As climate change intensifies, investors want to know how it will affect a company’s future – and how the company’s operations are in turn affecting the climate. Stock exchanges around the world are responding to this demand with new requirements for climate disclosure.

Hong Kong is no exception. On June 27, Kelly Lee, Senior Vice President, Policy and Secretariat Services, Listing Division, Hong Kong Stock Exchange explained to AmCham members and guests what kind of new disclosure requirements listed companies in Hong Kong can expect, and how these requirements will impact the larger business community in the region.

Although companies are already required to share information about a range of environment, social and governance (ESG) metrics, such as waste, packaging, and anti-corruption, more is needed in the area of climate. “Climate risk is like other risks,” says Lee, whether those be physical or cyber risks.

For financial years beginning in 2025, companies listed in Hong Kong must report on “Scope 1” emissions, greenhouse gas emissions from companies’ own operations, as well as “Scope 2” emissions, which are indirect greenhouse gas emissions associated with the purchase of electricity, steam, heat, or cooling. This will be the most straightforward requirement, since 90% of Hong Kong listed companies already report on both. However, in the future information about “Scope 3” emissions will also be mandatory, starting with a “comply or explain” basis and becoming more specific as the new rules are rolled out. Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its upstream and downstream value chain.

Lee highlighted that the new standards are based on what today’s global investors want to know. As such, they are meant to reflect international best practices and help keep Hong Kong competitive. They will also help companies capture, codify, and act on not only the climate risks they face, but also the opportunities that arise, such as new products related to climate protection .

The new requirements will align with the internationally-recognized International Financial Reporting Standard (IFRS) S1 and S2 (International Sustainability Standards Board or ISSB) standards, first published in June 2023. They will cover regulated financial institutions from all financial sectors. Although HKEx will implement the requirements, the Hong Kong Institute of Certified Public Accountants (HKICPA) will be in charge of setting the standards, just as they already do for accounting standards.

Exchanges around the world are actively in the process of implementing similar standards. According to Lee, the Hong Kong requirements are somewhat more stringent than those of mainland China exchanges such as Shenzhen and Shanghai; the United Kingdom and Singapore are currently conducting consultation on standards based on ISSB, similar to Hong Kong. European Union requirements, while not different from the ISSB standards, are more stringent. However, the Securities and Exchange Commission in the United States rolled out its consultation on new standards before the ISSB standards were published, and therefore has not yet implemented its new requirements.

According to the results of a consultation conducted during the past year, listed companies are concerned about whether they will have the capacity or the data to comply. Therefore, the exchange decided on a phased implementation, with different time frames for large market cap companies – mainly the constituent companies of the Hang Seng Index – as opposed to Main Board or GEM companies. Several kinds of implementation relief will also be available, based on a company’s capabilities, the sensitivity of commercial information, or the financial impact of having to disclose such information.

Lee outlined the four pillars of disclosure: governance; strategy; risk management; and metrics and targets.

To ensure good governance in disclosure, a company should report on how it or its board manages climate risks and opportunities. However, since this might overlap with other types of governance, companies should not duplicate their reports.

When information has been prepared about how a company manages these risks and opportunities, the next step is to outline the strategy. This includes what the company will do, how it understands the financial impact, and an assessment of the company’s state of climate resilience: how will climate change impact the company? For the last area, companies may need to conduct scenario analysis.

The company also needs to report on how these risks will then need to be managed. Again, because this process might be similar to how other risks are managed, duplication is discouraged.

Finally, the company must outline the metrics and targets it uses to manage climate risks and opportunities. “Use figures that are related to other pillars, that support the narratives of the previous pillars,” says Lee. “Don’t just dump data.” Companies are also encouraged to use cross-industry metrics, such as the percentage of assets vulnerable to climate risk, internal carbon pricing mechanisms, or how climate risk is factored into remuneration. At the same time, a company can use targets to monitor its own performance.

The session, organized together with the Hong Kong Climate Governance Initiative with the support of the Hong Kong Institute of Directors, also included breakout groups among the attendees to reflect and respond to the new requirements.

One group highlighted the fact that with new standards, no one will know all of the answers. However, the new requirements will create a “knock-on effect” in the market: a company’s Scope 1 and 2 information are its customer’s Scope 3 requirements. Other participants in the session mentioned the importance of changing organizational culture to benefit from the opportunities that could be captured.

Most agreed that continuous updates would be required, since current climate models already underestimate real-world impacts: would the valuation of a 10-year-old flood defense, for example, still be accurate, when “100 year” floods happen every five years? Independent Non-executive Directors will likely need to improve their existing knowledge of climate topics.

To help companies get ready for the new requirements, HKEx has published an Implementation Guidance online as well as offering an ESG Academy as a one-stop platform. There, companies can find guides, webinars, reports, and detailed information about the new rules, as well as links to external resources. These resources will be key to helping companies capture and act on information related to climate change and build better resilience for the future, while contributing to Hong Kong’s position as a hub for green finance.

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