HKEX Insight

By Katherine Ng, COO of Listing, HKEX

The global Covid-19 pandemic has highlighted the importance of building sustainability and ESG factors into business strategy. Amid the pain that the virus has caused, it has also offered businesses large and small an opportunity to learn and prepare for the future.

The social and economic challenges posed by Covid-19 have emphasised the true value of identifying a business’ strengths and weaknesses, as well as recognising and mitigating material risks. Enshrining ESG principles in business strategy makes a company more agile and better prepared to deal with sudden change, whether that is a broken supply chain or the immediate need for employees to work from home.

HKEX, as a market operator, a regulator, and a publicly listed company has a unique vantage point in witnessing the far-reaching impact of Covid-19, which has unquestionably put new focus on how companies respond to social and stakeholders’ needs during times of crisis. We believe that Covid-19 will drive a new wave of ESG awareness and adoption.

Opportunity

Unknown to them in 2019, Hong Kong companies gained early preparedness for Covid-19. They gained experience in dealing with disruption from Hong Kong’s prolonged domestic social unrest. And as a result, many businesses updated their business continuity plans, recognising the role they played within the community, and ensuring that they had the right issues management procedures in place.

Crisis creates an opportunity for companies to clearly identify material risks and evaluate the importance of these on business’s strategy. Whether that is physical risks to property, which was highlighted for many Hong Kong companies during Typhoon Mangkhut in 2018, to the impact of a complete macro-driven shutdown of a sector such as tourism and travel in this pandemic -- crisis helps identify materiality.

The Covid-19 crisis has also amplified the actions taken by businesses, and investors are taking note. Strong, clear communications about what a business is doing, and why, has also become more important. ESG actions are being ranked by data companies, ratings agencies and analysts, creating valuable new performance data for investors and presenting an opportunity for listed companies to put their values into action.

Governance

Since making ESG reporting mandatory for all Hong listed companies in 2015, HKEX itself has tried to lead by example strengthening its own sustainability standards, ESG reporting and CSR engagement. HKEX has also sought ways to collaborate with listed companies to help them improve their governance practices through education and insight, helping directors better understand materiality assessment, target setting, and reporting boundaries. Covid-19 has now brought fresh attention to corporate governance.

In order to build ESG principles into their strategies, companies must know what, and where, their risks are, and have a plan to deal with those risks. Materiality is key, but there is no universal approach to assessing it.

Recent HKEX rule changes have therefore elevated the ESG debate to board level, where risks and opportunities are assessed and boards explain their approach on material ESG-related issues directly to their shareholders and other stakeholders.

In exceptional times companies need exceptional leadership, and that requires board diversity.

Diversity provides imbedded checks, fosters creativity and a rounded view of risks and opportunities. Empathy, practicalities, and the assessment of financial costs, human costs and societal costs become balanced. Crisis provides a stark reminder of why diversity of thought is critical for strong leadership.

Social

Globally, the events in the first half of 2020 have amplified support for the concept of “stakeholder capitalism”, highlighting the need for a balanced approach to profits, community and sustainability.

Strong relationships and trust are cornerstones of carrying a company and its employees through bad times. For example, this crisis has shown that businesses with large numbers of on-site employees face heightened health and safety risks, and those organisations have a major social obligation to respond and lead, not just for their employees welfare, but for society a whole. Engaged, responsible companies have supplied employees with protective gear and taken measures to ensure that the virus won’t travel from employees to customers via physical contact. Others have sponsored virus-fighting measures within their local business community, showing a strong sense of community investment. Companies that are focused on being part of their community are more likely to find support in times of crisis.

Some of the world’s most prominent companies have been harshly criticised by their communities for their reaction to the virus. Communities expect businesses to show leadership, and share the load, and those that have failed or are failing will create  material risks to long-term sustainability.

Silver Lining

The damage and pain caused by Covid-19 is widespread and undeniable. But it can be a catalyst for positive change. This crisis will accelerate the global acceptance and implementation of ESG principles in business. Leaders that adapt to the changes, create sustainable strategies, and foster employee and community goodwill will enhance their brand and reputation.