The Stock Exchange of Hong Kong Limited recently announced the adoption of new climate-related disclosure requirements under its environmental, social, and governance framework. The regulations will necessitate the disclosure of Scope 1 and Scope 2 greenhouse gas emissions starting from January 1, 2025. This move aligns with a global trend to expand financial reporting to include sustainability and other ESG issues, driven by international organizations, fund managers, and market demands. However, the rapid increase in ESG reports has outpaced existing regulatory frameworks, leading to inconsistencies and potential legal complications.
The International Financial Reporting Standards Foundation introduced the International Sustainability Standards Board at COP26, the 2021 United Nations Climate Change Conference. The ISSB spent two years developing sustainability disclosure standards, and the resulting IFRS Sustainability Standards were published in June 2023. These standards were divided into two reporting tiers, IFRS S1 and IFRS S2, both coming into effect on January 1, 2024. IFRS S1 established general sustainability disclosure requirements, while IFRS S2 focused on specific climate-related disclosures to complement IFRS S1, emphasizing a company’s governance, strategy, risk management, and metrics and targets related to sustainability or climate.
One significant aspect of the IFRS S2 requirements is the reporting of GHG emissions, divided into three scopes. Scope 1 emissions pertain to sources directly controlled by the company, while Scope 2 emissions are indirect emissions from external sources. Scope 3 emissions cover a comprehensive range of categories, with the most prominent being purchased goods and services. In response to 115 comments on the proposal, the Stock Exchange of Hong Kong Limited decided to adopt New Climate Requirements based on IFRS S2, with mentions of IFRS S1. Notably, the new requirements will mandate disclosure of Scope 1 and Scope 2 GHG emissions starting from January 1, 2025.
The disclosure of Scope 3 emissions will vary based on the filing entity type. For LargeCap Issuers, Scope 3 disclosure is optional in 2025 under a “comply or explain” standard, becoming mandatory from January 1, 2026. Main Board Issuers have optional Scope 3 disclosure based on “comply or explain,” while GEM issuers can choose to disclose Scope 3 voluntarily. The HKEX New Climate Requirements differ from other major jurisdictions in their approach, with the EU’s European Sustainability Reporting Standards mandating Scope 3 for all reporting entities and the U.S. SEC’s Climate-Related Disclosure Rule making Scope 3 optional based on materiality assessment, though facing delays due to legal challenges.