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In this edition, we focused on the Shanghai International Economic and Trade Arbitration Commission’s (SHIAC) new arbitration rules, which take effect January 1, 2024.
Embracing the global trend of ISSB Standards: New climate disclosure regime under HKSE Listing Rules
Global | Publication | May 2024
The Hong Kong Stock Exchange (HKSE) released its consultation conclusion on the new climate-related disclosure requirements (the New Climate Rules) on 19th April 2024. It closely aligns with the ISSB Climate Standards1 (IFRS S2) and places HKSE among the first exchanges to enhance relevant disclosure requirements based on the international standards.
The climate-related disclosures under the HKSE’s Listing Rules have transitioned from a basic and optional 'comply or explain' framework, to a comprehensive and partially mandatory governance. While the extent of disclosure requirements may differ for issuers of different sizes, all issuers will be bound by green house gas (GHG) disclosure obligations. These changes will take effect on 1 January 2025 (the Effective Date).
In this article, we will take you through a concise overview of this latest update.
Content
1. The New Developments
Under the New Climate Rules, a new Part D will be added to the current Environmental, Social and Governance Reporting Guide2 (the ESG Code). This Part D sets out a detail framework of required disclosures that had to be made in the ESG reports, which focuses on climate related risks and opportunities (CRRO) that the issuers are facing3.
(a) Market Tiers and Phased Approach
Taking into account market readiness for the change, the listed issuers will be classified into different market tiers. Each tier has different degree of compliance requirements, which will be implemented at a different timetable (the Phased Approach):
| Market tiers | New Climate Rules Implementation Timetable | |
|---|---|---|
| GHG emissions Scopes 1 and 24 |
GHG Scope 35 and |
|
|
LargeCap Issuers6: Issuers that are the constituents of Hang Seng Composite LargeCap Index throughout the year immediately prior to the reporting year. |
Mandatory: For financial years commencing on or after 1 January 2025 |
Comply or explain: For financial years commencing on or after 1 January 2025 |
| Mandatory: For financial years commencing on or after 1 January 20267 |
||
|
Main Board issuers:
|
Comply or explain: For financial years commencing on or after 1 January 2025 |
|
|
GEM issuers |
||
| Voluntary disclosure: For financial years commencing on or after 1 January 2025 |
||
For LargeCap Issuers, once they are subject to mandatory disclosure requirements under the New Climate Rules, they must continue to make relevant disclosures in future ESG reports, even if they subsequently cease to be qualified as LargeCap Issuers.
(b) Disclosure Requirements – the 4 Core Pillars
Under the current Listing Rules, issuers are only required to provide a general disclosure regarding their policies for handling significant climate-related issues, and how impacts (if any) stemming from those issues are managed8.
The New Climate Rules set to broaden the disclosure regime, and align with the IFRS S2 to the maximum extent possible. Issuers are required to disclose information under the categorisation of 4 core pillars. The summary table below aims to provide a general overview of the New Climate Rules.
| The new disclosure requirements under the 4 core pillars (ESG Code Part D): | |
| (I) Governance – the governance process, controls and procedures an issuer uses to monitor, manage and oversee CRRO9 |
|
| Governance body or person |
Who would be responsible for overseeing the CRRO of the issuer, their responsibilities and policies applicable to them |
| Issuer’s management |
Management’s roles in the governance process for overseeing CRRO |
| (II) Strategy – an issuer’s strategy for managing CRRO10 |
|
| CRRO |
CRRO that may affect the issuer’s cashflow, access to finance or costs of capital over short, medium or long term |
| Business Model and value chainNote |
Current and anticipated CRRO on the issuer’s business model11 and value chain12 |
| Strategy and decision makingNote |
Issuer’s responds and plans on CRRO, how it achieves climate-related targets, and any legal or regulatory requirements on targets |
| Issuer’s progress of and resourcing for the above plans | |
| Financial position and performance, and cashflowNote |
Current financial effects: qualitative and quantitative information on how CRRO affects the issuer’s financial positions and for which there is a significant risks of material adjustments to carrying amounts of assets and liabilities for the reporting period |
| Anticipated financial effects: qualitative and quantitative disclosures on the expected impact on the issuer’s financial position, performance and cash flow over short, medium and long term |
|
| Climate resilienceNote |
Information on the resilience of the issuer’s strategy and business models towards climate-related changes, developments and uncertainties. It should be assessed with climate-related scenario analysis. |
| (III) Risk Management – the process an issuer uses to identify, assess, prioritise and monitor CRRO13 |
|
| Climate related risks |
Issuer’s processes and related policies for identifying, assessing, prioritising and monitoring such risks |
| Climate related opportunities |
Issuer’s processes for identifying, assessing, prioritising and monitoring such opportunities |
| Overall risk management |
How the above processes are integrated into the issuer’s overall risk management process |
| (IV) Metrics and Targets – the metrics and targets an issuer uses to understand its performance in relation to CRRO14 |
|
| GHG | Issuer’s absolute gross GHG emissions generated during the reporting period. It is classified into Scopes 1 GHG emissions (direct greenhouse gas emissions), Scope 2 GHG emissions (indirect greenhouse emissions from the generation of electricity, steam, heating or cooling consumed by the issuer) and Scope 3 GHG emissions (indirect greenhouse gas emissions that occur in the value chain of an issuer), with specific guidance on measurement methods to be used and disclosure details for different scopes |
| Climate-related transition risks, physical risks and opportunities |
The amount and percentage of issuer’s assets or business activities vulnerable to (in case of risks), or aligned with (in case of opportunities), CRRO |
| Capital deployment |
Amount of issuer’s capital expenditure, financing or investment deployed towards CRRO |
| Internal carbon prices |
Whether carbon price is deployed in issuer’s decision-making process and how it is applied |
| The price used by issuer to assess the costs of GHG emissions |
|
| Remuneration |
Whether climate-related considerations are factored into issuer’s remuneration policy and how it is done |
| Industry-based metrics |
The industry-based metrics that are associated with business models, activities or other common features that characterise participation in an industry |
| Climate-related targets |
Any climate-related targets that issuer is required to meet under law or regulation, including GHG emission targetsNote |
| Any qualitative and quantitative climate-related targets issuer set to monitor progress towards achieving its strategic goalsNote |
|
| Issuer’s approach in setting and reviewing each target, and how issuers monitor progress against each targetNote |
|
| Issuer’s performances against each climate-related target and an analysis of relevant trends or changes |
|
| For each of the above climate-related targets , specific disclosure requirements apply to GHG emission targets e.g. whether each of Scope 1, 2 or 3 GHG emissions are covered by the target etc. |
|
Note: In preparing the disclosures, issuers shall refer to and consider the applicability of cross-industry metrics and industry-based metrics set out in the Metrics and Targets pillar under Core Pillar (IV) of the table (except discussions in relation to climate-related targets)15
(c) Implementation Reliefs
To address concerns over issuers’ reporting challenges by virtue of limitations in the resources and/or technical knowledge and expertise for compliance with the New Climate Rules, the HKSE has introduced four implementation reliefs that are applicable to certain disclosures under the New Climate Rules. These reliefs are summarised below16:
- Reasonable Information Relief: disclosures can be made based on reasonable and supportable information that is available at the reporting date without undue cost or effort of the issuer;
- Capabilities Relief: in preparing disclosures on climate-related scenario analysis and anticipated financial effects, issuers can adopt an approach that is informed by or commensurate with their available skills, capabilities and resources at a particular point in time;
- Commercial Sensitivity Relief: this relief applies to all disclosure requirements forclimate related opportunities, if (i) such information is not publicly available, (ii) it could reasonably be expected to seriously prejudice the economic benefits the issuer would otherwise be able to realise in pursuing the opportunity, and (iii) it could not be disclosed in manner without leading to such prejudice;
- Financial Effects Relief: allows disclosure of qualitative instead of quantitative financial information where certain conditions are met.
The ESG Code establishes the framework for the applicability of the reliefs, and specifies the disclosure requirements to which these relief measures are relevant.
2. Getting Ready for the New Climate Rules
(a) HKSE’s Guidance
To support issuers in meeting the New Climate Rules, the HKSE has released a “Implementation Guidance for Climate Disclosures under HKEX ESG reporting framework” (the Implementation Guidance). The Implementation Guidance sets out principles, guidance and illustrative examples for the implementation of the New Climate Rules and aims to provide practical, step-by-step guidance for preparation of reports in accordance with the revised the ESG Code. Issuers are encouraged to refer to the guidance to facilitate an efficient preparation for the new regime.
(b) Plan Early
While the climate-related information will only be required to publish in 2026, some disclosure obligations necessitate collection of climate-related data for the full financial year starting from the Effective Date (being 1 January 2025). It may also require issuers to adjust their daily operations to facilitate the data collection. Issuers therefore are advised to plan ahead early to prepare for data collection and to minimise disruptions, if any, to their operations. Issuers may also consider engaging ESG consultants to assist with the process.
(c) Internal Governance
The New Climate Rules require disclosure on the governance process an issuer put in place to monitor and manage CRRO. It is therefore recommended for issuers to revisit, and enhance if necessary, their terms of reference and internal policies in order to address the disclosure requirements.
3. Conclusion: Charting the path forward
With the New Climate Rules, HKSE is committed to uphold market quality in line with the global trend of the ISSB standards, which will also serve as the foundation for Hong Kong’s local set of sustainability reporting standards. It is also part of HKSE’s efforts to prepare for and facilitate the issuers' smooth transition towards mandatory climate-related disclosures.
It is therefore crucial for issuers from all industries and of all sizes to maintain a flexible mind, to embrace and prepare for future changes, which are bound to be more robust and extensive in terms of the level of compliance obligations.
Footnotes
1
A set of climate-related standards by the International Sustainability Standard Board (ISSB) published in June 2023, which together with the ISSB General Standards published by ISSB, aim to serve as the global baseline of sustainability reporting standards for entities worldwide to prepare consistent, comparable and reliable sustainability disclosures.
2
HKSE’s Main Board Listing Rules (MBLR) Appendix C2. It will be renamed as “Environmental, Social and Governance Reporting Code” when the New Climate Rules take effect
3
New MBLR Appendix C2 paragraph 2(3)
4
ESG Code adopts the definitions under IFRS S2, which generally, categorises GHG emissions into direct emissions that occur from sources owned or controlled by an entity (Scope 1), and indirect emissions from generation of purchased or acquired electricity, steam, heating or cooling consumed by an entity (Scope 2)
5
ESG Code adopts the definition under IFRS S2, which generally means indirect greenhouse gas emissions (not included in Scope 2 GHG emissions) that occur in the value chain of an entity, including both upstream and downstream emissions
6
Amended MBLR Appendix C2 paragraph 17(2)
7
Issuers that are constituents of the Hang Seng Composite LargeCap Index (HSCLI) throughout their entire financial year 2025 will be required to make mandatory climate disclosure in respect of their ESG reports for the financial year 2026, and such ESG reports will be published in 2027
8
Current MBLR Appendix C2 Part C, section A aspect A4
9
New MBLR Appendix C2 paragraphs 2(3) and 19
10
New MBLR Appendix C2 paragraphs 2(3), 20-26
11
ESG Code adopts the definition under IRFS S2, which defines the term as “an entity’s system of transforming inputs through its activities into outputs and outcomes that aims to fulfil the entity’s strategic purposes and create value for the entity and hence generate cash flows over the short, medium and long term”
12
ESG Code adopts the definition under IRFS S2, which defines the term, generally, to mean the full range of interactions, resources and relationships related to a reporting entity’s business model and the external environment in which it operates
13
New MBLR Appendix C2 paragraphs 2(3) and 27
14
New MBLR Appendix C2 paragraphs 2(3), 28-40
15
New MBLR Appendix C2 paragraph 41
16
Implementation Guidance for Climate Disclosures under HKEX ESG reporting framework Pages 17-19
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