What a historic month (April) for climate disclosures in Hong Kong!
The Stock Exchange of Hong Kong (HKEX) has recommended that listed companies disclose climate-related information in ESG reports earlier. Last month, HKEX announced the Implementation Guidance for Climate Disclosures, which will be gradually implemented in January next year. However, an NGO has discovered vulnerabilities in green finance strategies and measures in Hong Kong.
HKEX has highlighted some points in the new guidance:
- The New Climate Requirements are developed based on International Financial Reporting Standards (IFRS) S2 (Climate-related Disclosures). Implementation reliefs including proportionality and scaling-in measures are introduced to address concerns over the reporting challenges that some issuers may face.
- The amended Listing Rules(The ESG Code) will come into effect on 1 January 2025. A phased approach is adopted for the implementation of the New Climate Requirements.
IFRS is always linked to the term International Sustainability Standards Board (ISSB) which is always mentioned in the various media platforms. ISSB is an organization announced by COP26, which is responsible for formulating IFRS Sustainability Disclosure Standards. IFRS S1 and IRFR S2 are two sustainability disclosure standards issued by the ISSB, a new standards-setting committee established by the IFRS Foundation on November 3, 2021.
The latest climate requirements announced by HKEX are based on IFRS S2. IFRS S1 focuses more on how sustainability information affects financial statements; while IFRS S2 requires companies to disclose climate-related risks and opportunities.
IFRS S2 Climate-related Disclosures launched in 2023, need to disclose greenhouse gas emissions and calculations in scopes 1, 2, and 3. Therefore, the HKEX has stipulated that disclosure of Scope 1 and Scope 2 greenhouse gas emissions will be mandatory from 2025.
This is all about IFRS in the table:
The ESG Code — HKEX clearly states the process of climate-related scenario analysis. HKEX recommends that, once issuers identify risks, they should determine the scope of operations to be covered in the scenario analysis, where important factors that can be considered include Business nature and operations, Geography, and Data availability.
HKEX also suggested that assumptions should be included in the scenario analysis, including macroeconomic trends; national- or regional-level variables (e.g. exposure to local climate conditions, demographics, land use, infrastructure, and availability of natural resources); climate-related policies in the jurisdictions in which the issuer operates; company-level variables (e.g. business growth, workforce location); energy usage and mix; and developments in technology.
It’s important to note that the risk may be the same across companies, but the variables vary. HKEX gives an example, climate-related risk of a construction company and a data centre operator is rising mean temperatures, but the construction company may select variables related to heat and labour productivity as it expects material financial effect from the decrease in construction workers’ productivity, whereas a data centre operator may consider the electricity price as the relevant variable as it expects the increase of cooling demand to impact its operating expenses significantly.
How do experts from all industries evaluate it?
“With a strong market mandate, we at HKEX are pleased to be among the world’s first exchanges to enhance the climate-related disclosure requirements based on IFRS S2. We are also adopting a phased approach and implementation reliefs to support listed companies to meet the new requirements without undue burden and within a reasonable timeframe,” said Katherine Ng, HKEX Head of Listing.
“The New Climate Requirements form part of the wider Hong Kong roadmap for the local adoption of the ISSB Standards. This will be an important part of our ongoing efforts to prepare listed companies towards eventual sustainability reporting in accordance with the local sustainability disclosure standards under development, enhancing Hong Kong’s capital markets attractiveness and competitiveness,” added Ms Ng.
“The adoption of ISSB disclosures has been a strong ask from investors and corporate customers worldwide,” says Sammie Leung, Partner, Regional ESG Services, PwC Asia-Pacific. “With the market gaining in maturity in terms of ESG disclosures over the last few years, some businesses are enjoying the benefits created from sound disclosure practices, such as additional business opportunities and lower cost of capital.”
However, an NGO Greenpeace study revealed three major weaknesses in the development of green finance in Hong Kong:
(1) No high-level strategic plan,
(2) No restrictions on direct financing of fossil fuels,
(3) No regulations against “greenwashing”, This may make it difficult for Hong Kong to become a leading green financial center in Asia.
The new guidance updated by HKEX is formulated per the ISSB and is not completely imitated. This is because the culture and society of each country or region are different. It is insightful for HKEX to use the ISSB framework and formulate personalized regulations. After each listed company discloses in accordance with the guidance of the HKEX after 2025, the company will be more responsible, bring stable development to Hong Kong society, and lay a stable foundation for Hong Kong to achieve carbon neutrality before 2050. Corporations as key influencers in achieving national net-zero targets, so it is necessary to regulate their emissions. In addition, due to Hong Kong’s geographical location and unique political status, I believe that it can drive the entire Greater Bay Area and even Asia towards the net zero goal.
Implementation Guidance for Climate Disclosures under HKEX ESG reporting framework: https://www.hkex.com.hk/-/media/HKEX-Market/Listing/Rules-and-Guidance/Environmental-Social-and-Governance/Exchanges-guidance-materials-on-ESG/guidance_enhanced_climate_dis.pdf
