Apr 23 Legal Update
HKEX consultation on climate-related disclosures
HKEX published a consultation paper on proposals to enhance climate-related disclosures under the ESG framework (Appendix 27). It proposes to (i) make such disclosures in ESG reports mandatory, and (ii) introduce new disclosures aligned with the International Sustainability Standards Board (“ISSB”) Climate Standard (ISSB standard expected to be finalised by end of Q2). (Press release; full document)
Proposed climate-related disclosures are much more detailed than currently required by HKEX. There are 4 core pillars, namely Governance, Strategy, Risk management, Metrics and targets.
HKEX intends to implement the proposals for financial years commencing on or after 1 Jan 2024. Acknowledging the readiness of issuers and their concerns, there are interim provisions for certain disclosures (e.g. financial effects of climate-related risks and opportunities, scope 3 emissions and certain cross-industry metrics) for the first 2 reporting years, i.e. full compliance for years on or after 1 Jan 2026 (report to be published in 2027).
It is noted that HKEX will provide implementation guidance together with consultation conclusions in due course.
The consultation period will close after 14 July 2023.
We have summarised the key proposals below. (For detailed disclosure requirements: see summary table (P. 6 of consultation paper), proposed amendments to Listing Rules (Appendix II)).
Key proposals include:
- Disclose the issuer’s governance process, controls and procedures used to monitor and manage climate-related risks and opportunities, including
—How the board ensures appropriate skills and competencies to oversee relevant strategies
— How and how often the board and its committees are informed about climate-related risks and opportunities
— How the board and its committees consider climate-related risks and opportunities when overseeing the issuer’s strategy, decisions on major transactions, and risk management policies
- Climate-related risks and opportunities
— Disclose climate-related risks and, where applicable, opportunities faced by the issuer and their impact on its business operations, business model and strategy
— Note: issuers may opt to disclose climate-related opportunities
- Transition plans
— Including any changes to issuer’s business model and strategy, and any adaptation and mitigation efforts
— Climate-related targets
— Where carbon credits are intended to be applied towards GHG emission targets, should disclose information regarding such intended use, its gross GHG emission targets, net GHG emission targets separately
- Climate resilience
— Resilience of its strategy (including business model) and operations to climate-related changes, developments or uncertainties
— Assessed using climate-related scenario analysis
- Financial effects of climate-related risks and opportunities
— Disclose the current (quantitative where material) and anticipated (qualitative) financial effects of climate-related risks and, where applicable, opportunities on issuer’s financial position, financial performance and cash flows
— INTERIM/ALTERNATIVE DISCLOSURE (a) current financial effect: allow qualitative disclosures (b) anticipated financial effect: (i) information that enables investors to understand the aspects of financial statements that are most affected (ii) work plan, progress and timetable for full disclosure (“plan for full disclosure”)
3. Risk management
- Disclose the process issuer used to identify, assess and manage climate-related risks and, where applicable, opportunities (which envisages disclosure of)
— E.g. how such process is integrated into issuer’s overall risk management process
4. Metrics and Targets
- GHG emissions (by GHG Protocol or the protocol the issuer is required to use under its local legislation): scope 1, scope 2 and scope 3
— SCOPE 3: INTERIM/ALTERNATIVE DISCLOSURE (i) information that enable investors to understand its relevant upstream or downstream activities along the value chain (ii) plan for full disclosure
- Other cross-industry metrics: such as percentage of assets or business activities (i) vulnerable to transition/physical risks or (ii) aligned with climate-related opportunities, and the amount of capital expenditure deployed towards the same
— INTERIM/ALTERNATIVE DISCLOSURE (i) describe such assets or business activities (ii) plan for full disclosure
- (Where applicable) internal carbon price
- Remuneration: disclose how climate-related considerations are factored into remuneration policy
- Industry-based metrics: issuers are “encouraged to consider” industry-based disclosure requirements prescribed under international ESG reporting framework
What you should do/watch out for:
- Note the consultation period, for making responses as appropriate
- Update the board and relevant teams on the broad proposals, following management’s initial assessment of the impact (in light of implementation timeframe)
- Detailed analysis by management for board discussions in due course (e.g. review internal systems, co-ordinate among divisions to identify information gaps and assess readiness for implementation)
– The importance of pre-AGM engagement (Alliance Advisors)
Cornerstone practices for Greater China 2023
- Best practices for shareholder engagement
- Why pre-engagement maximises future support
- Shareholder activism trends in APAC
- Watch out for signs of activism
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