970s report Limits to Growth, as a

sobering read for anyone still not

convinced of seriousness of these global

environmental risks. The report predicts

that with the speed at which resources

are being used, waste is being produced

and the amount of land made non-

agricultural by desertification, at some

point in the next 50 to 80 years society

as we know it will collapse and we

will return to a quality of life equivalent

to the early 1900s.

If this seems alarmist, Frommer points

out that many of the symptoms the

Rome Group predict will foreshadow

the collapse are already evident, such

as the rising prices of energy and

c o m m o d i t i e s . S e v e r a l o t h e r

interviewees warn that companies

shou ld no t unde re s t ima t e t he

seriousness of the environmental risks

‘you can sit down and write four pages on key risksand key stakeholders without blinking, that doesn’ttake a lot of money’Glenn Frommer

Sustainability Development Manager, MTRC

ENVIRONMENTAL REPORTING IN MAINLAND CHINA

In many ways mainland China has been ahead of Hong Kong in terms of the

strictness of its environmental regulation, though enforcement remains a

problem. Peter Hills points out that China is introducing legislation on waste

control which is closely modelled on the European approach. Richard Wong

attributes this to growing supply chain pressure. ‘Most of China’s products are

being exported to Europe and the US, and the requirements on environmental

and corporate social responsibility (CSR) in those jurisdictions are quite

advanced. Increasingly they are demanding some sort of accreditation on

environmental grounds for these products.’

While this supply chain pressure is driving a lot of reform, there remain a

number of problematic areas on the mainland. The move from environmental

reports to ‘sustainability reports’ is a difficult area in China. A sustainability

report needs to cover the social aspects of the business, as well as the

environmental aspects. This is the ‘triple bottom line’ (economic, environmental

and social) approach. This would require companies to report on issues such

as workplace safety and labour rights which are seldom openly discussed.

The mainland is also experimenting with bringing in ‘green GDP’. This could

mean China ’s very high rate of economic growth could be revised


ENVIRONMENTAL REPORTINGthey face — having the right approach

to issues such as energy efficiency and

environmental protection is likely to

determine which businesses survive.

‘Many of the most highly compensated

fund managers before the Asian crisis

would have told you they were not that

concerned with corporate governance,’

says Melissa Brown. ‘Then afterwards

they were told by headquarters to ask

the companies in their portfolios

‘Germany encourages a wide variety oforganisations, from schools to butchers

shops, to prepare environmental reports’Richard Wong,

Senior Environmental Protection Officer,

Corporate Environmental Management,

Environmental Protection Department,

HKSAR Government

questions about corporate governance.

They had a change of heart. ’ She

suggests that the companies which are

silent about these risks will inevitably

be seen as higher risk by investors. ‘The

market will not react very well to their

earnings message i f they are not

transparent.’

SUGGESTED SOLUTIONS

The HKICS research paper on ER hopes

to provide practical guidelines on how

companies can get started on the

process. The interviewees were asked

to suggest what businesses and the

government should be doing to improve

the standard of ER in Hong Kong.

GUIDELINES FOR BUSINESSES

The good news to emerge from the

interviews conducted for the HKICS

report is that ER does not have to be a

laborious, or even a costly, exercise for

most small to medium-sized enterprises

(SMEs). ‘This is not rocket science,’ says

Peter Hills, ‘most of it is a matter of

common sense: how much electricity

have you used? how much waste have

you produced? There are potentially

many different questions to ask, but you

do not have to do it all at once, it is an

evolving process.’

Andrew Thomson points out that SMEs

do not need to produce the same sort

of report as large companies with

significant environmental footprints. He

urges small companies to keep it simple

and start reporting on their most

obvious environmental and social

indicators. These might include, on the

env i ronmenta l s ide , e lec t r i c i t y

consumption, environmental policy,

waste generation, water consumption;

or, on the social side, diversity of the

board of directors, equal opportunities

for staff, maternity leave, etc.

Richard Wong believes strongly that

the ER initiative is relevant to all

companies, irrespective of size. ‘About

six years ago I went to Germany, and I

discovered that Germany encourages a

wide variety of organisations, from

to a much lower rate when the losses

re su l t i ng f rom env i ronmen ta l

des t ruct ion, dwindl ing natura l

resources and pollution are factored

in. Peter Hills points out that this

involves the crucial question of how

far environmental resources can be

translated into monetary values. Eric

Bohm believes that the move towards

recognising ‘green GDP’ is inevitable.

‘The PRC has learnt from Western

Europe and North America that there

is a cost to rapid Industrialisation. The

WWF position is that China and India

have just as much right as anywhere

else to enjoy industrialisation, but let’s

do it wisely to avoid disaster.’


ENVIRONMENTAL REPORTINGschools to butchers shops, to prepare

environmental reports. Here, of course,

the main thing is to engage them in

this process, rather than imposing

rigorous requirements.’ The key concept

is that individual actions, no matter how

s m a l l , c o n t r i b u t e t o w a r d s

environmental sustainability. ‘Think

green, live green, act green. This is true

for all of us. You can start with your

own family, go home and prepare a

checklist with just, say, 10 indicators

to start with. You will quickly see there

are ways you can improve,’ he says.

Perhaps the main reason companies

have been hesitant to get started on ER

is the perception that it will add to their

costs. Frommer points out that the costs

can be minimised. ‘If you want to do a

pr inted repor t us ing the Global

Reporting Initiative (GRI) indicators, yes

it is expensive, but who says that is the

only way you can do it? You can sit

down and write four pages on key risks

and key stakeholders without blinking,

that doesn’t take a lot of money.’

Perhaps the most crucial factor in

making a success of ER is commitment

from senior management. Linden

Coppell, Environmental Manager,

Cathay Pacific, cited this as a major

force behind the success of their

reports. ‘The senior level awareness of

environmental issues is very high. We

have an environmental steering group

with senior representation from most of

our key departments. We also have a

Swire environmental committee, led by

the group deputy chairman.’

Cathay started i ts environmental

reporting process in 1995, with the

appointment of an environmental

manager who produced a publicly

available report on the company’s

environmental issues. Of course,

Cathay’s survival as a company is

heavily dependent on its environmental

track record. Airlines are particularly

involved in the current debate over

climate change, with a lot of attention

focused on the impact of air travel on

the build up of greenhouse gases in the

atmosphere. Cathay relies heavily on

their first class and business class

travellers and has received questions

from them regarding their carbon

dioxide emissions. Those travellers or

companies trying to maintain a carbon-

neutral policy (for example HSBC),

need to be able to calculate their

cont r ibut ion to carbon d iox ide

emiss ions per f l ight . ‘Financia l

institutions see air travel as their biggest

indirect contributor to climate change,’

says Coppell.

Cathay is also vulnerable to rising fuel

costs, and Coppell explains that the

m a i n d r i v e r b e h i n d C a t h a y ’ s

environmental work is therefore to

reduce emissions and increase energy

efficiency.

THE GOVERNMENT’S ROLE

The HKICS ER survey spoke to the

EPD’s Richard Wong to get an idea of

what action the government is taking

to promote ER. ‘The government leads

by example,’ he says, citing the fact

that s ince 1998 al l government

departments have had to produce an

annual environmental performance

report. Should the government go to

the next logical step and make ER

mandatory in the private sector?

This was not a welcome suggestion to

most of the interviewees. Eric Bohm

believes that such reporting will only

be successful i f companies do i t

voluntarily. ‘It is difficult to make

someone do something if they don’t

understand why they should do it.

Making it mandatory will not change

the attitude, the culture has to be

changed.’ He believes that Hong Kong

should rely on ‘moral suasion’ whereby

i t becomes the soc ia l norm to

voluntarily adopt environmentally-

friendly lifestyles.

He points out that you will always have

companies prepared to break the rules

— the US has mandatory ER, but


ENVIRONMENTAL REPORTING‘[environmental reporting] is not rocket science,most of it is a matter of common sense — howmuch electricity have you used, and how muchwaste have you produced?’Peter Hills,

Director and Chair Professor,

The Centre of Urban Planning and Environmental

Management

University of Hong Kong

‘companies can produce a shorterreport and have it backed up by

information on their website’Andrew Thomson,

Chief Executive Officer,

Business Environment Council

The EPD (www.epd.gov.hk) has

produced a number of guidelines

and leaf lets on environmental

reporting which will be of use to

companies. It also runs a helpdesk

on environmental reporting.

The Global Reporting Initiative

(www.globalreport ing.org) also

p r o d u c e s g u i d e l i n e s o n

environmental reporting.

financial statements can be ‘creative’

with the truth, as Enron demonstrated.

‘What we want is companies committed

to being socially responsible. There are

a lot of corporate social responsibility

(CSR) issues involved, such as child

exploitation, women’s rights, sexual

harassment, non-payment of wages.

They can only be solved through

people’s generosity of spirit to correct

the problem.’

Peter Hills points out that before making

ER mandatory, you have got to make

sure the appropriate backup systems are

in place, most important ly, that

eve ryone knows how to do i t .

‘Therefore I don’t advocate a mandatory

requirement in 2006,’ he says.

Andrew Thomson believes the best way

would be to initially require companies

to report on certain basic parameters,

while at the same time providing more

incentives for voluntary reporting. He

points out that there is already a market

mechan i sm ope ra t ing whe reby

companies with good transparency and

good risk management have a lower

cost of capital.



Annex 3

Drivers for Change



1. CLIMATE CHANGE

Climate change has been increasingly recognised as the biggest challenge facing humanity by many scientists who

argue that global warming over the past 50 years is mainly attributable to human activities. According to the

evidence provided by these scientists, emission of greenhouse gases such as carbon dioxide, mainly the result of the

burning of fossil fuels for providing power and transport, is heating up the planet and having devastating impact on

mankind. Despite the controversy about the effects of climate change on the natural world, there is evidence that it

has contributed to the rising sea levels, increase of fierce storms, droughts and spread of diseases. In recent years,

leaders in many countries including Tony Blair, the Prime Minister of the UK, realising its profound effect, have

publicly stated that combating climate change would be on the top of their agenda.

The joint effort of the international community to tackle climate change dates back to 1994 when The United

Nations Framework Convention on Climate Change (“UNFCCC”) came into force. In February 2005 the Kyoto

Protocol, being an amendment to the UNFCCC which aimed at reducing emissions of greenhouse gases, came into

force following ratification by Russia. As of April 2006, 163 countries, with the notable exceptions of the US and

Australia, have ratified the Kyoto Protocol. Countries which ratified the Kyoto Protocol commit to reduce their

emissions of greenhouse gases. Parties to the Kyoto Protocol are obliged to engage in emissions trading which means

that if their actual emissions are below or above the limits specified in the protocol, the unused credits of a party can

be sold to other parties that have actual emissions beyond their limits. This scheme rewards countries which meet

their targets and provides financial incentives to others to do the same. It is worth noting that most of the provisions

of the Kyoto Protocol apply to developed countries. China, India and other developing countries are exempt from the

requirement to reduce emissions on the ground that they were not the main contributors to the greenhouse gas

emissions during the industrialisation period which is believed to be causing the climate change nowadays. Such

“common but differentiated responsibilities” have been criticised by some countries as inequitable.

Though the impact of climate change and the relevant international treaties may not be fully appreciated by the vast

majority of people in Hong Kong, few of them are strangers to air and noise pollution which they experience in their

daily lives. The pollution problem is also receiving a lot more attention in the business community as it becomes

more evident that the pollution problem in Hong Kong has already got to the point where its reputation and

competitiveness as a prominent commercial and financial centre are at stake.

The steady increase of environmental awareness worldwide in recent years has helped people understand that all

forms of human activities, including business activities, have an impact on the environment. Nowadays, people

believe that while maximising profits is invariably the main objective of companies, they, as with all human individuals,

do have an obligation to minimise their environmental footprints and safeguard the environment. Against this

background, the trend of companies publishing environmental reports emerged since 1990s and has continued to

grow gradually over the years.


ENVIRONMENTAL REPORTING2. POLLUTION IN HONG KONG

The environmental awareness of Hong Kong society has noticeably increased in the last one or two years, mainly

due to the increasing seriousness of air pollution in Hong Kong which has begun to affect the daily lives of Hong

Kong people in terms of health and general wellbeing. Concern about losing talented people who are leaving Hong

Kong for other countries as a result of the worsening air quality is also mounting.

There is also evidence that some expatriates are asking for more hardship fees if they are going to be stationed in

Hong Kong. In the long run, the attractiveness of Hong Kong as a place for setting up business is likely to be

jeopardised38 if the pollution problem is not tackled in time. The growing adverse impact of air pollution on the

competitiveness of Hong Kong as a leading international city is alarming to many who used to find it difficult to

associate environmental protection with business and competitiveness.

Finding solutions for pollution in Hong Kong is becoming imperative and the Chief Executive of the HKSAR, Mr

Donald Tsang has already indicated that tackling air pollution will be a priority for the rest of his term. The recent

initiatives taken by the government such as the “Dressing Down Campaign”, the “Action Blue Sky Campaign” and

“The Energy Conservation Programme” are all evidence of the government’s commitment to clear up pollution.

Governments have a very important role to play in combating pollution. The introduction of far-sighted policies and

administrative measures by governments has a direct bearing on the increase of environmental awareness of a

society. For Hong Kong, a city which is suffering from air pollution not solely caused by activities taking place within

its own boundary, fighting pollution may even be more complicated. The government has stepped up its communication

and co-operation with the Guangzhou officials with the objective of making joint efforts to reduce the emissions

caused by the factories located in the Pearl River Delta, which is widely accepted as one of the main causes of air

pollution in Hong Kong. The cross-border emissions trading scheme, which is a major proposed measure of the

government to clean up the Hong Kong sky, proposes that the government will sell emission quotas to polluters who

can sell their surplus to others if their emissions fall under their quota. Emissions trading, the so-called “free market

environmentalism”, is not a new idea39. It was first introduced in the Kyoto Protocol and has been adopted in the

European Union since January 200540. A pilot scheme has also been implemented in several areas of the PRC since

2002. It has also been adopted by some large corporations having worldwide presence such as HSBC which

introduced the “carbon neutral pilot project” in 2005 by which the group-wide carbon dioxide emissions of some

170,000 tonnes is said to have been offset by purchasing an equal amount of quotas from a few projects around the

world. Whether a cross-border emissions trading scheme will be a success for Hong Kong is still uncertain, but it is

at least a concrete measure by the government to alleviate the cross-border pollution problem which Hong Kong is

now facing.

38 According to the findings of a survey commissioned by the American Chamber of Commerce released on 28 August 2006: 95% of the respondents wereworried about poor air quality; 39% had trouble recruiting professionals to work in Hong Kong; more than 50% knew of professionals who declined tocome to Hong Kong because of the quality of the natural environment in Hong Kong; 79% believed that the city’s attractiveness to foreign investors isdecreasing; and 59% thought the continuing deterioration would cause their companies to invest elsewhere. The survey was conducted by ACNielsen.A total of 616 questionnaires were sent and 140 were completed and returned (SCMP 28/8/2006).

39 A Discussion Paper titled “Possible Design for a National Greenhouse Gas Emissions Trading Scheme” by the Australian Government was released inAugust 2006 for public consultation.

40 The European Union Greenhouse Gas Emission Trading Scheme commenced operation in January 2005. The scheme is based on Directive 2003/87/ECwhich entered into force on 25 October 2003.



The abovementioned administrative measures of the government have helped promote the environmental awareness

of the general public and the business community. On another level, the business community has also responded

positively to the pollution problem by making a collective pledge to improve the air quality in Hong Kong.

A project, Clean Air Charter, was launched by the Hong Kong Business Coalition on the Environment, a coalition of

29 business associations headed by the Hong Kong General Chamber of Commerce with the objective to improve air

quality in the Greater Pearl River Delta. There are more than 300 companies which have signed the Charter,

pledging to take voluntary action to minimise pollution in their business activities by monitoring emissions, publishing

information on energy use, total emissions of air pollutants and adopting energy-efficient measures etc. Though the

Clean Air Charter is a voluntary pledge, it is a business sector-wide effort to address the pollution problem in Hong

Kong. It shows that the business community is prepared to shoulder its responsibility of combating air pollution.

Clearing up pollution in Hong Kong is an uphill battle especially when one of the sources is demonstrably beyond

the control of Hong Kong. One, however, should not jump to the conclusion that it is a matter only for the

government. It is a cause which requires the support and co-operation of the whole society as well as the PRC

government. It is not the focus of this research paper to suggest solutions for the pollution problem in Hong Kong.

However, it is our suggestion that the business community in Hong Kong can play a crucial role in combating

pollution. In addition to joining a voluntary pledge to minimise pollution which is undoubtedly a very positive act,

the business community should be more proactive and consider undertaking ER on a voluntary basis. ER can help a

company achieve energy savings, reduction of waste, more efficient use of materials and early identification of

environmental risks. It is an effective measure to help reduce pollution in Hong Kong. To a certain extent, it can also

alleviate the pollution in the Pearl River Delta, taking into account that many of the Hong Kong companies have

already relocated their operations to the Pearl River Delta. The promotion of ER within the business community is a

good cause which is worthy of the support of the business associations and the government.


B IBL IOGRAPHY1 ACCA. (2000 & 2003) The Big Picture: How the Environment Influences Corporate Profit

2 ACCA. (2003) An Introduction to Sustainability Reporting for Organizations in Hong Kong

3 ACCA. (2004) Toward Transparency: Progress on Global Sustainability Reporting 2004

4 ACCA. (2006) Report of the Judges — ACCA Hong Kong Awards For Sustainability Reporting 2005

5 Advisory Committee on Business and the Environment, UK. (1997) Environmental Reporting: An Approach to Good

Practice

6 Alyson Slater and San Gilbert (2004) The Evolution of Business Reporting: Make Room for Sustainability Disclosure,

Wiley Periodicals

7 Association for Sustainable & Responsible Investment in Asia. (2005) ISO 14001: 2004 What Do Investors Need to

Know?

8 Barry Elliott & Jamie Elliott. (2006) Financial Accounting and Reporting, Prentice Hall, 10th edition

9 Business in the Community, UK. (2005) Impact Review

10 Center for Corporate Citizenship, Boston College. April 2004 Conference Report

11 Commission of the European Communities. (2001) Green Paper — Promoting a European Framework for Corporate

Social Responsibility

12 Corporations and Markets Advisory Committee, Australian Government. (2005) Corporate Social Responsibility —

Discussion Paper

13 David Owen. ICCSR Research Paper Series — ISSN 1479-5124 Recent Developments in European Social and

Environmental Reporting and Auditing Practice — A Critical Evaluation and Tentative Prognosis

14 Department for Environment Food and Rural Affairs, UK. (2005) Government Position Statement on Environmental

Management Systems

15 Department for Environment Food and Rural Affairs, UK. (2006) Environmental Key Performance Indicators —

Reporting Guidelines for UK Businesses

16 Department of Trade and Industry, UK. (2006) A Consultation on Narrative Reporting Requirements for Companies

17 Department of Trade and Industry, UK. (April and December 2005) Guidance on the Change to the Directors’ Report

Requirements in the Companies Act 1985

18 European Environment Agency. (2001) Technical Report No.54 — Business and the Environment: Current Trends and

Developments in Corporate Reporting and Ranking

19 European Union. (2005) A Quality Environment — How the EU is contributing

20 Eva Poon, Richard Welford, Peter Hills and Jon Hills. (2003) The Role of Industry Associations and Chambers of

Commerce in Promoting Corporate Environmental Governance in Hong Kong

21 Global Reporting Initiative. (2002 & 2006) Sustainability Reporting Guidelines, 2002 version and G3 version

22 Hong Kong Environmental Protection Department. (1999) A Guide to Environmental Reporting for Controlling Officers

23 Hong Kong Environmental Protection Department. (2001) A Guide to Corporate Environmental Performance Reporting

24 Hong Kong Environmental Protection Department. (2002) A Benchmark for Environmental Performance Reports

developed by Deloitte Touche Tohmatsu


B IBL IOGRAPHY25 Jason Chi-hin Chan and Richard Welford. (2005) Assessing Corporate Environmental Risk in China: An Evaluation of

Reporting Activities of Hong Kong Listed Enterprises

26 KPMG. KPMG International Survey of Corporate Social Responsibility Reporting 2005

27 Law Concerning the Promotion of Business Activities with Environmental Consideration by Specified Corporations,

etc., by Facilitating Access to Environmental Information and Other Measures (Law No.77 of 2004, Japan)

28 Margaret Lo, Joyce Tsoi, Richard Welford, Peter Hills and Jon Hills. (2003) In-House Environmental Knowledge

Capital and Corporate Environmental Governance in Hong Kong Businesses

29 Masons. (2006) Update — March

30 Ministry of Environment, Japan. (2004) Environmental Reporting Guidelines

31 National Emissions Trading Taskforce, Australian Government. (2006) Possible Design for a National Greenhouse

Gas Emissions Trading Scheme

32 Sonja Studer, Richard Welford and Peter Hills. (2005) Drivers and Barriers to Engaging Small and Medium-Sized

Companies in Voluntary Environmental Initiatives

33 The Kyoto Protocol

34 The State Council Information Office, PRC. (2006) White Paper on Environmental Protection

35 The Stock Exchange of Hong Kong Limited. The Rules Governing the Listing of Securities on The Stock Exchange of

Hong Kong Limited

36 UK Companies Bill formerly called Company Law Reform Bill


ACKNOWLEDGEMENTSThe Institute would like to thank the following people for their assistance and contribution to this research project:

• All the respondents to the Questionnaire-Based Survey

• Mr Phillip Baldwin — Chief Executive of HKICS

• Mr Eric Bohm — Chief Executive Officer, WWF

• Ms Melissa Brown — Executive Director, Association for Sustainable and Responsible Investment in Asia

• Mr Kieran Colvert, Editor of CSJ, the official monthly publication of the Institute

• Ms Linden Coppell — Environmental Manager, Cathay Pacific

• Mr Glen Frommer — Sustainability Development Manager, MTR

• Professor Peter Hills — Director and Chair Professor, The Centre of Urban Planning and Environmental Management,

University of Hong Kong

• Dr Lam Che Fai, Assistant Professor, Department of Business Administration, Hong Kong Shue Yan College

• Dr Andrew Thomson — Chief Executive Officer, Business Environment Council

• Mr Richard Wong — Senior Environmental Protection Officer, Corporate Environmental Management, Environmental

Protection Department, HKSAR Government

Breaking the silence on environmental risk

breaking the silence on environmental risk

Documents