On April 19, the Stock Exchange of Hong Kong Limited announced the adoption of climate-related disclosures under its environmental, social, and governance framework. The new regulations will require the disclosure of Scope 1 and Scope 2 greenhouse gas emissions starting January 1, 2025.
There has been a global push to expand the financial reporting requirements of corporations from traditional financial data, to include sustainability and other ESG issues. The push for ESG was driven by international organizations, fund managers, and the market. The result was a rush by corporations to issue ESG and sustainability reports. However, the quick rise of reports outgrew the existing regulatory schemes, resulting in inconsistencies and potential legal pitfalls.
At COP26, the 2021 United Nations Climate Change Conference, the International Financial Reporting Standards Foundation announced the creation of the International Sustainability Standards Board. IFRS develops global accounting standards that are used in 168 jurisdictions, including Hong Kong.
The ISSB worked for two years drafting sustainability disclosure standards. The IFRS Sustainability Standards were released in June 2023, and jurisdictions are currently working on amending and adopting them in compliance with their respective legal and regulatory requirements.
The IFRS Sustainability Standards are divided into two reporting tiers, IFRS S1 and IFRS S2, both went into effect January 1, 2024. IFRS S1 established sustainability disclosure requirements, while IFRS S2 set out specific climate-related disclosures to be used along with IFRS S1. Both focus on a company’s governance, strategy, risk management, and metrics and target, as they relate to either sustainability or climate.
Under metrics and target, the IFRS S2 requires the reporting of GHG emissions. These reports are divided into three scopes. Scope 1 emissions are those that occur from sources controlled by the company. Scope 2 emissions are indirect emissions from the “generation of purchased or acquired electricity, steam, heating or cooling consumed by an entity.” Scope 3 emissions are divided into 15 categories, the most notable being “purchased goods and services.”
The Exchange, a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited, announced that, following a review of 115 responses on the proposal, it will be adopting New Climate Requirements. The requirements are based on IFRS S2, with references to IFRS S1. Notably, the new requirements only include mandatory disclosure of Scope 1 and Scope 2 GHG starting January 1, 2025.
Disclosure of Scope 3 divided by the type of filing entity. For LargeCap Issuers, Scope 3 is optional for 2025, using a “comply or explain” standard. Scope 3 becomes mandatory January 1, 2026. For Main Board Issuers, it is optional under “comply or explain.” For GEM issuers, it is voluntary.
The HKEX New Climate Requirements offer a different approach than other major jurisdictions. The EU’s European Sustainability Reporting Standards, also called the ESRS, require Scope 3 for all reporting entities. The U.S. Securities and Exchange Commission’s Climate-Related Disclosure Rule made Scope 3 optional, based on a materiality assessment. The SEC rule has since been delayed due to legal challenges.
