Governance Briefing — April 24, 2023
HKEX’s climate disclosure consultation would align issuer reporting with IFRS S2, phasing in Scope 1-3 emissions, scenario analysis, and financed emissions expectations from 2024 financial years.
Executive briefing: Hong Kong Exchanges and Clearing Limited (HKEX) opened consultation on enhancements to its ESG disclosure framework that would mandate climate-related reporting aligned with the International Sustainability Standards Board’s IFRS S2 beginning with financial years starting on or after 1 January 2024. The proposal requires all issuers to provide governance, strategy, risk management, and metrics disclosures consistent with TCFD, including Scope 1, Scope 2, and eventually Scope 3 greenhouse gas (GHG) emissions, climate resilience analysis, and financed emissions for financial institutions. Boards must treat the consultation as a near-term compliance blueprint, mobilising climate data infrastructure, scenario analysis, and assurance programmes ahead of the expected rule adoption.
HKEX plans phased relief for certain data points—allowing a two-year grace period for Scope 3 emissions and financed emissions while still expecting issuers to describe methodologies and transition plans in the interim. The exchange also proposes industry-specific guidance, cross-referencing the Hong Kong Monetary Authority’s climate risk practices and the Insurance Authority’s supervisory expectations, signalling convergence across financial regulators. Issuers should proactively upgrade governance, controls, and technology to avoid scrambling once the consultation closes and final rules issue.
Capability and disclosure expansion
The consultation expands requirements across several capability areas:
- Governance transparency. Boards must describe oversight structures, climate competency, and integration with risk management processes. HKEX expects disclosure of board-level training, expertise, and how incentives align with climate objectives.
- Strategy and resilience. Issuers must present qualitative and quantitative scenario analysis covering multiple time horizons, material climate risks and opportunities, and transition plans with interim targets.
- Risk management integration. Companies must explain processes for identifying, assessing, and managing climate risks, including how they interact with enterprise risk management frameworks and supply-chain due diligence.
- Metrics and targets. Required metrics include absolute emissions, emissions intensity, internal carbon pricing, use of renewable energy, and progress against science-based targets. Financial institutions must provide financed, facilitated, or insurance-associated emissions depending on business model.
HKEX aligns definitions with IFRS S2, providing international investors with comparable data and enabling issuers to leverage global reporting systems. However, the breadth of metrics and scenario expectations will stretch data architecture and modelling capabilities—particularly for mid-cap issuers lacking mature sustainability teams.
Implementation roadmap
Issuers should structure implementation into pragmatic phases:
- Diagnostic and governance alignment. Conduct gap analysis comparing current ESG reporting to the proposed Appendix 27 requirements. Map board oversight committees, management responsibilities, and reporting lines; schedule board education on IFRS S2 concepts and sector risk pathways.
- Data and technology upgrades. Expand data capture for Scope 1 and Scope 2 emissions across subsidiaries, joint ventures, and leased assets. Implement supplier engagement programmes, data sharing protocols, and digital platforms to quantify Scope 3 categories within the two-year transition window.
- Scenario analysis and target setting. Develop climate scenarios consistent with IPCC pathways (1.5°C and well-below 2°C) and local physical risk projections for Hong Kong and key operating geographies. Translate findings into capital allocation plans, resilience investments, and transition targets with interim checkpoints.
- Assurance and reporting controls. Establish internal controls over climate data, including segregation of duties, audit trails, and validation rules. Engage external assurance providers early to align methodologies with expected assurance mandates and investor expectations.
Given the short implementation window, issuers should integrate climate reporting into annual report planning cycles and align with other jurisdictional requirements (such as EU CSRD or Mainland China guidance) to avoid duplicative processes.
Responsible governance and oversight
HKEX emphasises board accountability and cross-functional governance:
- Board oversight. Boards should document climate governance charters, delegate responsibilities to sustainability committees, and define key risk indicators (KRIs) for transition and physical risk exposure.
- Management accountability. Assign C-suite sponsors—such as the CFO and CRO—to integrate climate metrics into financial planning, stress testing, and risk appetite statements. Link remuneration to delivery of climate targets.
- Policy integration. Align climate governance with existing HKMA supervisory policy manual modules, SFC Fund Manager Code of Conduct requirements, and Insurance Authority guidance to ensure consistent messaging to regulators and investors.
- Stakeholder engagement. Plan structured dialogues with investors, lenders, and civil society to validate scenario assumptions and disclose transition plans transparently.
These governance mechanisms should be codified in board minutes and sustainability policies so issuers can evidence oversight during HKEX reviews or investor engagements.
Sector playbooks
- Financial institutions. Banks and asset managers must develop methodologies for financed emissions (using PCAF standards), set portfolio decarbonisation targets, and integrate climate risk into credit approval and asset allocation. Scenario analysis should align with HKMA’s Climate Risk Management guidelines.
- Property and infrastructure. Quantify physical risk exposure (flooding, heat stress) for major assets, model capital expenditure for resilience upgrades, and disclose energy efficiency roadmaps aligned with Hong Kong’s Climate Action Plan 2050.
- Manufacturing and supply chain-intensive sectors. Map upstream suppliers, prioritise high-emission categories for data collection, and introduce supplier engagement programmes to improve emission factor quality.
- Technology and services. Integrate climate scenario outputs into product innovation pipelines, explaining how services support client decarbonisation and referencing renewable energy procurement strategies.
Measurement and progress tracking
Issuers should design dashboards to monitor progress and evidence compliance:
- Emissions completeness. Track coverage of Scope 1 and Scope 2 data (percentage of sites metered, percentage of energy sources tracked) and maturity of Scope 3 category estimation. Document methodological changes and assurance status.
- Scenario readiness. Maintain scenario libraries with assumptions, model owners, and update frequency. Record how scenario insights influence capital allocation and risk appetite decisions.
- Target performance. Monitor interim emissions reduction milestones, renewable energy uptake, and investment in transition or adaptation projects.
- Governance evidence. Collect board meeting minutes, training completion records, and executive compensation linkage to demonstrate oversight.
- Assurance readiness. Track progress toward limited then reasonable assurance by documenting control testing, third-party assurance engagements, and remediation of audit findings across emission scopes and scenario models.
- Investor engagement. Track investor queries, responses, and feedback to refine disclosures and ensure alignment with global climate reporting expectations.
Integrating these metrics into enterprise performance management systems will streamline upcoming assurance and regulatory reviews, while reinforcing accountability for climate commitments.
Zeph Tech supports HKEX-listed companies with IFRS S2 readiness assessments, climate data architectures, and governance playbooks that convert disclosure obligations into actionable transition strategies.
Issuers should also watch for the ISSB’s IFRS S1 general sustainability disclosure requirements, which HKEX intends to consider in future phases; building modular reporting architectures now will ease multi-framework alignment.
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