Proposed enhancement of Hong Kong’s climate-related disclosures under the current environmental, social and governance (“ESG”) framework

On 14 April 2023, the Stock Exchange of Hong Kong Limited (“HKSE”) published a consultation paper seeking market feedback on proposals to enhance climate-related disclosures under the current ESG framework for listed companies in Hong Kong.

Currently, Hong Kong issuers are required to disclose a board statement regarding the board’s governance and oversight of ESG issues; there are also requirements to disclose certain climate-related information on a “comply or explain” basis, such as information on policies to identify and mitigate significant climate-related issues, a description of significant climate-related issues, and the actions taken to manage them.

To keep pace with international developments, the HKSE has now proposed to mandate all Hong Kong issuers to make climate-related disclosures in their ESG reports, and to introduce new climate-related disclosures that align with the International Sustainability Standards Board Climate Standard. The key proposals cover four key areas: “Governance”, “Strategy”, “Risk management” and “Metrics and target”. The new disclosure requirements are 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 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; and
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.

Subject to responses to HKSE’s consultation paper, the revised Listing Rules will come into effect on 1 January 2024 and apply to ESG reports in respect of financial years commencing on or after 1 January 2024. Recognising that certain disclosure requirements may require more time and work to comply with, interim provisions will be provided on these requirements for issuers’ ESG reports covering the first two reporting years following 1 January 2024 (i.e., the Interim Period). 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).

The proposals mark a significant milestone for HKSE 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 in December 2020. It is important that issuers should start reviewing their internal procedures and put in place any measures necessary for complying with the enhanced requirements.

Interestingly, the HKSE mandate is similar, and in many ways, parallels the areas the U.S. Securities and Exchange Commission proposed in its climate disclosure rules issued in 2022. For a general comparison, please see Seyfarth’s alert. We are still awaiting final SEC rules, which have been delayed.

Link to consultation paper:

https://www.hkex.com.hk/News/Regulatory-Announcements/2023/230414news?sc_lang=en