SFC Environmental Disclosure for Listed Issuers: Climate-Related Financial Disclosure Requirements

The Hong Kong Stock Exchange (HKEX) published its final consultation conclusions on climate-related disclosure requirements in April 2024, mandating that all listed issuers report under the International Sustainability Standards Board (ISSB) framework effective for financial years commencing on or after 1 January 2025. This represents the most significant expansion of environmental, social, and governance (ESG) reporting obligations in Hong Kong since the introduction of mandatory ESG reporting in 2016. The new rules, codified as amendments to Appendix C2 of the HKEX Listing Rules, require listed companies to disclose climate-related risks and opportunities, governance processes, risk management strategies, and metrics and targets—including Scope 1, 2, and 3 greenhouse gas (GHG) emissions. For compliance officers and in-house legal teams, the transition timeline is compressed: the first reporting cycle under the new rules covers financial years ending 31 December 2025, meaning disclosure preparation must begin no later than Q2 2025. Failure to comply may result in HKEX enforcement actions including public censure, trading suspensions, or referral to the Securities and Futures Commission (SFC) for further investigation under the Securities and Futures Ordinance (Cap. 571).

The Regulatory Framework: From Voluntary to Mandatory Climate Reporting

HKEX Listing Rule Amendments Effective 2025

The HKEX introduced the new climate-related disclosure requirements through amendments to the Listing Rules, specifically Appendix C2 (Environmental, Social and Governance Reporting Guide) and the corresponding Main Board and GEM Listing Rules. The rules took effect on 1 January 2025, applying to all listed issuers regardless of market capitalisation or industry sector.

The amendments require disclosure of four core pillars aligned with the ISSB’s IFRS S2 Climate-related Disclosures: governance, strategy, risk management, and metrics and targets. Issuers must disclose their governance bodies and management’s role in overseeing climate-related risks and opportunities. The strategy section requires a description of climate-related risks and opportunities that could reasonably be expected to affect the issuer’s business model, strategy, and financial planning over the short, medium, and long term.

Risk management disclosures must explain how the issuer identifies, assesses, and manages climate-related risks, including whether these processes are integrated into overall risk management. The metrics and targets section requires disclosure of Scope 1, Scope 2, and Scope 3 GHG emissions, measured in accordance with the GHG Protocol Corporate Standard. Issuers must also disclose climate-related targets and the metrics used to measure progress against those targets.

Scope of Application and Transitional Relief

The HKEX provided transitional relief for certain disclosure elements. For financial years commencing on or after 1 January 2025, issuers must report on governance, strategy, and risk management in full. However, for Scope 3 GHG emissions, quantitative disclosure is only required for financial years commencing on or after 1 January 2026, providing a one-year transitional period.

Small-cap issuers (those with market capitalisation below HK$10 billion as at the date of the issuer’s annual report) receive additional transitional relief. They are not required to disclose Scope 3 emissions until financial years commencing on or after 1 January 2028. Similarly, they may omit certain quantitative scenario analysis disclosures until the same date, provided they explain why such analysis is not feasible and disclose qualitative information instead.

The HKEX also clarified that issuers may rely on reasonable and supportable information that is available without undue cost or effort when preparing disclosures. This is consistent with the ISSB’s proportionality mechanisms, which recognise that not all issuers have the same resources or data availability.

Enforcement and Consequences of Non-Compliance

The HKEX Listing Rules impose a continuing obligation on issuers to comply with the disclosure requirements. Non-compliance may result in a range of enforcement actions under the HKEX’s disciplinary powers. The HKEX may issue a public censure, impose a fine of up to HK$10 million per breach under the Listing Rules, or require corrective action including reissuing the annual report.

In serious cases, the HKEX may refer the matter to the SFC for investigation under the Securities and Futures Ordinance (Cap. 571). The SFC may pursue civil or criminal proceedings for market misconduct, including false or misleading disclosures under section 384 of the SFO. Directors and officers may face personal liability if they authorised or permitted the non-compliance.

The HKEX’s enforcement record since 2020 shows increasing scrutiny of ESG disclosures. In 2023, the HKEX issued public censures to three listed issuers for failing to include mandatory ESG report content, including climate-related metrics. Compliance officers should treat the new climate disclosure requirements with the same rigour as financial reporting obligations.

Preparing for the First Reporting Cycle: A Step-by-Step Guide

Step 1: Conduct a Climate Risk and Opportunity Assessment

The first step in preparing for the new disclosure requirements is to conduct a comprehensive climate risk and opportunity assessment. This involves identifying the climate-related risks and opportunities that are relevant to the issuer’s business model, supply chain, and operations.

Issuers should classify risks into two categories: physical risks (acute events such as floods or typhoons, and chronic shifts such as rising sea levels) and transition risks (policy changes, technological shifts, market sentiment, and reputational factors). For each identified risk, the issuer must assess the likelihood and potential magnitude of impact over the short term (1–3 years), medium term (3–10 years), and long term (10+ years).

The HKEX’s guidance on climate disclosures recommends using scenario analysis to assess climate resilience. Issuers should consider at least two scenarios: a scenario aligned with the Paris Agreement goal of limiting global warming to 1.5°C, and a higher-emissions scenario (e.g., Representative Concentration Pathway 8.5). The scenario analysis should inform the issuer’s strategy and financial planning, including capital expenditure, asset valuation, and insurance coverage.

Step 2: Establish Governance and Oversight Structures

The Listing Rules require disclosure of the governance body (typically the board of directors) or individual(s) with oversight of climate-related risks and opportunities. Issuers must describe how the board or relevant committee integrates climate considerations into its oversight of strategy, risk management, and financial reporting.

The recommended approach is to assign climate oversight to an existing board committee, such as the audit committee or a dedicated ESG committee. The committee should receive regular reports from management on climate-related matters, at least quarterly. The issuer must disclose the frequency of such reporting in its annual ESG report.

Management-level responsibilities should also be clearly defined. The issuer should designate a senior executive, such as the chief financial officer or chief risk officer, as the person responsible for climate-related risk management and disclosure preparation. The disclosure should name the relevant position and describe how performance against climate-related targets is linked to executive compensation, if applicable.

Step 3: Develop GHG Emissions Measurement and Reporting Capabilities

The new rules require disclosure of Scope 1 (direct emissions from owned or controlled sources), Scope 2 (indirect emissions from purchased electricity, steam, heating, and cooling), and Scope 3 (all other indirect emissions in the value chain) GHG emissions. Issuers must measure emissions in accordance with the GHG Protocol Corporate Standard, including the Corporate Value Chain (Scope 3) Standard.

For most issuers, Scope 1 and Scope 2 emissions data is relatively accessible, as it can be derived from utility bills, fuel consumption records, and refrigerant usage. Scope 3 emissions present a greater challenge, as they require data from suppliers, customers, and other third parties.

The HKEX’s transitional relief for Scope 3 emissions provides time to build data collection systems. Issuers should begin by mapping their value chain to identify the most significant Scope 3 categories (e.g., purchased goods and services, upstream transportation and distribution, use of sold products). The issuer should then engage with key suppliers to request emissions data or develop proxy data using industry averages.

Issuers should also consider using third-party verification services to enhance the credibility of their emissions data. The HKEX does not currently mandate third-party assurance for GHG emissions, but the ISSB framework encourages issuers to seek external assurance. The HKEX has indicated that it will review the case for mandatory assurance in future consultations.

Interaction with the SFC’s Fund Manager Climate Disclosure Requirements

Overlapping Obligations for Asset Managers

The SFC introduced its own climate-related disclosure requirements for fund managers in August 2022, effective from 1 January 2023. These requirements, set out in the SFC’s “Guidelines for the Disclosure of Climate-related Information by Fund Managers,” apply to SFC-licensed corporations that manage collective investment schemes.

For fund managers that are also listed issuers (e.g., dual-regulated entities such as investment banks with asset management arms), the HKEX Listing Rules and the SFC Guidelines impose overlapping but distinct obligations. The SFC Guidelines require disclosure at the fund level, covering governance, investment strategy, risk management, and metrics for each fund. The HKEX rules require disclosure at the corporate level, covering the listed issuer’s own operations.

Compliance officers should ensure that the two reporting streams are consistent and do not contradict each other. For example, if a listed fund manager discloses a net-zero target under the SFC Guidelines for its funds, the same target should be reflected in the corporate-level disclosure under the HKEX rules if the target covers the issuer’s own operations.

Alignment with the ISSB and the Hong Kong Sustainability Reporting Roadmap

The HKEX’s climate disclosure requirements are fully aligned with the ISSB’s IFRS S2 standard, which was published in June 2023. The ISSB standards are now the global baseline for sustainability reporting, endorsed by the International Organization of Securities Commissions (IOSCO) and adopted by jurisdictions including the United Kingdom, Japan, and Singapore.

The Hong Kong government published its “Hong Kong Sustainability Reporting Roadmap” in March 2024, setting out a phased approach to adopting ISSB standards across all Hong Kong entities, including private companies and public sector bodies. The roadmap envisions mandatory ISSB-aligned reporting for all large Hong Kong-incorporated companies by 2028.

The HKEX’s 2025 implementation places Hong Kong ahead of many other Asian jurisdictions in climate disclosure. For comparison, Singapore’s SGX requires climate reporting for all listed issuers from financial year 2025, but with transitional relief similar to Hong Kong’s. Mainland China’s mandatory climate reporting for listed companies begins in 2026, under rules issued by the Ministry of Finance and the China Securities Regulatory Commission.

Practical Challenges and Common Pitfalls

Data Gaps and Estimation Uncertainty

The most common challenge issuers face is the lack of reliable primary data for Scope 3 emissions. Many suppliers, particularly those based in developing economies, do not yet measure or report their own emissions. Issuers must therefore rely on estimation methodologies, such as using industry average emission factors or input-output models.

The HKEX permits the use of reasonable estimation methods, provided the issuer discloses the methodology and the level of uncertainty. However, issuers should be aware that significant estimation uncertainty may attract scrutiny from investors and regulators. The HKEX’s enforcement division has indicated that it will review the reasonableness of estimation methods during its routine ESG report reviews.

Resource Constraints for Small and Mid-Cap Issuers

Small and mid-cap issuers (market capitalisation below HK$10 billion) face particular resource constraints. The transitional relief for Scope 3 emissions and scenario analysis provides some breathing room, but the core governance, strategy, and risk management disclosures are still required from financial year 2025.

Issuers in this category should consider outsourcing climate disclosure preparation to specialist consultants or law firms. The cost of preparing an ISSB-aligned climate report can range from HK$200,000 to HK$800,000 depending on the complexity of the issuer’s operations and the availability of data. This cost is likely to decrease as standardised data tools and reporting platforms become more widely available.

Avoiding Greenwashing and Misleading Disclosures

The SFC and HKEX have both issued warnings against greenwashing—making misleading or unsubstantiated claims about climate performance. In November 2023, the SFC published a circular on “Greenwashing in ESG Funds,” noting that it had identified cases where fund managers made claims about climate alignment without adequate supporting evidence.

For listed issuers, the risk of greenwashing arises when disclosing climate targets, net-zero commitments, or carbon offsetting strategies. Issuers should ensure that any forward-looking statements are accompanied by a clear explanation of the methodology, assumptions, and progress metrics. The HKEX’s Listing Rules require that disclosures be “not misleading” and supported by “reasonable basis.” Directors should satisfy themselves that the climate disclosures meet this standard before approving the annual report.

Actionable Takeaways

1. Begin climate risk assessment and scenario analysis immediately—the first reporting deadline under the new HKEX rules is for financial years ending 31 December 2025, and preparation cannot be deferred.
2. Assign board-level oversight of climate disclosures to an existing committee, such as the audit committee, and document the governance structure in board minutes.
3. Develop a Scope 3 emissions data collection plan, prioritising the most significant value chain categories, and engage key suppliers before the 2026 mandatory reporting date.
4. Ensure consistency between HKEX corporate-level climate disclosures and any SFC fund-level disclosures if the issuer is also an SFC-licensed fund manager.
5. Engage external auditors or independent verifiers for GHG emissions data to enhance credibility and reduce the risk of regulatory scrutiny or enforcement action.

Disclaimer: This article does not constitute legal advice. Consult a qualified solicitor or compliance professional for advice specific to your circumstances.