ESG Interviews with Hong Kong Listed Companies - 1

Jun 2022

Climate Change and Sustainability - Environmental, Social and Governance (ESG) Best Practices brought to you from the Boardroom

 

 

Part 1 (of 5) The Financial Sector - Bank of China (Hong Kong), interview with Mr Kenny Luo Nan, General Manager, Board Secretary and Company Secretary.

 

 

It was a partly cloudy and rainy Friday, 13 May 2022 when I arrived on the bright and well-lit 53rd floor of the Bank of China Tower and passed the sign “Board Secretariat” to meet Mr Kenny Luo, Bank of China (Hong Kong) Limited (BOCHK), one of Hong Kong’s leading banking groups and the end result of a merger of a dozen banks back in 2001.

 

Today's interview with the newly elected Council member of The Hong Kong Chartered Governance Institute (HKCGI) is the first of a series of in-depth and in-person ESG interviews with Hong Kong listed companies with the objective 1) to identify best practices in Hong Kong and internationally, and 2) to inform the design of an upcoming HKCGI ESG survey to assess the current state of ESG people, process, technology and data capabilities of listed companies in Hong Kong, and the real-life challenges and opportunities they face to meet climate change and sustainability requirements from their diverse stakeholder constituents.

 

In addition to BOCHK, I will have the opportunity and pleasure to exchange thoughts on the climate change and sustainability strategy with Board members, company secretaries, and chief sustainability officers of some of the strongest household names here in Hong Kong.

 

They include CK Hutchison Holdings Limited (a diversified conglomerate, whose businesses include ports, retail, infrastructure, and telecom), CLP Power Hong Kong Limited (energy), MTR Corporation Limited (transportation), and New World Development Company Limited (real estate development and more) covering all five industry sectors for which the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) provided industry-specific supplemental guidance.

 

TCFD recommendations will be one of the frameworks that the International Sustainability Standards Board (ISSB), established as a result of the 2021 United Nations (UN) Climate Change Conference in Glasgow (COP26), will use as a foundation for its new proposed standards around general sustainability-related disclosure requirements and specific climate-related disclosure requirements. ISSB will also incorporate industry-based disclosure requirements derived from Sustainability Accounting Standards Board (SASB) Standards in a move towards greater harmonisation of disclosure requirements.

 

Purpose and sustainability strategy

 

Let’s start with the overarching purpose of an organisation or its “raison d’etre” (literally reason of its existence or license to operate).

 

"As a subsidiary of state-owned Bank of China operating in Hong Kong and also Southeast Asia, BOCHK plays an important role in achieving and actively supporting China’s net zero emissions target by 2060 and as such we have aligned the timeframe of BOCHK’s sustainability strategic plan from a three-year to a five-year plan to be fully in sync with the Mainland’s 14th five-year plan," Kenny shares at the outset of our interview.

 

BOCHK’s 2021-2025 sustainability strategy, in essence, defines key objectives under each of the E, S and G pillars.

 

  1. Environmental

- Supporting clients to transition to a low-carbon economy

- Cultivating regional green finance capabilities

 

  1. Social

- Building a mutually beneficial society

 

  1. Governance

- Achieving efficient and transparent governance

 

"Climate change and the dynamic and ever-increasing stakeholder expectations related to the broader ESG theme may appear to be a challenge in terms of resourcing, time and effort, and stakeholder buy-in to prepare your organisation, but for financial institutions like BOCHK it presents also a significant commercial opportunity to 1) assist our clients with their financial services needs as their trusted advisor and financier as they transition to a low-carbon economy, and 2) develop green and sustainable investment products and services to meet increasing market demand and redirect financing towards achieving the UN Sustainable Development Goals (SDGs)," according to Kenny.

 

 

 

People and Governance

 

"To me, setting the right tone from the top and strategically communicating and cascading priorities is key to build and sustain the desired culture and mindset and achieving efficient and transparent governance is both a desired end and a means to an end to achieve our 2021-2025 sustainability strategy," emphasises Kenny.

 

BOCHK has established a three-tier governance structure with a Board level Sustainability Committee to set the overall strategic direction and vision, where 60% of the members are Non-Executive Directors, a Management level Sustainability Executive Committee to translate the strategic direction into strategic initiatives, and an Operational level Sustainability Working Group to execute the strategic initiatives, supported by a Human Resources/ Corporate Social Responsibility Office.

 

"We have 36 actions as part of our 2021-2025 sustainability strategy, which we incorporated into key performance indicators (KPIs) of our management and staff to drive accountability and ownership."

 

Regulatory Reporting and Risk Management

 

I read BOCHK’s 2021 Sustainability Report to prepare for my interview with Kenny and noted it had been prepared in accordance with the Global Reporting Initiatives (GRI) Standards, the ESG Reporting Guide issued by Hong Kong Exchanges and Clearing Limited (HKEX) and the TCFD framework.  Prior to 2019 it was called the corporate social responsibility (CSR) report.

 

There are sustainability reporting frameworks and standards, where frameworks provide principles-based guidance on how information is structured, how it is prepared, and what broad topics are covered. Meanwhile, standards provide specific, detailed, and replicable requirements for what should be reported for each topic, including metrics.

 

We are seeing that TCFD as a framework is increasingly gaining traction with adoption of its recommendations and supporting disclosures by HKEX, the Hong Kong Monetary Authority, the Hong Kong Insurance Authority, and the Securities & Futures Commission. The framework, in essence, outlines four thematic areas, that is: 1) governance, 2) strategy, 3) risk management, 4) metrics and targets for all industry sectors, with supplemental guidance for a number of industry sectors ((a) financial sector, (b) energy, (c) transportation, (d) materials and buildings, (e) agriculture, food & forest products).

 

For banks as a subsector of the financial sector (other three being insurance companies, asset owners, asset managers), there is TCFD guidance in three of the four areas:

 

Strategy - Disclose credit exposure to carbon-related assets, and their climate-related risks, that can be grouped into physical risks, which arise from changes in weather that impact the economy, and into transition risks, which arise from the transition to a low-carbon economy.

 

Risk Management - Identify, monitor, and manage climate-related risks in the context of traditional banking industry risk categories such as credit risk, market risk, liquidity risk, and operational risk.

 

Metrics & Targets – 1) Identify the metrics used to assess the impact of climate-related risks in the short, medium, and long term, which can relate to credit exposure, equity and debt holdings, or trading positions, 2) Disclose the amount and percentage of carbon-related assets relative to total assets as well as lending and other financing connected with climate-related opportunities, and 3) Disclose Greenhouse Gas (GHG) emissions, where data and methodologies allow.

 

For small and medium-sized banks with limited budget, resources, time, and lack of sufficient data and technology, and often in-house expertise, it can be quite a significant effort to identify climate-related risks in the banking and trading books and translate these into relevant insights for management to identify climate-related and sustainability opportunities, products and services.

 

Concluding remarks and next steps

 

Banks have an important role to play in 1) assisting companies in their net zero transition journey through providing sustainable finance (green bonds, social bonds, sustainability bonds, or so-called use-of-proceed instruments, and sustainability-linked loans, which focus on overall ESG improvement of the issuer), where we are seeing an upward trend as a percentage of total funding, and 2) advisory in debt capital markets (DCM) and sustainable mergers & acquisitions (M&A) transactions. There is a substantial opportunity for banks to help their clients to meet their ESG goals, especially banks who have deep expertise of the regional market (e.g. GBA) and sector (e.g. food and agribusiness) combined with a trusted relationship with their clients.

 

By Prof Lapman Lee, Professor of Practice (ESG, FinTech, Governance), Hong Kong Polytechnic University

Managing Director, Triniton Advisors, specialized in climate change and sustainability governance and risk management, financial and strategic communications

 

Got Questions?

Please contact the Technical & Research Section: 2881 6177 or email: research@hkcgi.org.hk

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