Dr Robin Kennish, Director Corporate Sustainability & Climate Change – ERM
Summer Chen, Senior Consultant, Climate Change – ERM
Hong Kong Stock Exchange (HKEX) has been advancing requirements for sustainability reporting for listed companies with the intention of raising the bar to meet prevailing international practice. The HKEX Environmental Social Governance (ESG) Reporting requirements came into effect in July 2020 and since then HKEX published (November 2021) new guidance on climate disclosure to facilitate reporting in line with the Task Force of Climate-related financial Disclosure (TCFD). Hong Kong’s Securities and Futures Commission (SFC) also finalised (August 2021) amendments to the Fund Manager Code of Conduct (FMCC) that will require fund managers to take climate related risks into consideration in the investment and risk management process.
Internationally, there have been three major sustainability disclosure proposals released earlier this year to guide on how to report on, and assess, climate-related risks. They come at a pivotal time in corporate disclosure and have significant implications for investors and issuers in Hong Kong.
- In the United States, the SEC’s March 2022 proposal, Enhancement and Standardization of Climate-Related Disclosures for Investors, focuses on the protection of investors in publicly traded companies in the U.S.
- In Europe, the EFRAG’s April proposal, European Sustainability Reporting Standards (ESRS) to inform the EU’s Corporate Sustainability Reporting Directive (CSRD).
- The ISSB’s March proposal, General Requirements for Disclosure of Sustainability-related Financial Information and Climate-related Disclosures exposure drafts to guide individual jurisdictions and regulators.
While the SEC, ESRS, and ISSB proposals deal with similar material, they differ in certain aspects, including their enforceability, jurisdictional scope, substantive scope of coverage, and detailed requirements. The Evolution of Sustainability Disclosure was jointly authored by the SustainAbility Institute by ERM (‘ERM’), ERM’s primary platform for thought leadership on sustainability, and Persefoni, the leading carbon management and accounting platform. It profiles these three proposals, focusing on the components related to climate-related risk and opportunity disclosure and the use of the TCFD guidance.
Key takeaways and implications for HK corporate disclosure include:
- The evolving guidance from the SEC, EFRAG, and IFRS builds on 20+ years of continuous improvement in the field: Engagements among global ESG, sustainability, and climate change experts and organizations continue to refine, focus, and improve the disclosure landscape for ESG-related information, especially quantifiable GHG data and climate change-related risks.
- Companies in HK should focus on the Task Force on Climate-Related Financial Disclosures (TCFD) framework to guide current reporting: All three proposals draw heavily on the disclosure framework introduced by the Task Force on Climate-related Financial Disclosures (TCFD) which provides a framework for companies to use to help them to evaluate their climate-related financial risks and opportunities that applies across industries, geographies, and types of organizations.
- More companies in HK will disclose emissions (Scope 1, 2, and 3): The ESRS and ISSB proposals directly call for disclosure of Scope 3 emissions (indirect emissions from an issuer’s upstream and downstream value chains) and companies should be ready to calculate emissions to disclose for the FY23 reporting year. This will increase the amount of available data and facilitate reporting over time. As more companies report their Scope 1 and 2 emissions data, Scope 3 reporting will become easier and more reliable.
- Third party assurance will become more common: Companies in HK should prepare for limited assurance requirements soon, with a longer-term transition to reasonable assurance likely under both the SEC and ESRS disclosure regimes.
- Timeline for compliance is pushing pace for 2023/4: For all three frameworks, large companies in HK should collect data beginning at least with their Fiscal Year 2023 and prepare to file by the following year.
- Commenting on the proposals: Each of the proposals is currently undergoing public consultation. The deadlines for submission of comments are as follows
– SEC: Comments are due June 17, 2022
– ISSB: Comments are due July 29, 2022
– ESRS: Comments on ESRS are due by August 8, 2022
ERM and Persefoni encourage corporate issuers, investors, and other stakeholders to participate in the public consultation process for these proposals to help drive momentum towards a consistent global reporting baseline.
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