Climate change: Hong Kong-listed companies aren’t yet ready for stock exchange’s new environmental risk disclosure rules, Grant Thornton report finds

There is a gap between their ESG reporting and climate disclosure rules expected to come into effect as early as January, says the accounting giant
Only a handful of them made quantitative disclosures of the impact of climate risks and opportunities on the finances of the company, it found

ESG investing

Yujie Xuein Shenzhen

Published: 8:00am, 23 Sep 2023

Why you can trust SCMP

There is still a gap between the environmental, social and governance (ESG) reporting of Hong Kong-listed companies and new mandatory climate-related disclosure rules expected to come into effect as early as January, according to accounting firm Grant Thornton.

Companies need to accelerate their ESG strategies and reporting, while the stock exchange should provide more support to help listed firms overcome challenges arising from the introduction of the tougher requirements, it said on Friday.

“We opine that [bourse operator] HKEX should publish a detailed implementation guide for the upcoming revised disclosure rules and provide more support to small and medium-sized enterprises which generally lack the resources to comply with the new disclosure requirements,” said Eugene Ha, deputy managing partner of Grant Thornton Hong Kong, in a statement that accompanied a report looking into the issue.

In April, Hong Kong Exchanges and Clearing (HKEX) published a consultation paper in which it proposed making it compulsory for all listed companies in Hong Kong to provide climate-related disclosures in their ESG reports starting in 2025 covering financial years beginning on or after January 1, 2024.

The proposed new disclosure rules are based on the Climate Standard of the International Sustainability Standards Board which is built on Task Force on Climate-related Financial Disclosures recommendations.

28:31

Hong Kong flooded by ‘once-in-a-century’ rainstorm

The new requirements include quantifying the financial effects of climate-related risks and opportunities, and disclosing so-called Scope 3 greenhouse gas emissions. That refers to all indirect emissions that occur in the value chain of a company, including those attributable to suppliers and customers.

According to the report released on Friday by Grant Thornton that studied the 2022 annual and ESG reports of more than 100 Hang Seng Composite Index (HSCI) constituent companies spanning 12 industries, 82 per cent of the large-cap HSCI firms have described their climate-related risks and opportunities over the short, medium, and long term, up from 73 per cent in 2021.

However, only a handful of them have included a quantitative disclosure of the impact of those risks and opportunities on the finances of the company, such as the actual expenses incurred by each identified issue, it found.

The disclosure rate for Scope 3 greenhouse gas emissions was also “relatively low”, at 69 per cent in 2022, the report found. Both the energy and materials industries reported 100 per cent disclosure rates, while the telecommunications and information technology sectors recorded low disclosure rates, at 33 per cent and 50 per cent respectively, mostly because of the difficulties in obtaining reliable Scope 3 emissions data throughout the complex global supply chain, according to the report.

“Given the challenges of gathering and processing the ESG data, we believe that corporate investments in emerging technologies such as artificial intelligence (AI) and big data not only will minimise the efforts spent on ESG disclosures and substantially improve ESG reporting transparency and accountability, but also will help reduce carbon footprints through optimising energy and emission management of their operations,” Ha suggested.

According to the report, 70 per cent of the large-cap HSCI companies have implemented or invested in AI and big data to improve their operations based on their disclosures.

Just over half the companies have engaged a third party to perform independent audits of their ESG reports, an increase of 19 percentage points from 2021, the report found. However, the ESG review rate of Hong Kong-listed companies still lags behind countries leading the field, according to Ha.

Enterprises need to enhance independent audits of corporate ESG performance to limit the potential for greenwashing – making false claims about the environmental benefits of a product or service – mitigate risks, and prevent corporate scandals, the accounting firm recommended.

“With growing regulatory pressure around the world to address environmental impacts, and the overall shifts in market preferences and expectations on environmental sustainability, climate-related materiality topics will become more paramount to the strategy and decision-making of companies in the future,” said Ha.

“We urge Hong Kong-listed companies to take immediate actions to accelerate catch-up in ESG strategy and reporting in order to stay ahead of the curve.”

Post