Title: Hong Kong Companies Urged to Seek Independent Audits for ESG Disclosures to Enhance Credibility, as Global Trend Favors Mandatory Audits
Large companies in Hong Kong are being encouraged to take the lead in verifying their environment, social, governance (ESG) data by proactively engaging external auditors to attest to the quality of their sustainability disclosures. Experts argue that this move will enhance confidence in ESG information, which stakeholders, including investors and lenders, rely upon for making capital-allocation decisions aligned with climate change mitigation and sustainability objectives.
According to Tan Ee Sin, EY’s climate change and sustainability services partner for Hong Kong and Macau, companies should seek assurance over key information material to investors and creditors as the first step in gaining the credibility of their sustainability disclosures. These material issues differ based on industry and location, and it is important for companies to regularly engage internal and external stakeholders to update and address changes in the business landscape and challenges.
While there is currently no comprehensive assurance standard, the International Auditing and Assurance Standards Board is developing a global baseline for sustainability assurance. The proposed standard, expected to be published for public consultation in the coming months, aims to provide greater consistency for information users and is slated for launch by the end of next year.
Historically, large companies in Hong Kong have trailed their global counterparts in verifying ESG data, but the gap is closing. In 2021, just over half of the Hong Kong-based companies that disclosed ESG data had their information assured or verified, which is an increase from 28% in 2019. However, an analysis by Hong Kong’s stock exchange revealed that only 6.7% of the 400 listed firms obtained independent assurance, indicating that many companies have yet to gain enhanced credibility from such audits.
According to the International Federation of Accountants (IFA), most verification engagements among large firms have focused on greenhouse gas emissions over the past three years. However, in 2021, only 53% of disclosures covered all four aspects of ESG – greenhouse gas emissions, other environmental issues, social issues, and governance issues. This figure represents an increase from 43% in 2019, highlighting the need for comprehensive and well-rounded disclosure.
While Hong Kong does not currently mandate auditing of ESG disclosures, there is a growing international trend towards such a requirement. New Zealand, for example, will impose a requirement on approximately 200 large financial institutions to seek limited assurance on greenhouse gas emissions from October next year. The European Union also plans to introduce limited assurance before October 2026, followed by reasonable assurance at a later stage.
Limited assurance provides a less detailed understanding of a company’s processes and requires the selection of fewer samples for verification and analysis. In contrast, reasonable assurance necessitates gathering sufficient audit evidence to reduce risk to an acceptable level and allows auditors to express a positive opinion. Currently, around 80% of sustainability assurance globally is of the limited type, indicating an increase in companies pursuing more thorough audits.
Despite the progress made, experts advise Hong Kong companies to be proactive in seeking independent audits for their ESG disclosures to enhance their credibility. By doing so, they can stay ahead of the global trend towards mandatory audits and demonstrate their commitment to sustainability and transparency. As the development of assurance standards continues, companies should prioritize engaging external auditors to ensure the reliability and accuracy of their ESG information.
In conclusion, with the importance of ESG disclosures growing, companies in Hong Kong are urged to take the initiative and seek independent audits to enhance the credibility of their sustainability information. By doing so, they can instill confidence in stakeholders such as investors and lenders while aligning their efforts with global trends towards mandatory audits. As developments in assurance standards progress, it is crucial for companies to stay ahead of the curve and demonstrate their commitment to sustainability.
