Hong Kong – As one of the most important recent developments in global sustainability regulations, the International Sustainability Standards Board (ISSB) plans to finalise its proposed new standards on sustainability disclosures by the end of 2022. Grant Thornton Hong Kong expects that the proposed standards would likely form the baseline for local jurisdictions and be incorporated into local requirements, and the individual jurisdictions would be adopting the standards soon after they are officially issued by the end of this year.

In particular, Grant Thornton Hong Kong suggests incorporating three requirements from the proposed ISSB standards in Appendix 27 of the Listing Rules of the Hong Kong Stock Exchange, the existing sustainability reporting framework for listed companies in Hong Kong, as a priority. Better alignment of Hong Kong’s sustainability reporting framework with the global standards will help further improve transparency and data availability, thereby enabling the city to tap the full potential of sustainable investing and enhancing its position as a green finance hub.

The three requirements include disclosing information, [especially sustainability-related financial information,] that allows investors to assess the effect of significant sustainability-related risks and opportunities on a company’s enterprise value, disclosing material information about sustainability-related risks and opportunities across a company’s value chain, and adopting climate-risk scenario analysis under the climate-related disclosure standards.

Earlier this year, the ISSB initiated a consultation on two proposed sustainability disclosure standards, namely the general sustainability-related disclosure standard and the climate-related disclosure standard, with an aim to consolidate various standards for environmental, social and governance (ESG) reporting and develop a more consistent global baseline of sustainability disclosure for the capital markets. The Securities and Futures Commission (SFC) and the Hong Kong Exchanges and Clearing Limited (HKEX) are evaluating a climate-first approach to implement the ISSB standards for Hong Kong listed companies as a priority.

Expected convergence between local sustainability reporting framework and global standards

“With the ISSB’s proposed new disclosure standards, we anticipate that the existing requirements under Appendix 27 of the Listing Rules will go hand in hand with the new global disclosure standards and be enhanced in the near future,” said Eugene Ha, Deputy Managing Partner of Grant Thornton Hong Kong. “At the same time, we expect that policymakers may also make reference to emerging markets’ ESG disclosure standards in formulating the revised rules and guidelines.”

To facilitate the implementation of the new requirements in different local jurisdictions, Eugene Ha suggested policymakers should give more examples and clearer definitions of the key terms in the proposed standards, allow more flexibility in implementation timelines, and provide support for smaller companies to cope with possible challenges that may arise when they try to meet the new requirements.

Proper processes, controls and ESG governance structure needed for companies to meet the new requirements

The ISSB’s General Requirements Exposure Draft, which sets out the overall requirements for sustainability-related financial disclosures, proposes that the sustainability-related financial information disclosed would be centred on a company’s consideration of its governance, strategy and risk management, and the metrics and targets it uses to measure, monitor and manage significant sustainability-related risks and opportunities. Moreover, the proposed standards would require the sustainability-related financial information to be reported at the same time as the financial statements are reported.

 “Given that the standards would require the sustainability-related financial information to be reported at the same time as the financial statements are reported, companies will need to ensure that they have the proper processes and controls in place to provide quality and timely sustainability information at the same time as their financial information,” said Mian Wong, Advisory Director of Grant Thornton Hong Kong, who urged companies to be better prepared to brace for the new sustainability reporting standards.

“Training is a crucial element too to get the companies ready to meet the new disclosure requirements. Furthermore, companies will have to consider establishing a governance structure to support a robust reporting system for both sustainability and financial reporting. Last but not least, companies may also consider reviewing their existing systems to meet the new data collection and calculation processes requirements,” she added.

Mian Wong encouraged companies to seek professional advice, such as recommendations on ESG strategies and assistance in formulating a complete set of policy and procedure for the ESG framework, for building a robust ESG governance structure. She said companies may also need to seek professional advice on the preparation of their ESG reports as more stringent disclosure requirements are anticipated in the foreseeable future.

Standardised reporting standards and more transparent disclosures essential for enhancing Hong Kong’s capabilities as a sustainable finance hub

Despite the potential challenges, the consolidated and more standardised sustainability reporting standards are expected to facilitate investors in making decisions about sustainable investing as they help make available more comparable data, and hence provide important impetus for the further development of sustainable finance.

“While more investors are pursuing ESG factors in their investments, asset managers will have to ensure that they have the right tools, data and information to make the best possible investment decisions. With the direction of enhancing disclosure standards by policymakers around the globe, we anticipate that more comparable, transparent and detailed data and information will be available to asset managers in the foreseeable future,” said Eugene Ha.

“Standardised reporting standards, standardised data and more transparent disclosures will benefit the development of different green finance solutions and further strengthen Hong Kong’s capabilities as a hub for sustainable finance,” he said.