Hong Kong Stock Exchange consults on mandatory climate-related disclosures proposal

The Hong Kong Stock Exchange has issued a consultation paper on proposals to require listed companies to make mandatory climate-related disclosures in their annual ESG reports. Currently, climate-related disclosures are only required on a “comply or explain” basis.

The proposed mandatory disclosures are based on the current exposure draft of the climate-related disclosure standards issued by the International Sustainability Standards Board (ISSB). They are categorised under four core pillars: (i) governance, (ii) strategy, (iii) risk management, and (iv) metrics and targets.

The amendments to the Listing Rules are expected to come into effect on 1 January 2024 and will apply to ESG reports in respect of financial years commencing on or after that date. Recognising concerns as to market readiness, the Stock Exchange is proposing interim measures during the first two reporting years for certain aspects, with full compliance expected for financial years commencing on or after 1 January 2026.

1. Mandatory climate-related disclosures
2. Background driving the change
3. Proposed implementation timetable

Mandatory climate-related disclosures

The Stock Exchange is proposing to amend Part B of Appendix 27 of the Listing Rules to expand the existing mandatory disclosure requirements (on governance structure, reporting principles and reporting boundary) to require climate-related disclosures. Issuers will need to include in their annual ESG reports information on their exposure to, and management of, climate-related risks and opportunities with reference to the four pillars set out below. A new Part D of Appendix 27 sets out the detailed disclosure requirements:

• Governance – the governance process, controls and procedures the issuer uses to monitor and manage climate-related risks and opportunities. This requires disclosure of information such as the identification of board members responsible for the oversight of climate-related opportunities and how the board and its committees oversee target setting in respect of significant climate-related risks and opportunities and the monitoring and review of such targets;
• Strategy – the issuer’s strategy for addressing significant climate-related risks and opportunities. This requires an issuer to disclose, among other things, an assessment of any climate-related risks reasonably likely to have a material effect (in the short, medium or long term) on the issuer’s business model, strategy and cash flows, access to finance and cost of capital. The issuer is expected to describe its transition plans, including how it is responding to the climate-related risks/opportunities identified (for instance by changes to the issuer’s business model or strategy), information on its climate-related targets and its progress against these. Issuers are also expected to make climate resilience disclosures, including information that enables investors to understand the resilience of the issuer’s strategy and operations to climate-related changes, developments or uncertainties as well as the climate-related scenario analysis used to assess the effect of climate-related risks. The current and anticipated financial effects of the climate-related risks and opportunities also need to be disclosed. During the proposed two-year interim period following implementation, issuers will be able to include alternative disclosures where quantitative information or information on the anticipated financial effects is not available;
• Risk management – the process the issuer uses to identify, assess and manage climate-related risks and opportunities. This includes disclosure of how the issuer assesses the likelihood and effects associated with such risks and how it prioritises climate-related risks relative to other types of risks; and
• Metrics and targets – the metrics and targets the issuer uses to measure, monitor and manage significant climate-related risks and opportunities and how the issuer assesses performance (including progress towards the targets set). The requirements are set out under the following sub-categories, with “*” indicating that alternative disclosures are available during the two-year interim period for issuers unable to comply with the full requirement:
  • Greenhouse gas (GHG) emissions*, requiring disclosure of emissions data. Issuers also need to disclose additional information in relation to GHG emissions, including the standard under which GHG emissions have been measured. This can either be the GHG Protocol or the protocol that the issuer is required to use by local legislation for measuring GHG emissions;
  • Transition risks*, requiring disclosure of the amount and percentage of assets or business activities vulnerable to transition risks;
  • Physical risks*, requiring disclosure of the amount and percentage of assets or business activities vulnerable to physical risk;
  • Climate-related opportunities*, requiring disclosure of the amount and percentage of assets or business activities aligned with climate-related opportunities;
  • Capital deployment*, requiring disclosure of the amount of capital expenditure, financing or investment deployed towards climate-related risks and opportunities;
  • Internal carbon prices, relevant for issuers who maintain an internal carbon price;
  • Remuneration, requiring a description of how climate-related considerations are factored into remuneration policy; and
  • Industry-based metrics, where issuers are encouraged to make industry-based disclosures in accordance with other international ESG reporting frameworks and standards.

Background driving the change

With international regulatory developments moving towards higher ESG disclosure standards, the Stock Exchange’s proposals are aimed at ensuring that Hong Kong’s disclosure regime is in line with international standards. In particular, the proposals reflect the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD) and the ISSB climate-related disclosure standards (namely the IFRS S2 Climate-related Disclosures Exposure Draft as this is supplemented or modified by ISSB when the standards are finalised). ISSB has indicated its plan to publish the final ISSB standards towards the end of the second quarter of 2023. The Stock Exchange has noted that it will monitor developments and take into account the final version of the ISSB standards when finalising the Listing Rule amendments.

As investors are increasingly seeking high quality, comparable information from listed companies on climate and other ESG-related aspects, these proposals also seek to ensure Hong Kong listed companies can meet those needs. The Stock Exchange is also trying to balance the development of its ESG reporting framework with the market’s readiness to comply with the enhanced disclosure obligations. In November 2022, the Stock Exchange released its analysis of a review of listed companies’ compliance with the ESG reporting regime. The report showed strong compliance with disclosures on board governance of ESG issues, and over 85% of issuers in the review sample had made all of the prescribed climate-related disclosures. However, the Stock Exchange also noted some practical difficulties for listed companies to comply with enhanced ESG disclosure standards, including concerns on data unavailability, the absence of standardised methodologies in conducting scenario analysis or quantification of financial impacts, and a lack of expertise (both internally and externally). Given this, the Stock Exchange has proposed alternative disclosures for certain aspects during the two-year interim period from implementation to give the market more time to achieve full compliance.

The Stock Exchange has also been preparing the market for the move towards greater ESG disclosure expectations. In November 2021, it published its Guidance on Climate Disclosures to provide practical guidance to assist issuers with preparing climate-related disclosures.

Proposed implementation timetable

The consultation paper is open for comment until 14 July 2023. This timeframe is intended to enable those wishing to respond to take into consideration the final version of the ISSB climate-related disclosure standards discussed above.

The Listing Rule amendments are expected to come into effect on 1 January 2024. They will apply to ESG reports in respect of financial years commencing on or after that date. The Stock Exchange is proposing interim measures to ease the compliance burden in respect of certain of the disclosures during the first two reporting years. Full compliance for all aspects of the climate-related disclosures would be expected for ESG reports for financial years commencing on or after 1 January 2026.

IPO applicants are encouraged to take note of, and ensure they are geared up to comply with, the proposed climate-related disclosure requirements. A company needs to disclose in its IPO prospectus material ESG risks and information. The Stock Exchange expects companies to have mechanisms in place to be able to comply with the ESG requirements upon listing.

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