Climate change is a global concern, and investors are seeking more information to understand the carbon management levels of companies and their progress in addressing the impacts of climate change. Recently, the Hong Kong Exchanges and Clearing Limited (HKEX) published a consultation paper proposing the optimization of climate-related disclosures under the Environmental, Social, and Governance (ESG) framework. HKEX suggests mandating all issuers to disclose climate-related information in their ESG reports and introducing new climate-related disclosure requirements aligned with the International Sustainability Standards Board (ISSB) climate standards.

Previously, the International Sustainability Standards Board (ISSB) had confirmed in February 2023 that the International Sustainability Disclosure Standards (ISDS) — IFRS S1 and S2 — would be officially released and implemented starting in 2024. These standards are considered the benchmark for global ESG disclosure standards.

This article will introduce the development of the ISSB, track the impact of the International Financial Reporting Sustainability Disclosure Standards on HKEX's existing disclosure standards, and analyze the new requirements for corporate carbon management posed by ESG regulations.

01

【Development of ISSB】

Establishment of ISSB

On November 3, 2021, during the 26th United Nations Climate Conference, the International Financial Reporting Standards Foundation (IFRS Foundation) announced the official establishment of the International Sustainability Standards Board (ISSB). During its formation, ISSB integrated several mainstream international sustainability disclosure standard organizations, including IIRC, SASB, VRF, and CDSB, and collaborated with TCFD and GRI to develop a comprehensive global benchmark for sustainability disclosure standards to meet the information needs of global investors regarding climate and other sustainability matters.

Publication of Exposure Drafts

In March 2022, ISSB published the exposure drafts for the "International Financial Reporting Sustainability Disclosure Standard 1 — General Requirements for Disclosure of Sustainability-related Financial Information" (referred to as "S1 Standard") and the "International Financial Reporting Sustainability Disclosure Standard 2 — Climate-related Disclosures" (referred to as "S2 Standard"). This marked a significant step towards establishing a unified ESG and climate disclosure standard. The S1 Standard emphasizes that sustainability reporting should have the same status as financial reporting, while the S2 Standard is based on the TCFD framework and shares certain compatibilities with it.

Review of Exposure Drafts

In February 2023, ISSB completed the review of the exposure drafts for S1 and S2 standards and determined that these standards would take effect for annual reporting periods beginning on or after January 1, 2024. The board has entered the drafting and voting procedures and is expected to publish the final versions of the sustainability and climate-related information reporting standards by the end of June 2023.

Latest Developments

In May 2023, ISSB published the "Consultation Paper on Agenda Priorities" (hereinafter referred to as the consultation paper), soliciting public opinions from global stakeholders. This is the first agenda consultation conducted by ISSB since its establishment, aimed at formulating and improving its work plans and determining priorities for the next two years.

On June 19, 2023, the Beijing Office of the IFRS Foundation held an unveiling ceremony, marking the official operation of the Beijing Office as the representative institution of the Foundation in China, following the signing of a Memorandum of Understanding between the Chinese Ministry of Finance and the Foundation on December 29, 2022.

02

【Impact of ISSB Standards on HKEX ESG Guidelines】

Regarding existing disclosure standards, the international application of ISSB's existing S1 and S2 standards is continuously increasing. In April 2023, HKEX published a consultation paper on climate-related disclosures, planning to change the "comply or explain" requirement for climate disclosures to mandatory disclosure in 2024 and extend it to all listed companies. The consultation paper primarily seeks comments on revisions to the existing "Appendix Twenty-Seven" of HKEX, representing a reform aimed at aligning the disclosure standards of listed companies with ISSB's S2 Standard.

The main areas of focus in HKEX's publication of the climate-related disclosure consultation paper include:

01 Increased Rigor, Changing "Guidance" to "Code"

The revision changes the title of the appendix containing ESG-related clauses from "Environmental, Social and Governance Reporting Guide" to "Environmental, Social and Governance Code." HKEX stated that the term "guidance" might be misinterpreted as voluntary, whereas issuers are required to comply with the rules on a mandatory basis or provide explanations, failing which would violate the Listing Rules.

02 Mandatory Disclosure of Climate Change Content

In the governance section: The introduction now includes the requirement for issuers to report on their climate-related strategies, policies, and performance in the board report.

In the strategy section: The current "comply or explain" disclosure requirement for climate-related issues will be upgraded to mandatory disclosure. The mandatory disclosure content will refer to the TCFD recommendations and the ISSB climate standards. Topics such as climate change and key performance indicators, including direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions, will be included in the "mandatory disclosure" scope.

In the metrics and targets section: Disclosure of greenhouse gas emissions data is required, covering Scope 1, Scope 2, and Scope 3 emissions. Issuers must also disclose capital expenditures related to climate-related risks and opportunities and how climate-related considerations are incorporated into remuneration policies. Issuers that have established internal carbon prices must disclose their internal carbon price and how it is applied to decision-making processes.

The consultation paper is currently in the opinion solicitation phase, and the revised Listing Rules and Appendix Twenty-Seven are planned to take effect on January 1, 2024, applying to ESG reports for fiscal years beginning on or after the effective date.

HKEX's consultation paper is based on the climate standards exposure draft published by ISSB in March 2022 and the recommendations approved by ISSB in April 2023. With the formal release of the S2 standard by ISSB at the end of June, HKEX will adjust the disclosure framework again to align with the final standards. The current consultation paper aims to provide issuers with more time for internal coordination. After the standards are introduced, HKEX may require listed companies to mandatorily disclose Scope 1 and Scope 2 carbon emission information and, after the transition period, Scope 3 information. This will be significant for advancing corporate carbon management.

03

【New Requirements for Corporate Carbon Management】

The measures taken in the Hong Kong stock market provide important reference value for the conduct and disclosure of corporate carbon management.

Firstly, companies need to ensure the disclosure of their Scope 1 and Scope 2 carbon emissions. In the 2022 ESG review of the Hong Kong stock market, 90% of issuers disclosed Scope 1 and 2 emissions in their ESG reports. In contrast, only 5.3% of A-share listed companies disclosed Scope 1 and 2 emissions, significantly lower than international levels.

Secondly, companies should gradually manage carbon emissions across their value chains. Given the current situation, most Chinese companies face significant challenges in managing, calculating, and disclosing data for Scope 3 greenhouse gas emissions. Therefore, companies need to recognize the necessity of carbon management, plan and deploy in advance, and establish a robust system for Scope 3 greenhouse gas emissions. By widely comparing and evaluating existing calculation methods used by peers, companies can ensure timely, accurate, and high-quality disclosure when regulatory requirements become stricter.