Special Issue: Apr 24 Legal Update
Top stories
HKEX consultation conclusions on climate-related disclosures
HKEX published conclusions on its consultation on the enhancement of climate-related disclosures under the ESG framework. The proposals were adopted as modified, with a “phased” approach. Implementation reliefs are also introduced for some new requirements, replacing the “interim provisions” approach as originally proposed. (Press release; full document, implementation guide)
New Part D
Proposed climate-related disclosures are contained in a new part of the ESG Code (“New Climate Requirements”). Based on the global ISSB’s IFRS S2 standard, there are 4 core pillars namely Governance, Strategy, Risk management, Metrics and targets.
“Phased” approach
Effective for financial years starting on or after 1 Jan 25, all listed companies would be required to report on scope 1 and 2 emissions (currently in Part C, subject to “comply or explain”). Other New Climate Requirements will be subject to “comply or explain” for all Main Board listed issuers.
However, for Hang Seng Composite LargeCap Index companies, these would become mandatory for years on or after 1 Jan 2026. (See HKEX press release for summary table)
Implementation reliefs
These are available for some requirements, e.g. “Financial effects relief” (“F”) : (subject to conditions) allows qualitative instead of quantitative disclosure for anticipated/current financial effect. Other reliefs are “Reasonable information relief” (“RI”), “Capabilities relief” (“C”), (for disclosure of climate-related opportunities) “Commercial sensitivity relief” (“CS”). (See P. 24 of consultation conclusions, for summary table of applicability of reliefs)
However, reliefs are not available for all requirements. E.g. governance, risk management, climate targets.
HKEX has published a detailed implementation guide (over 140 pages). It contains references to the relevant general disclosure principles of IFRS S1 standard. Issuers are encouraged to refer to and use the guide when preparing disclosures.
Next Steps
HKEX explained that the New Climate Requirements form part of the wider HK roadmap for the local adoption of ISSB standards. They serve as an interim step towards the local sustainability disclosure standards for HK generally, which are being developed by HKICPA.
The purpose of requiring climate reporting on a “comply or explain” basis only is to provide issuers with more time to prepare to make such disclosures. It urges issuers to disclose information required under each of the “comply or explain” provisions to the extent possible. It is vital that issuers kick start the process to identify gaps in their current systems as soon as possible to help prepare themselves for the eventual climate reporting in accordance with the HK Standards.
We have summarised the key requirements in the Appendix.
What you need to know:
A key concept: “materiality”
-
General threshold under ESG Code unchanged: this applies to non-climate aspects; being “determined by the board as sufficiently important to investors and other stakeholders” i.e. not only financial aspects
-
For Part D: added that an issuer “must disclose information about climate- related risks and opportunities that could reasonably be expected to affect its cash flows, its access to finance or cost of capital over the short, medium or long term” i.e. financial aspects
-
For the avoidance of doubt, issuers are allowed to prepare disclosures under the New Climate Requirements under the “double materiality” approach i.e. both financial impact and impact on the environment
What you should do:
-
Update the board and relevant teams on the new requirement
-
Management to perform a gap analysis for board discussions in due course
Also in this issue
Regulators
HKEX published consultation conclusions on proposed amendments to Listing Rules relating to treasury shares (“T Shares”) , together with a Guidance Letter and (updated) FAQ. (Press release, full report)
The new T Shares regime will take effect from 11 June (“Effective Date”). The requirement to cancel repurchased shares will be removed, so that issuers may hold the repurchased shares in treasury. However, this is subject to the laws of their places of incorporation and their constitutional documents. E.g. HK Companies Ordinance does not currently allow treasury shares and the government is proposing amendments.
What you need to know:
Other key Listing Rule changes include:
-
Resale of T Shares by an issuer generally follows the rules that currently apply to an issue of new shares
-
Plus additional disclosure
-
-
“Market protection” measures (e.g. mitigating the risk of stock market manipulation)
-
E.g. a 30-day moratorium period to restrict (i) a resale of T Shares (whether on-market or off-market) after a share repurchase (subject to carve-outs, e.g. share grants under a share scheme); (ii) an on-exchange share repurchase after an on-exchange resale of T Shares
-
Prohibiting T Shares resale on the exchange (i) when there is undisclosed inside information; (ii) during the 30-day period preceding results announcement; or (iii) if knowingly made with a core connected person
-
It is noteworthy that the restricted period for on-exchange share repurchases and grants of options/awards under share schemes will ALSO be adjusted from one month to 30 days immediately before the date of board meeting for the approval of the issuer’s financial results
-
-
Issuers (being holders of treasury shares) to abstain from voting on matters that require shareholders’ approval under Listing Rules
-
T Shares excluded from an issuer’s issued or voting shares under various parts of the Rules (e.g. public float and size test calculations)
The FAQs clarify that an issuer is permitted to obtain shareholder approval to amend its constitutional documents, at its AGM held before the Effective Date.
-
General mandate to issue new shares/resell T Shares: to specifically authorise the resale of T Shares; that it may use the mandate for such purpose only after the Effective Date
-
Share scheme rules need to be amended, in order for share grants to be satisfied by T Shares
The Guidance Letter sets out useful information regarding CCASS arrangements to appropriately identify and segregate T Shares. E.g. laws of Bermuda and the Cayman Islands require repurchased shares to be held in the issuer’s own name, in order to be classified as T Shares. This impacts CCASS arrangements.