Hong Kong

A. ESG Reporting

1. Are there legal or regulatory requirements for companies to make ESG disclosures in your jurisdiction?

Yes.

2. What are the key legislative and regulatory sources for ESG disclosure requirements and to whom do they apply?

ESG disclosure requirements are primarily aimed at listed companies and financial institutions:

(a) The ESG Reporting Guide in Appendix C2 to the Hong Kong Listing Rules (ESG Reporting Guide) issued by the Hong Kong Stock Exchange (HKEX) sets out ESG disclosure requirements to be reported on an annual basis by Hong Kong primary-listed companies. The climate-related aspects will be significantly enhanced from 1 January 2025 as outlined in section A.11 below.

(b) The Hong Kong Monetary Authority’s Supervisory Policy Manual contains a Climate Risk Management module (HKMA Climate Module), which includes best practices on climate disclosures by “authorized institutions” (primarily banks).

(c)  Asset managers (licensed by the Securities and Futures Commission (SFC)) of certain collective investment schemes are required to make climate-related disclosures. SFC-authorised (i.e. retail) green or ESG funds must include certain disclosures in the offering documents and disclose, at least annually, how the fund has attained its ESG focus.

(d) Hong Kong incorporated companies (unless exempted) are required under the Companies Ordinance to prepare an annual directors’ report covering (amongst other matters) its environmental policies, performance and compliance with relevant laws and regulations. However, these requirements are relatively high-level.

3. Are the requirements mandatory or do they apply on a comply-or-explain basis?

The requirements are mandatory, except as noted below.

The ESG Reporting Guide contains mandatory disclosures in relation to ESG governance structure. General disclosures and key performance indicators regarding environmental and social aspects are on a “comply-or-explain” basis. The upcoming HKEX Climate Disclosure Rules (as defined below) will permit smaller listed companies to report on a comply-or-explain basis for most climate disclosures, while larger listed companies are subject to a higher degree of compliance obligation – see section A.11 below for more detail.

While the HKMA Climate Module is not a mandatory guideline, an authorized institution’s failure to comply can potentially be taken into account when assessing whether it continues to be fit and proper to hold the relevant licence. The HKMA Climate Module expects authorized institutions to make TCFD-aligned disclosures by no later than 2025. However, depending on factors such as significance of the authorized institution’s Hong Kong operations, a comply-or-explain approach may be taken, with explanations and plans for future enhancements given.

4. Which aspects of ESG do the requirements focus upon?

For listed companies, environmental, social and governance aspects are all covered, but the focus of the upcoming changes is on climate.

For financial institutions, the focus is on climate.

5. Are the disclosure requirements based on international standards? If so, which one(s)?

The ESG Reporting Guide is influenced by elements of the GRI Standards and the TCFD recommendations. Listed companies are encouraged (but not required) to align with the TCFD recommendations on their climate disclosures. The upcoming HKEX Climate Disclosure Rules are substantially based on IFRS S2, with the accompanying implementation guidance incorporating reporting principles under IFRS S1 (insofar as they are relevant to climate-related disclosures). 

Authorized institutions are expected to report climate disclosures in line with the TCFD recommendations (at a minimum). The HKMA will be “pragmatic” in monitoring disclosures initially, with a view that authorized institutions should become TCFD-aligned by 2025.

6. How do the disclosure requirements approach materiality (e.g. single or double materiality)?

Broadly speaking, the HKEX’s current reporting framework under the ESG Reporting Guide can be regarded as double materiality, whilst the upcoming HKEX Climate Disclosure Rules adopt a single materiality approach in line with the ISSB Standards (though listed companies can prepare additional disclosures under a double materiality approach if they wish).

The requirements applicable to authorized institutions and asset managers are based on the TCFD recommendations and therefore adopt a single materiality approach.

7. Are there requirements for the disclosure of GHG emissions? If so, please specify the scope (e.g. Scope 1, Scope 2 and/or Scope 3), to whom they apply and whether there are requirements on the measurement methodology.

Currently, Scope 3 reporting is encouraged (but not mandatory). Listed companies report on Scope 1 and Scope 2 emissions on a comply-or-explain basis. Authorized institutions are subject to Scope 1 and Scope 2 reporting requirements under the HKMA Climate Module. Large asset managers are required to report on portfolio carbon footprints of Scope 1 and Scope 2 GHG emissions where data is available or can be reasonably estimated. It is not mandatory to adopt a specific GHG measurement methodology.

Under the upcoming HKEX Climate Disclosure Rules:

(a) Scope 1 and Scope 2 emissions must be reported on a mandatory basis by all listed companies. Scope 3 emissions will be mandatory for larger listed companies (after a phasing-in period) and comply-or-explain for other Main Board listed companies. See section A.11 for more detail.

(b) In line with IFRS S2, companies must adopt the GHG Protocol as the measurement methodology unless it is required by another jurisdiction or exchange to use a different method.

8. Are there requirements to obtain independent assurance of any ESG disclosures? If so, what is the scope of such requirements? 

Encouraged but not mandatory.

The government has announced it will develop local sustainability-related assurance standards (see section A.12 below). It is not yet clear whether and, if so, to what extent mandatory assurance requirements will apply.

9. For companies not subject to mandatory or comply-or-explain ESG reporting, are voluntary ESG disclosures customary?

Some large non-listed entities have issued ESG reports even though it is not mandatory and referenced international standards.

10. Has your jurisdiction issued or adopted a taxonomy on sustainable activities? Is it mandatory and what is its scope of application?

There is no mandatory taxonomy, but the HKMA has issued a local taxonomy (referencing the EU-Mainland Common Ground Taxonomy amongst other frameworks). The taxonomy currently covers certain activities in the following sectors: power generation; transportation; waste management; and construction.

The aim is to expand its coverage to include more sectors and activities, including transition activities, in future iterations.

11. Are there plans to adopt or incorporate the ISSB’s IFRS S1 and/or S2 standards? If so, please indicate the extent of alignment, to what extent the standards will be mandatory, to whom they will apply and the timeline.

Yes, the HKEX has finalised climate disclosure requirements which are substantially based on IFRS S2 (the HKEX Climate Disclosure Rules).

The HKEX Climate Disclosure Rules will apply to listed companies in a phased manner as follows:

(a) Scope 1 and Scope 2: mandatory for financial years commencing on or after 1 January 2025.

(b) Other new climate disclosures (including Scope 3):

(i)  Main Board issuers included in the Hang Seng Composite LargeCap Index^[1] (Large Cap Issuers): comply-or-explain for financial years commencing on or after 1 January 2025 and mandatory for financial years commencing on or after 1 January 2026;

(ii) other Main Board issuers: comply-or explain for financial years commencing on or after 1 January 2025; and

(iii) GEM-listed issuers: voluntary.

ESG reports prepared in compliance with IFRS S1 and IFRS S2 will be considered as having complied with the HKEX Climate Disclosure Rules.

In addition, the Government has appointed the Hong Kong Institute of Certified Public Accountants to develop local sustainability reporting standards (HK Standards) aligned with the ISSB Standards (i.e. IFRS S1 and S2). It is intended that reporting rules based on the HK Standards will be developed by financial regulators and HKEX for adoption by regulated financial entities and listed companies.

The HKEX Climate Disclosure Rules are therefore regarded as an interim step. In particular, the HKEX notes it will consider whether and how to upgrade the requirements to a mandatory status for all listed issuers (and not just Large Cap Issuers) when it consults on the adoption of the HK Standards.

12. Other upcoming developments / direction of travel

Under the Government’s Vision Statement:

(a) the HK Standards under development are intended to align with the ISSB Standards for application to regulated financial entities and listed companies; and

(b) local sustainability-related assurance standards will be developed, taking into account the latest global developments including those at the International Auditing and Assurance Standards Board.

As mentioned, the HKEX will consider whether the HK Standards (when available) will apply on a mandatory basis to all listed issuers (and not just Large Cap Issuers).

Financial regulators have been encouraging the use of a reporting template for SMEs (aligned with the TCFD framework), which can be used by financial institutions to collect environmental-related data from SMEs. It is voluntary at this stage, but can be seen as a first step on the journey towards standardising climate disclosures by SMEs.

A code of conduct is being developed for voluntary adoption by ESG ratings and data products providers providing products and services in Hong Kong. The voluntary code is being developed by an industry working group and is intended to align with IOSCO recommendations. The initiative is supported and sponsored by the SFC.