ESG Insights (Nov 2024): Hang Seng Indexes Company 2024 ESG Annual Review

Hang Seng Indexes Company 2024 ESG Annual Review

The first article of this issue will give an overview of the 2024 sustainability performance assessment conducted by the Hong Kong Quality Assurance Agency (HKQAA). The assessment shows that the Hong Kong universe continued to outperform the A-share universe in terms of environmental, social and governance (ESG) performance. However, both markets saw a drop in overall average score. The overall score gap between the two stock universes has widened slightly, while a higher proportion of lowly rated A shares got better grades owing in part to stricter disclosure requirements in the mainland market.

The second article will look into the latest performance of the Hang Seng Corporate Sustainability Index Series and Hang Seng ESG 50 Index, as well as other ESG indexes.

A-SHARE STOCKS SHOW IMPROVEMENT ALBEIT FROM LOW BASE

The 2024 HKQAA sustainability performance assessment covered 483 Hong Kong-listed constituents of the Hang Seng Composite Index and 1,430 Chinese A shares, which are constituents of the Hang Seng China A (Investable) Index that fulfil the eligibility requirements for Northbound trading under the Stock Connect Scheme. The assessment period spanned the entirety of the year 2023. Following the long-term trend, the Hong Kong universe continued to give a better ESG performance compared with the A-share universe, though both markets have declined in overall average scores (Exhibit 1). Hong Kong-listed stocks posted an average score of 52.5 (a “BBB+” rating), while the mainland-traded shares scored 38.1 (a “BB+” rating) on average.

The box below introduces the historical and technical background of the HKQAA sustainability performance assessment framework.

HKQAA Sustainability Performance Assessment Framework

In 2010, Hang Seng Indexes Company launched the Hang Seng Corporate Sustainability Index Series to provide benchmarks for sustainable investments in companies listed in Hong Kong and mainland China. Since 2014, Hang Seng Indexes Company has appointed HKQAA, an independent and professional assessment body, to conduct an annual evaluation of the sustainability performance of listed companies in Hong Kong and mainland China.

HKQAA’s proprietary sustainability performance assessment model is designed to rate a company’s system maturity and risks with regard to sustainability performance. It makes reference to both international and mainland Chinese guidelines and protocols such as ISO 26000, the Global Reporting Initiative, and the Guidelines on Corporate Social Responsibility Reporting for Chinese Enterprises. The assessment captures both general and industry-specific criteria covering three core aspects — Environmental, Social and Governance — which in turn are further divided into seven aspect subjects: governance, environment, human rights, labour practices, fair operating practices, consumer issues, and community involvement and development. An assessed company will be given a sustainability rating, ranging from AAA (“Sustainable”) to D (“Vulnerable”), alongside a corresponding score on a scale of 0 to 100 (Exhibit 2).

The assessment exercise begins each year with HKQAA sending out the questionnaires to individual companies for completion, followed by web-based research through various channels, including annual reports, sustainability reports on the company’s website, and company news from various media sources. The assessment results are computed based on questionnaire responses (if any), web-based research findings, and risk and rating considerations including the accountability rating, country and industry risk ratings (considering the company’s operating location and industry operation), and media watch rating (considering the effects of relevant media coverage on the company’s reputation and core business).

The ESG rating distribution of Hong Kong-listed companies has remained relatively balanced, as shown in the largely bell-shaped distribution, while the ESG rating distribution of A-share companies followed the long-standing trend of skewing towards the right, implying a higher concentration with lower ESG ratings (Exhibit 3). However, A-share stocks with lower grades have generally improved in the 2024 assessment, with over 27% of companies now getting a “BB+” rating, compared with 23% doing so in the 2023 assessment. The improvement came as these companies, despite starting from a low base, demonstrated stronger overall commitment to sustainability issues against the backdrop of policy advancements and tightened requirements in the mainland market. A case in point comes in this year’s release of formal disclosure rules by the three major stock exchanges in Shanghai [1], Shenzhen [2] and Beijing [3], after a state-backed think-tank first floated the idea of establishing uniform disclosure practices that tailored to China-focused ESG priorities in 2022.

BIG TECH HEEDS CLIMATE RISK MANAGEMENT, MOST FIRMS PRIORITISE CUSTOMER COMMUNICATION

In terms of industry, Industrials companies, especially those listed in mainland China, registered considerable gains in overall score corresponding in part to tightened exchange disclosure requirements, according to HKQAA data. Out of a total of 148 Hong Kong-listed and A-share stocks in the 2024 assessment that posted an increase of at least three points in overall score, the majority were Industrials (Exhibit 4). In the meantime, the HKQAA assessment showed that top Information Technology and Telecommunications A-share companies made marked increases in the Environment pillar, after making their first foray into nature-related risk assessment in accordance with the Taskforce on Nature-related Financial Disclosure (TNFD) recommendations [4]. But overall, the assessed companies have remained slow to take on emerging environmental themes.

For the Social pillar, most companies continued to address the issues of “health & safety” and “employment condition & decent work”, while putting more effort into “customer communication”. In terms of governance, companies still have room for improvement in adopting a more holistic risk management mechanism that integrate the ESG aspects and operational risks, while some have begun to invest and promote initiatives such as artificial intelligence and digitisation to build an innovation culture that support and advance sustainability efforts, according to HKQAA.

The overall score gap between the Hong Kong and A-share universes has widened marginally by 0.3 points. In terms of aspect subject performance, Hong Kong-listed companies continued to show higher scores in the seven aspect subjects (Exhibit 5). Each of the seven aspect subject score is compiled based on the performance of individual companies and takes into account various rating factors including accountability, country and industry risks, and media-watch monitoring.

HONG KONG LARGE-CAP STOCKS MAINTAIN LEAD IN ESG RATING

Consistent with historical performance, the 82 constituents of the Hang Seng Index, representing the largest and most liquid stocks listed in Hong Kong, earned an “A-” rating with an ESG score of 59 on a market value-weighted basis as of end-September 2024. That indicates a continued outperformance against the broader Hong Kong market (which has an average score of 52.5 and a “BBB+” rating). Meanwhile, the top 40 stocks with the highest ESG ratings in the 2024 HKQAA ESG assessment are all Hong Kong-listed, with the top 10 adding an average of 2.3 points against last year’s exercise. Even as it is worth noting that not all large caps are equally sustainable and smaller firms can be good ESG performers, large companies tend to excel in sustainability practices due to their resources and capabilities. They are also more likely to boast a global presence, hence drawing closer scrutiny from various stakeholders such as regulators and investors and pushing them for better ESG disclosure and performance.

Disclaimer

The information contained herein is for reference only. Hang Seng Indexes Company Limited (“Hang Seng Indexes”) ensures the accuracy and reliability of the information contained herein to the best of its endeavours. However, Hang Seng Indexes makes no warranty or representation as to the accuracy, completeness or reliability of any of the information contained herein and accepts no liability (whether in tort or contract or otherwise) whatsoever to any person for any damage or loss of any nature arising from or as a result of reliance on any of the contents of this document, or any errors or omissions in its contents and such contents may change from time to time without notice.

The information contained herein does not constitute any express or implied advice or recommendation by Hang Seng Indexes for any investments. Investment involves risks. Prospective investors should seek independent investment advice to ensure that any of their decisions is made with regard to their own investment objectives, financial circumstances and other particular needs. Prospective investors should also note that value of securities and investments can go down as well as up and past performance is not necessarily indicative of future performance.

?? Hang Seng Indexes Company Limited 2024. All rights reserved.

[1] Shanghai Stock Exchange. (12 April 2024). Guidelines No. 14 of Shanghai Stock Exchange for Self-Regulation of Listed Companies – Sustainability Report (Trial).

[2] Shenzhen Stock Exchange. (12 April 2024). Self-Regulatory Guidelines No.17 for Companies Listed on Shenzhen Stock Exchange – Sustainable Development Report (for Trial Implementation).

[3] Beijing Stock Exchange. (12 April 2024). Guidelines No. 11 of Beijing Stock Exchange for Self-Regulation of Listed Companies – Sustainability Report (Trial).

[4] TNFD. (September 2024). Taskforce on Nature-related Financial Disclosures (TNFD) Recommendations.