In April 2023, the Hong Kong Stock Exchange (HKEX) published a consultation paper that, if adopted, will require listed companies to meet stringent disclosure requirements for their climate-related risks and opportunities, greenhouse gas (GHG) emissions, and net-zero transition plans1. The proposed enhancements have significant implications for companies because they:
- Adopt a higher level of reporting obligation, upgraded from current ‘comply or explain’ to mandatory for all listed companies.
- Largely align with the International Sustainability Standards Board (ISSB) Climate Standard 2, which builds on the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD).
- Come into effect on 1 January 2024 and apply to ESG reports published in 2025, though there are interim provisions of two reporting years for requirements that may require additional time and compliance effort.
This timeline ignites a sense of urgency, especially for listed companies that may so far have postponed climate reporting for reasons such as a lack of resources. Regardless of their size or where they are in their sustainability journey, organizations have a limited window of time in which to align with the proposed requirements.
COUNTDOWN TO HKEX CLIMATE-RELATED DISCLOSURES
 ESG listing rules refer to HKEX ESG Reporting Guide and related Listing Rules.
 Rest of the requirements refers to requirements that HKEX acknowledges may take more time and work to comply with.
ENHANCED DISCLOSURE REQUIREMENTS UNDER THE FOUR TCFD PILLARS - OVERVIEW
*Note: Requirements with interim provisions
OVERCOMING THE FIVE KEY CHALLENGES OF DISCLOSURE
The process of alignment will not be a simple ‘once-and-done’ exercise. It may take years to gather the right quality of data and to adapt and extend existing processes. Companies need to start early if they are to understand how ready they are for compliance and tackle the following five key challenges:
Extensive involvement across business departments: Broad buy-in from the business is a pre-requisite, as the implementation of the new climate disclosure requirements will require the transformation of existing climate-related processes and policies of various business units across the whole organisation. In doing so, departments may need to take up new responsibilities or even create new roles – these include refining or building new data collection templates or systems, and enhancing existing policies in regards to managing climate-related risks and reporting to regulators accordingly. Sustainability or climate change management does not fall under the responsibility of one department: a cross-departmental approach is essential.
Improved assessment of the financial impact of climate-related risks and opportunities: Companies will need to conduct scenario analysis to understand how physical and transitional risks and opportunities may impact their operations and businesses under various plausible scenarios and time horizons. Most importantly, companies should identify relevant metrics to associate the material risks and opportunities they uncover with the financial statement line items that are most likely to be impacted. For financial institutions, another important aspect is to understand the financial implications for their investment and lending portfolios, beyond those related to their own operations. Translating climate-risk into financial figures and adopting a forward-looking analysis involves various analytical challenges, with Hong Kong Monetary Authority (HKMA)’s recent survey of over 100 financial institutions in Hong Kong citing the top two barriers as a lack of climate-related data and a lack of standardized measurement methodologies.3
Reliable accounting and target setting capabilities for Scope 3 emissions: Scope 3 emissions are emissions from the company’s wider value chain, rather those under its direct control (Scope 1) or caused indirectly by the production of the energy it purchases (Scope 2). Reporting on Scope 3 emissions may prove to be the most challenging disclosure task for most companies, as it requires:
- Establishing a methodology to determine the relevance and significance of the 15 ‘Scope 3’ emission categories set out in the Greenhouse Gas Protocol.
- Understanding and evaluating credible target setting methodologies, which come with varying criteria and thresholds for different sectors.
- Sourcing quality supplier/tenant/client-level emissions data, and other external climate data from multiple channels for in-depth assessment, where datasets are often unstructured.
- Assessment of potential emission reduction pathways that are aligned with target trajectories; these then form the baseline for establishing a strategic roadmap for the implementation of reduction measures.
Financial institutions will also need to measure and set targets for ‘financed emissions’, that is, the emissions associated with their investment and lending activities. This involves additional complexities such as those arising from differences between industry sectors, asset classes, counterparties’ climate maturity, and evolving industry standards.
Enhanced data and IT infrastructure to absorb the burden on processes: Compared to other ‘Environmental’ and ‘Social’ aspects covered in the Listing Rules, climate-related data coverage and requirements, including assessment processes for scenario analysis and GHG emissions management, are significantly more extensive, demanding and complex. Robust controls need to be in place to ensure the accuracy and credibility of data, and companies should consider digitalizing and automating the data collection and assessment process. This will help to streamline the processing and the analysis of large quantities of data, enable continuous monitoring and tracking, and improve data quality. One example of this is establishing a centralized ESG data utility; however, migrating from current processes to a new platform requires significant coordination and management.
Organization-wide alignment and education: Once the above building blocks are in place, organizations need to build internal capabilities to manage climate-related risks across their whole enterprise. This often takes the form of workshop and regular work-group meetings to help internal stakeholders across all levels to understand the material climate-related risks and opportunities that may affect the company, the meaning of the company’s climate commitments and targets, and the key elements of the transition plan to achieve these goals. This is the key to the smooth and efficient execution of the transition plan to improve adaptation capacity and resilience.
GETTING AHEAD OF THE HKEX REQUIREMENTS
HKEX’s proposed climate disclosure requirements should prove beneficial for companies as they start protecting their balance sheet from climate uncertainties. Meeting the disclosure requirements will help companies to build organization-wide resilience, to mitigate the regulatory and reputational risks of greenwashing, and to explore new climate-related opportunities.
However, overcoming the implementation challenges will require a structural, data-driven approach to climate risk assessment and management and net-zero transition planning, underpinned by a rigorous ESG and climate data strategy as well as a significant degree of organizational transformation.
Capco’s team of experienced ESG professionals have advised companies from different sectors on their climate change and net-zero journey. Regardless of where your company is on its climate disclosure journey, we can support you in navigating and implementing climate disclosure initiatives by providing end-to-end, flexible, robust, and data-driven advisory services.
1. Enhancement of Climate-related Disclosures Under the Environmental, Social and Governance Framework, April 2023: https://www.hkex.com.hk/News/Regulatory-Announcements/2023/230414news?sc_lang=en
2. The IFRS S2 Climate-related Disclosures Exposure Draft published by the IFRS’s International Sustainability Standards Board (ISSB) in March 2022, sets out the specific requirements for the identification, measurement and disclosure of climate-related financial information. The ISSB has indicated its intention to publish the final standards by the end of the second quarter of 2023.