Greenpeace warns against inadequate disclosure for listed forestry companies

Press release - 2009-02-18
A new report by Greenpeace exposes the loopholes in the Hong Kong Stock Exchange’s rules on environmental disclosure for listed forestry companies. Most listed companies that claimed to be “environmental friendly” were only so by default, thus misleading investors.

In the Green or In the Red? Environmental Concerns and Risks for Forestry Listings in Hong Kong

Greenpeace is urging Hong Kong regulators to beef up disclosure standards and listing requirements on forestry companies to address deforestation, climate change and other pollution.

The report: "In the Green or In the Red? Environmental Concerns and Risks for Forestry Listings in Hong Kong", analyses the listing documents of companies in the logging and paper and pulp sectors including Nine Dragon, Shandong Chenming Papers and Samling Global. These companies were all listed after 2006 and represent a trend in the Hong Kong IPO market (1).

The report also reviews environmental issues related to the Asian and China forestry sector and related industries. It supplies recommendations for both regulators and investors to address the problems with disclosure.

The report reveals that the Hong Kong Stock Exchange has no specific environmental guidelines or disclosure requirements for forestry companies. In most listings, material information with respect to the sourcing of raw materials, independent verification of wood yields (2), pollution and emission levels, use of proceeds, continual obligations and environmental liabilities, are inadequate for investors to differentiate sustainable forestry companies to unsustainable ones.

"In the midst of the global financial crisis, it is beyond question that regulators need to overhaul their existing regulatory framework," said Tam Man-kei, Greenpeace China's Finance Campaigner.

He added, "Such overhaul must pave the way to embrace higher and more transparent disclosure standards and to look into the growing environmental trend, in order to enhance investors' due diligence and risk assessment in future."

The research concludes that most listings claimed their operations or products as "environmental friendly" by way of default, which give investors a false sense of security with respect to the companies' environmental performance.

"The Hong Kong Stock Exchange should draft specific disclosure requirements for systematic disclosure so as to put environmental issues into perspective.

These can resemble Chapter 18 of the listing requirements on the exchange concerning the minerals and natural resources sector, with an additional requirement to address material environmental information.

For example, forestry companies in China face a slew of environmental compliance measures. Proper disclosure will help investors assess risks," added Tam.

The report also identifies a lack of material information or disclosure, or strategy developed by companies to tackle climate risks. Tropical forest destruction accounts for about 20 percent of current greenhouse gas emissions.  In the forestry sector, logging and oil palm plantations are allegedly linked with destruction and degradation of forest and peatlands (3).

Greenpeace also demands regulators to conduct additional due diligence, taking into account opinions from civil society and local communities when they decide on a company's listing application.

As an example, the report performed a close reading on the listing documents of Samling Global (HKE3938), listed in March 2007, to highlight the hidden environmental risks that both individual and institutional investors might have overlooked.  The divided views over Samling's listing between the sponsors (4) and civil society prompted the question: when vetting IPO application, regulator's negligence on opinions from civil society and local communities could result in investor's loss (5).

"It was rumoured that another Malaysian-based logging company, Rimbunan Hijau, has been considering to list in Hong Kong. We have to learn lessons from previous cases and inform investors of the material risks so that they could pick companies that are both doing good and doing well," said Tam.

In this vein, the Green IPO policy, a joint effort between China's securities regulator and environmental authorities, provided regulators with fresh ideas on how financial regulations could advance environmental goals.  "A 10-day consultation window that gathers public opinion is embedded in the IPO application process," Tam explained "Greenpeace's leverage on this policy showed that companies' environmental liabilities could be revealed immediately, and in the long run advance environmental governance and compliance."

Download the report:
In the green or in the red?

Footnotes:

(1) The research covered forestry listings in Hong Kong stock exchange from 2003 to September 2008.

(2) For example, certification and accreditation system designed and maintained by Forest Stewardship Council (FSC). (http://www.fsc.org/)

(3) Greenpeace International. 2008. The Climate Bomb is Ticking -- Call for Zero Deforestation to Protect the Climate.

(4) Banks involved in Samling's offering included HSBC, Credit Suisse and Macquarie.

(5)As of September 2008, stock price performance of Samling Global versus that of the Hang Seng Index is the worst among stocks covered by the study.