Hong Kong has been actively strengthening its Environmental, Social, and Governance (ESG) reporting framework to align with international sustainability standards. With the introduction of the ESG Reporting Guide a decade ago, the Hong Kong Stock Exchange (HKEX) has been driving the disclosure of ESG information by listed companies and issuers. New proposed regulations will require all listed companies to publish comprehensive ESG reports that adhere to the Main Board Listing Rules, effective 1 January 2024. Furthermore, recent proposals by the HKEX aim to enhance climate-related disclosures, aligning them with international standards and expanding the scope of reporting. This article provides an overview of the current ESG reporting landscape in Hong Kong, highlights the proposed changes, and emphasises the increasing importance of climate-related disclosures for businesses operating in the region.

Hong Kong ESG regulations overview

The Hong Kong Stock Exchange (HKEX) first introduced its Environmental, Social, and Governance (ESG) Reporting Guide 10 years ago, in 2013. Since then, various changes have been made to the ESG framework to ensure that the level of disclosures are in line with international developments happening within the sustainability landscape.

Current ESG reporting landscape

In 2023, all listed companies or issuers are mandated to publish an ESG report that is in line with the requirements outlined in Appendix 27 the Main Board Listing Rules. The disclosures outlined in the ESG Reporting Guide include a discussion on ESG performance, compliance status, and stakeholder engagement, a Board statement, a section on the application of the HKEX reporting principles, the issuer’s reporting boundary, and the Environmental and Social subject areas.

The Guide is divided into two main levels of disclosures:

1. Mandatory disclosure requirements (“MDRs”), which are mandatory and whereby all requested information for the reporting period must be covered in the ESG report
2. “Comply or explain” provisions, whereby a lack of information must be supplemented by an explanation of the considered reasons for not including them.

The Environmental and Social disclosures fall under the “comply or explain” provisions. Each subject area is further specified based on various aspects, general disclosures on what information shall be provided under these aspects, and key performance indicators (KPIs) to demonstrate progress achieved by the issuer.

Proposed changes

On 14 April 2023, the HKEX issued a consultation paper, proposing that all issuers mandate climate-related disclosures in their ESG reports. New climate-related disclosures in line with the International Sustainability Standards Board (ISSB) Climate Standard were also introduced, which are set to form a new section (Part D) of Appendix 27. Throughout the consultation period, which is scheduled to end on 14 July 2023, the HKEX will gather and consider responses from various stakeholder groups. All new disclosures in Appendix 27 will come into effect on 1 January 2024, and key proposed disclosures are summarised as below.

Climate-related risk assessment

The consultation paper proposes that current and anticipated financial impacts from climate-related risks and opportunities be disclosed over a short-, medium-, and long-term. For current financial impacts, where quantitative figures are unavailable, qualitative disclosures are allowed during the interim period. For anticipated financial impacts, qualitative disclosures suffice to address concerns of data accuracy.

Scope 3 inventory building

In addition, Scope 1, Scope 2, and Scope 3 emission disclosures were proposed. During the interim period, issuers who are yet to disclose information in relation to scope 3 emissions should disclose the following:

1. Information, to the extent reasonably available, that may illustrate to investors the relevant upstream and downstream activities along its value chain which fall under scope 3 emissions
2. Work plan, progress, and timetable for making the required disclosures

To facilitate the uptake of these new disclosures, the HKEX will allow issuers to make interim disclosures between the effective date for the revised listing rules (1 January 2024) to and 1 January 2026, whereby the interim period will cease and issuers will be expected to meet the full compliance requirements.

Aligning with other climate-related metrics

The disclosure of cross-industry climate-related metrics required by the ISSB Climate Standard has also been proposed. These include:

1. The disclosure of the amount and percentage of assets or business activities which are:
   
   a) Vulnerable to transition risks, or
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   b) Aligned with climate-related opportunities
2. The amount of capital deployed for climate risks and opportunities
3. Metrics such as internal carbon pricing application, climate-related considerations on renumeration policy, and others recognised under international ESG frameworks

Conclusion

Climate-related disclosures are on the rise as investors are demanding greater transparency on how climate issues and climate-related policy will impact a business’s assets, operations, and financials. In striving towards becoming a regional green finance hub, Hong Kong will need to seriously consider these proposals. We believe that HKEX will take up most of the points proposed albeit at different stages.

For more information on the Hong Kong ESG regulatory landscape and updates, please visit our website at alayaconsulting.com.hk.

Alaya Consulting is a specialist advisory firm focused on ESG disclosure, pre-assurance, and training. As the first ESG consultancy in Asia to have a Science Based Target approved, Alaya Consulting leverages its sustainability expertise and cross-industry experience to empower clients and create long-lasting value while fostering continuous growth. The Alaya team comprises of professionals with diverse experiences, blending compliance, process improvement, environmental engineering, stakeholder engagement and training, aiming to combine insights with passion to solve reporting and communication challenges and to earn the trust of all its stakeholders.

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