HKEX climate norms will be ‘most stringent ESG requirements' in Asia
Hong Kong Stock Exchange's proposed climate disclosures for all issuers are set to become the toughest environment, social and governance (ESG) requirements across the Asia Pacific, according to one industry expert.
Still, increasing and tougher disclosures are aligning with asset owner needs for more information about what their portfolio companies are doing to assess and mitigate climate risks.
“These new rules represent a significant upgrade from the current “comply or explain” status of mandatory reporting and mark a key step towards alignment not only with the International Sustainability Standards Board Climate Standard but also with the UK Financial Stability Board’s Task Force on Climate-related Financial Disclosures by 2025,” said Boya Wang, sustainability research analyst at Morningstar.
“As a result, a range of climate-related metrics will be subject to disclosure, such as Scope 3 greenhouse gas emissions, cross-industry metrics and internal carbon price."
The exchange in April proposed new climate-related disclosures aligned with the International Sustainability Standards Board Climate Standard that will become mandatory in 2024.
A consultation paper was announced in April, and the market feedback period ended on July 18. The new requirements will form part of a company's overall ESG report.
The new rules will subject HKEX-listed companies to the most stringent ESG disclosure requirements in the region, according to Morningstar.
Morningstar
Previously, the HKEX only revised its Corporate Governance Code in January 2022 to strengthen board independence and promote boardroom gender diversity of listed companies, Wang said.
Compared to other major stock exchanges in the region, HKEX has been progressively tightening ESG reporting rules and become better equipped to comply with the tightening standards, he added.
REGIONAL ESG FOCUS
Hong Kong’s desire for stricter climate disclosure norms is representative of the increasingly stringent rules related to broader ESG and sustainability issues coming into play across the region.
The Singapore stock exchange – another popular listing location for Chinese companies and a competitor with HKEX – has also been gradually expanding the list of mandatory requirements for issuers, although these are less demanding than the new rules from HKEX, said Wang.
“Only four sectors – financial, agriculture, food and forest products as well as energy and transportation – are required to adhere to mandatory climate reporting by 2024, while remaining issuers will continue to follow a “comply or explain” basis.”
Singapore’s green finance industry task force, convened by the Monetary Authority of Singapore, has also released its final consultation on the Green and Transition Taxonomy.
In the Association of Southeast Asian Nations, or ASEAN, meanwhile, the second version of the ASEAN Taxonomy for Sustainable Finance has been published, offering a multitiered approach that allows for varying levels of adoption.
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INSURER OPPORTUNITY
Ahead of the introduction of these rules, some asset owners, particularly insurers, are seeing an opportunity to capitalise on their inherent expertise to forecast climate and other forms of risk.
AXA Greater China
AXA Hong Kong and Macau and technology and management consultancy Capco in June announced a strategic partnership to offer a climate-related risk and management and reporting solution to companies to help them fulfil climate disclosure obligations.
"We have proprietary climate risk models and tools, backed by our high-quality dataset and climate science expertise, for the assessment of physical climate risks,” Chelsea Jiang, chief technical and innovation officer, general insurance, AXA Greater China, told AsianInvestor recently.
“We certainly use these models and analysis for our own operations and we are also assessing our financial position based on these insights.”
Climate risks are broadly categorised as two interrelated risks – physical risks to assets from climate hazards and risks associated with transitioning to a low-carbon economy, Alan Au, APAC ESG lead for technology and management consultancy Capco, told AsianInvestor.
For financial institutions, impacts from physical risk can be measured by how their loan or mortgage portfolios are affected by rising sea levels, droughts, and other extreme weather conditions.
Impacts from transition risk can be measured by analysing an organisation’s exposure to heavy greenhouse gas (GHG) emitters, which is important to understand to prepare for expected increasingly stringent regulations coming into force.
Capco
“Measurement is more difficult than ‘traditional’ financial risks because, rather than looking at historical patterns, it requires the ability to predict future patterns and model their potential magnitude.
"On top of that, climate change is a process, not a single event – the impacts evolve, and risk transmission channels of hazards and their cascading effects add to the complexity,” Au said.
ASSET OWNER DEMANDS
The regulatory impetus comes at a time when asset owners from pension funds to family offices are becoming more demanding about action around climate risks from portfolio companies.
“Investors need transparent disclosure as the energy transition and climate scenarios used by companies can affect the business assumptions, costs, estimates, and valuations underlying financial statements,” a spokesperson from Canadian pension British Columbia Investment Management Corporation, or BCI, told AsianInvestor earlier this year.
The pension fund engages directly with companies through the Climate Action 100+ collaborative engagement, and uses the initiative’s net-zero company benchmark, which includes an assessment of audit-related climate disclosures.
BCI has also partnered with Asia Research and Engagement (ARE) and joined its Asia Transition Platform.
“Working with ARE will support BCI’s engagement and escalation with companies on climate change in the power sector and financial institutions across Asia,” the spokeperson said.
BCI, in step with several other global pension funds, also introduced greater climate disclosure norms for portfolio companies in its 2023 proxy voting policy.