On June 26, 2023, the International Sustainability Standards Board (ISSB) officially released two international financial reporting sustainability disclosure standards in their final drafts, namely International Financial Reporting Standard 1 – General Requirements for Sustainability-Related Financial Information Disclosure (IFRS S1) and International Financial Reporting Standard 2 – Climate-Related Disclosures (IFRS S2). These standards are designed to ensure that companies to provide sustainability-related information alongside financial statements in the same reporting package, and will come into effect on January 1, 2024.
Due to the upcoming alignment of Hong Kong’s ESG regime with the ISSB standards, there will be significant implications to listed companies and the governance professionals advising them. Companies are therefore being recommended to initiate key tasks such as climate risk assessment as soon as possible. This includes collecting, organizing, documenting the necessary data, as well as establishing other essential management mechanisms, to meet the required sustainability disclosure capabilities.
Key Difficulties and Compliance Challenges
The process of implementing the ISSB standards requires companies to take specific actions in strict accordance with the detailed guidelines, to which companies will need paying special attention on:
1. How to effectively account for and manage greenhouse gas emissions?
Significant efforts would need to be made to disclose the absolute emissions and intensity of Scope 3 emission for their value chains. Joint ventures and associates are also required to disclose separately their GHG emissions information for Scope 1 and Scope 2. It may be challenging to obtain this information, whereas most of the 2,600 listed companies in Hong Kong are SMEs. Companies will be required to have their systems, processes and controls undergo significant upgrading.
2. How to identify and disclose climate-related opportunities and risks?
Companies are required to undertake scenario analysis that conforms with Paris Agreement-aligned transition pathway to describe their climate resilience. The questions of how to use modelling methods to obtain relevant data for key inputs, and what significant assumptions would need to be made to ensure the accuracy and completeness of data sources will become an issue. Many companies would need to build up the capability to undertake this.
3. How to integrate and disclose alongside financial reporting?
Non-financial information needs to be symmetrical with financial information. How can consistent judgments and assumptions be applied? How can cross-departmental collaboration be coordinated? Establishing mechanisms for system processes, internal controls, governance oversight, and other aspects are necessary to accurately and timely support the disclosure requirements in compliance with the ISSB standards which emphasize on fair presentation, comparative information, use of financial data and assumptions, and sources of estimates, etc.
Major impacts of ISSB launch will have on companies in Hong Kong
In April 2023, the Hong Kong Stock Exchange (HKEX) issued a consultation paper proposing mandatory disclosure of climate-related information in ESG reports for all issuers. They also proposed the introduction of new climate-related disclosure requirements based on the ISSB standards, which would be added as Part D of Appendix 27 “Guidance on Environmental, Social, and Governance Reporting” of the HKEX Main Board Listing Rules.
The following focuses on the interpretation of the HKEX consultation paper and provides a comparative analysis of it with the ISSB standards to better understand their similarities and differences.
HKEX Climate-Related Disclosure Regulatory Review and Development Blueprint
Overview of the Current and Proposed Climate-Related Disclosure Requirements by HKEX
A Brief Analysis of the Differences between the Proposed New Climate-Related Information Disclosure Guidelines by HKEX and the ISSB Standards
China Is Accelerating Sustainable Development
China is currently in a phase where voluntary disclosure and partial mandatory disclosure by certain companies are taking place simultaneously. In December 2021, the Ministry of Ecology and Environment issued the “Administrative Measures for the Lawful Disclosure of Enterprise Environmental Information,” focusing on enterprises with significant environmental impacts and high public attention. It requires key pollutant-emitting units, companies subject to mandatory clean production audits, listed companies meeting certain criteria, and bond-issuing enterprises to disclose environmental information in accordance with the law. For example, key pollutant-emitting units are required to disclose eight categories of information, including environmental management information, pollutant generation, control and emission information, and carbon emissions information.
In June 2022, the State-owned Assets Supervision and Administration Commission issued the “Management Measures for Energy Conservation and Ecological Environment Protection Supervision and Management of Central Enterprises.” It emphasizes that central enterprises should actively practice the concept of green, low-carbon, and circular development. Energy conservation, ecological environment protection, carbon peak and carbon neutrality strategies should be incorporated into corporate development strategies and plans. They should focus on the orderly development of their core businesses and strengthen green, low-carbon industries such as energy conservation and environmental protection. On June 19, 2023, the ISSB and the Ministry of Finance jointly unveiled the office established in Beijing. The Ministry of Finance and the China Securities Regulatory Commission previously provided feedback on the ISSB drafts, indicating that China is actively participating in the promotion of sustainable disclosure standards that are in use by global economies.
International sustainable disclosure standards are moving towards compatibility and uniformity. The ISSB standards are built upon existing international disclosure requirements and are compatible with the four pillars of the TCFD disclosure framework. Its work has received support from the G20, including China. Chinese companies continue to enhance the disclosure of environmental information and the management of environmental impacts. Some leading state-owned enterprises have gone beyond passive disclosure and proactively established and managed their green supply chains, gaining an early advantage in this new international competitive arena.
Conclusion
As addressing climate change becomes a global consensus, the acceleration of corporate disclosure of climate-related information has entered a new phase. The equal importance of sustainability information and financial information will mark a new era, meeting the expectations of international investors and the requirements of the HKEX. Companies need to proactively build the corresponding management capabilities to be prepared.
If you would like to know more about the specific impacts and implementation arrangements of the ISSB standards, please feel free to contact us.