Corporate and government seek more ESG practices in small businesses

Dehtlet, a Hong Kong-based small and medium-sized enterprise specialising in innovative eco-toilet systems, has received international and Hong Kong awards for improving the environment.

The eco-toilet system has undergone more than seven generations of modification. The use of fabric glass in producing the eco-toilets at first was later found to contaminate the environment and so low-density polyethene, a material that poses less harm to the environment was adopted instead.

“We are still searching for technologies in making reclaimed rubber as suitable construction materials to replace low-density polyethene, which would still create pollutants during the manufacturing process,” said Lian Chan Lai-yan, the co-founder and managing director of Dehlet.

By deploying wind power, thermal power and gravity to conduct aerobic decomposition, the eco-system separates faeces and urine through aerobic decomposition.

The separation process does not require the use of water, which avoids the effluent problems associated with water treatment, and the solid could eventually return to nature while the liquid can be used for handwashing.

Chan said that reported by the United Nations, the sanitation coverage in rural areas of mainland China was even 2% lower than that of Kenya, shocking her husband and her to hop on the train of a sustainable business.

Citizens getting infected through bathroom drain pipes during the severe acute respiratory syndrome (SARS) outbreak in 2003 also inspired her to improve the toilet system amid the ongoing gloom of COVID-19.

In line with the career they wish to contribute to, recent years have witnessed the growing awareness of the Environment, Social and Governance concepts within corporates, ranking higher in the business agenda.

“The ESG standards become more demanding as most of our customers are listed and multinational corporations,” said Chan.

A Deutsche Bank research found out that more companies are adopting ESG as it could improve the business credit rating and attract investors, although the initial cost could reduce the operating profit in the short term.

Since July 1, 2020, Hong Kong Exchanges and Clearing has enforced a higher ESG reporting standard to enhance market competitiveness and shortened the publication deadline for listed companies, while it is not compulsory for SMEs.

“SMEs in Hong Kong are very restricted in developing ESG,” said Louis Cheng, director of the research centre for ESG at Hang Seng University of Hong Kong.

Chan said there is no official guidance for SMEs to develop ESG so far, and the cost to hire professionals for guidance and evaluation is unaffordable to SME owners.

Although there are no official regulatory guidelines for SMEs to conduct ESGs, consumers and investors increasingly emphasise environmental and social responsibility, said Cheng, adding that those companies account for 98% of Hong Kong business.

A CFA Institute analysis in 2020 found that 85% of the surveyed professional investors take ESG into account when they are making investment decisions for companies, which increased from 73% in 2017.

“Environmental and social are the relatively achievable pillars for SMEs that are mostly flat structured,” Cheng said. “As environmental awareness, policies and a sense of social responsibility are easier to develop than the governance pillar.”

Hong Kong Policy Address 2022 proposed to halve total carbon emissions by 50% before 2035 so as to achieve carbon neutrality before 2050.

“The environmental pillar can be implemented in parallel with the social pillar,” said Cheng. Internally, companies can adopt energy-saving devices in offices, while encouraging employees to print both sides of a paper

Chan said a sense of social responsibility could be aroused among the employees by implementing environmentally-friendly measures in the workplace, which could further contribute to the profound development of companies.

Institutions now have rolled out ESG indexes and programmes to appreciate and encourage SMEs in practising ESG, such as the Hong Kong SME Business Sustainability Index organised by the SME Sustainability Society.

As a small company that retails diving equipment and provides diving instruction, Diving Adventure has been keen to protect the marine environment. It was awarded as one of the top 10 companies in the fourth Hong Kong SME Business Sustainability index.

The company organises the ECF Marathon Coastal Clean-up with the Hong Kong Marine Conservation Association every year. It ceases the sales of “ghost gears”, which are abandoned fishing gears such as spearguns, while stopping giving spearfishing instructions.

To Stephen Au Siu-kin, the founder of Diving Adventure, working on sustainable development is an edge over other peers as most of the target customers are likely to choose environmental-friendly services provided by an ethical company.

In 2020, the diving training from Au’s centre was the first program recognised under the qualifications framework, a seven-level hierarchy covering qualifications in the academic, vocational and professional as well as continuing education sectors. Participants can get a reimbursement upon completion.

Gaining a better reputation also brings them opportunities to cooperate with listed companies.

“We once offered freediving training to employees from The Wharf (Holdings) Limited, and they donated the training fee they were supposed to pay to the charities,” said Au. After that, they established a long-term relationship and launched the Hong Kong Ocean Day campaign together for five years.

“People who wish to derive immediate effects from ESG are short-sighted,” Au said.

Most listed companies in Hong Kong hire specialist rating agencies to do ESG rating reports.

Au, however, said that the quantitative ESG reporting is tough for them because it is costly and unnecessary to hire a specialist consultant to do the reporting.

According to the list of ESG frameworks shown on HKEX, there is a wide range of ESG reporting frameworks and standards, and the indicators, methodologies and weightings used by ESG rating agencies in conducting ESG assessments also vary.

“For a Hong Kong SME at the start of their ESG journey, it can feel like navigating an impenetrable jungle,” said Grace Hui, head of Green & Sustainable Finance, HKEX on the official site.

One of the top three challenges for SMEs to promote sustainability is economic and financial instability, following the global health crisis and consumer expectations, according to the Centre for Civil Society and Governance at The University of Hong Kong in 2022.

Amid COVID-19, likewise every SME in Hong Kong, Au had a hard time maintaining his business operation. “When it’s hard to make ends meet, we can just do our best on ESG,” he said.

The Hong Kong Government, in this case, offers funding schemes to small enterprises, aiding their business. The three common ones are SME Export Marketing Fund (EMF), Technology Voucher Programme (TVP) and Dedicated Fund on Branding, Upgrading and Domestic Sales (BUD Fund).

Yet, these provide limited assistance to SMEs and Au said the Government was just “shouting slogans” when it comes to backing the SMEs in cultivating ESG.

“I expect to have more research funding schemes from the government so that NGOs (Non-governmental Organisations) and universities can develop SMEs environmental frameworks which they can invite SMEs to test out their effectiveness,” Cheng said.