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The Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), published a consultation paper seeking market feedback on proposals to enhance climate-related disclosures under the environmental, social, and governance (ESG) framework.
The Exchange proposes to mandate all issuers to make climate-related disclosures in their ESG reports, and introduce new climate-related disclosures aligned with the International Sustainability Standards Board (ISSB) Climate Standard. The ISSB Climate Standard builds on the principles of the TCFD recommendations and sets out detailed climate disclosures. The proposals mark a significant milestone in achieving the commitment to mandate TCFD-aligned disclosures by 2025 as announced by the Hong Kong Green and Sustainable Finance Cross-Agency Steering Group. Acknowledging the readiness of the issuers and their concerns, the Exchange proposes interim provisions for certain disclosures (e.g. financial effects of climate-related risks and opportunities, scope 3 emissions, and certain cross-industry metrics) for the first two reporting years following the effective date of 1 January 2024.
Part of the following sections are provided with transition relief:
e) Financial effects of climate-related risks and opportunities: Disclose the current (quantitative where material) and anticipated (qualitative) financial effects of climate-related risks and, where applicable, opportunities on the issuer’s financial position, financial performance and cash flows; requirements including:
Current financial effect: allow qualitative disclosures
Anticipated financial effect: (i) information that enables investors to understand the aspects of financial statements that are most affected; and (ii) work plan, progress and timetable for full disclosure.
g) GHG emissions: Disclose scope 1, scope 2 and scope 3 emissions;
Partial disclosure is allowed within the initial period for Scope 3 emissions: (i) information that enable investors to understand the issuer’s relevant upstream or downstream activities along the value chain; and (ii) work plan, progress and timetable for full disclosure.
h) Other cross-industry metrics: Disclose cross-industry metrics such as the percentage of assets or business activities (i) vulnerable to transition/physical risks or (ii) aligned with climate-related opportunities, and the amount of capital expenditure deployed towards climate- related risks and opportunities; requiring:
(i) describe the assets or business activities vulnerable to or aligned with such risks or opportunities, or that require capital expenditure; and
(ii) work plan, progress and timetable for full disclosure.
A summary of the new climate-related disclosure requirements is as follows:
Governance
Disclose the issuer’s governance process, controls, and procedures used to monitor and manage climate-related risks and opportunities;
Strategy
Climate-related risks and opportunities: Disclose material climate-related risks and, where applicable, opportunities faced by the issuer, and their impact on the issuer’s business operations, business model, and strategy;
Transition plans: Disclose the issuer’s response to climate-related risks and opportunities identified, including any changes to its business model and strategy, adaptation, and mitigation efforts, and climate-related targets set for such plans;
Climate resilience: Disclose resilience of the issuer’s strategy (including its business model) and operations to climate-related changes, developments, or uncertainties, which shall be assessed using a method of climate-related scenario analysis that is commensurate with the issuer’s circumstances;
Financial effects of climate-related risks and opportunities: Disclose current (quantitative where material) and anticipated (qualitative) financial effects of climate-related risks, and where applicable, opportunities on the issuer’s financial position, financial performance, and cash flows;
Risk management
Disclose the issuer’s process to identify, assess and manage climate-related risks and, where applicable, opportunities;
Metrics and target
Greenhouse gas emissions: Disclose scope 1, scope 2 and scope 3 emissions;
Cross-industry metrics: Disclose the amount and percentage of assets or business activities (i) vulnerable to transition/physical risks or (ii) aligned with climate-related opportunities, and the amount of capital expenditure deployed towards climate-related risks and opportunities;
Internal carbon price: For issuers who maintain an internal carbon price, disclose the internal carbon price and such that was applied in the issuer’s decision-making; and
Remuneration: Disclose how climate-related considerations are factored into executive remuneration policy.
The consultation period will end by 14 July 2023. Subject to responses to this consultation, the revised Listing Rules and Appendix 27 will come into effect on 1 January 2024 and apply to ESG reports in respect of financial years commencing on or after the Effective Date. Issuers are expected to be in full compliance with all the new climate-related disclosures in respect of financial years commencing on or after 1 January 2026 (i.e. the first ESG reports fully compliant with the new Rules will be produced in 2027). It is important that issuers should start reviewing their internal procedures and put in place any measures necessary for complying with the enhanced requirements.