29 May 2023
The Stock Exchange of Hong Kong Limited (SEHK) sets the stage for a transparency revolution with its groundbreaking proposal to enhance climate-related disclosures under the Environmental, Social, and Governance (ESG) framework.
In a groundbreaking move towards greater environmental transparency, the Stock Exchange of Hong Kong Limited (SEHK) has published a consultation paper seeking market feedback on proposals aimed at enhancing climate-related disclosures within the Environmental, Social, and Governance (ESG) framework. The proposed changes, outlined in the consultation paper, have the potential to reshape the way companies operating in Hong Kong report their climate-related risks and opportunities.
The SEHK’s key proposal is the mandatory inclusion of climate-related disclosures in issuers’ ESG reports, aligning them with the International Sustainability Standards Board (ISSB) Climate Standard. This standard, consisting of four pillars – Governance, Strategy, Risk Management, and Metrics and Targets – aims to provide a comprehensive framework for effective climate disclosure.
Under the proposed Governance pillar, issuers would be required to disclose their governance structure and management approach, including the role of the board and management in assessing and managing climate-related risks and opportunities. Additionally, issuers must outline the responsibilities of each party and establish mechanisms for regular board and committee updates on climate-related issues.
The Strategy pillar represents a crucial aspect of climate disclosure, requiring issuers to comprehensively disclose identified climate risks and opportunities. This includes an assessment of the impact of climate change on the financial position, performance, and cash flows of businesses, as well as the disclosure of transition plans and methodologies used for determining climate resilience through scenario analysis.
In the Risk Management pillar, issuers would disclose their process for assessing and prioritizing climate-related risks, along with the risk-assessment tools employed. Furthermore, issuers must integrate potential and emerging climate risks into their overall risk management approach, acknowledging the significance of climate risks within their broader risk landscape.
The Metrics and Targets pillar focuses on the quantification of climate-related data. Issuers would be required to provide specific details such as absolute gross greenhouse gas (GHG) emissions, covering scope 1, scope 2, and scope 3 emissions. GHG emissions must be calculated following the GHG Protocol or other protocols mandated by local legislation. Issuers must also report the percentage of assets or business activities vulnerable to climate-related risks and aligned with opportunities, as well as the capital expenditure, financing, or investment directed towards climate-related risks and opportunities. Additional requirements include disclosing internal carbon prices and the incorporation of climate-related considerations into remuneration policies.
To ensure a smooth transition, issuers must prepare for disclosing climate-related information according to the updated ESG Code starting from 1 January 2024. Acknowledging the complexity of certain provisions, the Code allows for interim provisions, offering a shorter or simpler version of specific disclosures during the first two reporting years. Issuers utilizing interim provisions must demonstrate work plans, progress, and timetables for implementing the mandated disclosures.
Max Tsang, Director of GreenCo, a leading sustainability consulting firm, recommends that companies familiarize themselves with the new requirements and initiate preliminary work well in advance. Tsang emphasizes the importance of early preparation due to the complexity and resource requirements involved in fully complying with the proposed disclosures.
Stephanie Chan, a seasoned consultant at GreenCo, highlights the significance of the rebranding of Appendix 27 from the ESG Reporting Guide to the ESG Code, emphasizing its mandatory nature. Issuers will no longer be able to evade stricter regulations by providing general and brief explanations. Chan further notes that increasing investor demand and stakeholder expectations are driving companies to enhance their ESG disclosures, thereby improving transparency, reputation, and brand value.
GreenCo, with its expertise in preparing climate-related disclosures across various industries, stands ready to support companies in meeting the proposed requirements. Their team of professionals, equipped with specialized GHG calculation tools, ensures comprehensive and accurate reporting of greenhouse gas emissions.
It is important to note that the proposed changes mentioned above are currently under consultation and subject to finalization. Interested parties are encouraged to provide feedback by submitting a questionnaire on the HKEX website before 14 July 2023.
