HKMA published a report presenting observations from the textual analysis of the environmental, social, and governance (ESG) reports of listed firms in Hong Kong. This study applies a wide range of computer-based textual analysis techniques to analyze the annual ESG-related textual disclosure of listed firms since the introduction, in 2016, of the mandatory disclosure requirement by the Stock Exchange of Hong Kong. The findings show that exposure of firms to ESG risks is one important source of uncertainty in their stock valuations and this uncertainty can be reduced effectively by their ESG disclosure. The fact that firms can benefit from being more transparent in ESG issues gives strong support to the continuing efforts of regulators to improve the ESG disclosure of firms.
The report provides a brief overview on the development of the ESG disclosure practice and requirements worldwide. It lays out the textual analysis of ESG reports, presents key observations, and discusses the empirical models and results of the effect of ESG disclosures on the stock valuation of listed firms. ESG funds have been found to be relatively resilient to the market turbulence during the COVID-19 crisis, suggesting that ESG factors significantly differentiate between stock valuations among firms. The key observations to the analysis include the following:
- Length of ESG disclosures have broadly increased since 2016, with firms in sectors more exposed to environmental issues, such as utility and energy, tending to disclose more information.
- Importance of environmental issues increased in ESG disclosures, while social and governance-related disclosures continue to dominate.
- Forward-looking information accounted for an important part of the ESG disclosures.
- Comparability of ESG reports among firms increased over time, while there was little improvement in the readability of reports.
Keywords: Asia Pacific, Hong Kong, Banking, Securities, ESG, Disclosures, Governance, HKMA
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