Economic Development

    Disclosure standards make climate goals achievable

    07/13/2023 - 09:00

    This article appeared originally in China Daily on 13 July, 2023.
    Authors: Wing Poon, Policy Advocacy Manager and Pascal Siu , Researcher at Our Hong Kong Foundation

    Disclosure standards make climate goals achievable.jpg

    Sustainable development is a hot topic everywhere in the world. The central government has established targets to reach carbon neutrality by the year 2060 and peak carbon emissions by 2030, while the Hong Kong Special Administrative Region is also committed to achieving carbon neutrality by 2050.

    Against the backdrop of these targets, sustainable financial development and low-carbon transformation are essential for achieving various climate goals. Recent market development in this regard has been spurred by the International Sustainability Standards Board’s (ISSB) release of an inaugural set of sustainability disclosure standards for global capital markets, which marks an important milestone toward accomplishing globally consistent disclosures and accelerating the process of unified disclosure of sustainable development information.

    Uniform disclosure standards needed

    The ISSB issued its first two International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures, establishing a common language for disclosing climate risks and opportunities.

    IFRS S1 provides guidelines for financial disclosures related to environmental, social and governance (ESG) developments, in which companies are required to disclose sustainability-related risks and opportunities to investors over the short, medium and long term.

    IFRS S2 contains specific climate disclosures, which specify the disclosure requirements for climate-related risks and opportunities, including greenhouse gas emissions, climate-related risks and opportunities. The standards will take effect from 2024.

    Some of the prevalent climate disclosure frameworks/guidelines include the ISSB, the Global Reporting Initiative, the Sustainability Accounting Standards Board, the Task Force on Climate-related Financial Disclosures, and the Sustainable Development Goals, but these frameworks have different focuses and levels of disclosure precision. Lack of consistency in disclosure standards makes it more difficult for global capital markets to price climate risks accurately.

    So the ISSB’s first sustainability disclosure standards are welcome, as they provide investors with relevant information and also help further align global sustainability reporting.

    The ISSB was established by the International Financial Reporting Standards Foundation, which is one of the most widely adopted accounting standards in the world. Back in the consultation stage of its sustainability disclosure standards, the framework received widespread support from major financial markets including Hong Kong, as the ISSB’s framework combines existing disclosure standards with more specific requirements to make the standards more comprehensive, rigorous and detailed.

    This will evidently expedite the process of unifying disclosures on global sustainable development, while also improving the depth and breadth of companies’ sustainability disclosures.

    Guidance needed on compliance

    The next step that needs to be addressed is how to assist listed companies in disclosing climate-related information in their ESG reports according to the requirements of the Hong Kong Exchanges and Clearing Limited (HKEX) and the ISSB starting from 2024.

    Meeting the requirements set by the ISSB is not an easy task; it is particularly challenging for companies to adhere to the ISSB’s guidelines in areas such as quantitatively disclosing physical and transition risks, as well as what are termed Scope 3 emissions. Relevant authorities, such as the HKEX, should provide further explanations and educate companies on how to comply with ISSB regulations.

    Emission-related disclosure guidelines in Hong Kong require that listed companies disclose their greenhouse gas emissions and intensity. Emissions are classified into three scopes based on their sources:

    Scope 1 includes direct emissions from sources such as fuel used in production processes and emissions from chemical processing;

    Scope 2 includes indirect emissions from sources like purchased electricity and other energy sources;

    Scope 3 includes emissions from upstream and downstream activities in the company’s value chain, such as logistics transportation, and even investment activities, which are considered the company’s indirect “invisible” emissions.

    At present, only Scope 1 and Scope 2 emissions are required to be disclosed. Scope 3 emissions are not yet included in the current compliance or explanation disclosure framework because of limitations in data collection, measurement methods and timeliness. For example, companies have difficulty collecting sufficient firsthand data to calculate Scope 3 emissions.

    Some companies rely on their upstream and downstream clients or suppliers to provide information on their own emissions, but the quality and accuracy of the data are sometimes subject to dispute. These all point to the difficulties and support needed from the government in fulfilling the requirement on Scope 3 disclosure.

    Despite some of these difficulties, ESG developments and disclosure frameworks have gathered steam around the globe. The latest disclosure guidelines set by the ISSB are just an additional manifestation of the progress all countries have made in aligning global sustainability reporting.

    As the ISSB’s sustainability disclosure standards will come into effect sooner or later, companies will need to collect ESG data themselves and from service providers, while also needing to comply with specific emission standards. As a result, companies and their suppliers will be encouraged to pay closer attention to new climate-related technologies and their greenhouse gas emission levels, concertedly achieving different climate goals.