Will greenwashing prevent HK from becoming the next green hub?

November 06, 2023 10:30
Photo: Reuters

Hong Kong may be slightly behind other jurisdictions in its breadth of environmental and sustainability regulations, but not for much longer. Several proposed requirements will soon expand and clarify the rules companies must adhere to in the future, meaning that whether firms like it or not, to operate in Hong Kong will mean meeting global green standards.

Aligning to the government’s goal of becoming carbon neutral by 2050, the Hong Kong Stock Exchange (HKEX) has announced that mandatory disclosures will come into effect on 1 January 2025, with a two-year transition period. However, when 40 percent of Hong Kong-listed companies are failing to meet the coming global green standards, claiming a “lack of awareness” of requirements , will this shift happen in time? And if it does, at what potential cost?

The rapid rollout of these new rules requires companies to take immediate action to understand the gaps in their environmental, social and governance (ESG) activities and documentation along with implementing appropriate adjustments, lest they risk misleading the market and falling victim to greenwashing.

A cautionary tale in ESG

Regulators understand that greenwashing behaviour directly undermines investors’ trust and the standard of sustainable financing in Hong Kong. Implementing reporting requirements, sharing good-practice guidelines and promoting climate strategies reduce greenwashing risks. However, companies may still find themselves in a variety of ESG disputes, across several different stakeholders and for various reasons, whether clear regulations exist or not.

In the very near future, companies with lax ESG standards and documentation processes may be at risk of other organizations, regulators, consumers, shareholders, competitors and activist groups alike taking action against them. Making false ESG claims, misrepresenting ESG activities and compliance, breaching fiduciary duties, and sharing inaccurate corporate disclosures that contain misleading ESG information, will see companies mounting a defense in the court of law and public opinion.

When environmental actions fall short of a company’s promises or mislead consumers with false claims of being environmentally friendly, they risk reputational harm that cannot be easily undone. Companies need to understand the proposed ESG regulations and actions, recognize the critical role data plays in ESG initiatives and documentation, identify potential actions stakeholders may take over ESG disputes, and develop different approaches to address greenwashing claims.

Finding allies in the battle against Greenwashing

To reduce risk and solve ESG disputes when they arise, companies will need to implement different strategies that leverage forensic accounting expertise.

Forensic accountants can examine the current requirements of regulations, identify future regulatory trends and provide context on acceptable standards across multiple industries. By conducting investigations into accusations of ESG violations, forensic accountants can help companies add another layer of ESG credibility for addressing internal weaknesses, bolstering ESG documentation, mitigating legal risks and combating greenwashing.

In Hong Kong, new imminent reporting standards are, compelling companies to reliable methods to maintain regulatory compliance, ensure proper ESG performance documentation through data and financial records, and verify their information accuracy is aligned with stakeholders' expectations.

While greenwashing, itself is not a specific proposed regulation, companies should not fall prey to ignoring its risks and costs.

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Shannon Tong is Senior Director at Alvarez & Marsal's Disputes & Investigations practice. Irene Siu is Senior Director at Alvarez & Marsal's Disputes & Investigations practice.