The impending effective date of Jan 1, 2025, for Hong Kong Exchanges and Clearing Ltd’s (HKEX’s) new climate disclosure rule is fast approaching. A recent workshop jointly organized by a local think tank, a green finance association, and an environmental disclosure system charity revealed that 49 percent of attendees, consisting of C-suites, directors, sustainability heads and principal consultants, felt “fairly unprepared” for the upcoming climate disclosure requirements.

One of the primary challenges faced by listed companies is related to data availability and quality. Variations in organizational structures, data management systems and differentiated reporting regulations and practices across jurisdictions make data collection a daunting task for conglomerates and multinational corporations that operate on an international scale.

The collection of Scope 3 data exemplifies the above-mentioned challenges, as it encompasses emissions along the entire supply chain. Adding to the difficulty of collecting accurate and reliable data is the innate intricacies of complex supply chains within sectors such as hospitality, food and beverage, and manufacturing and retail. Their vast networks of partners leave the data collection process more exposed to incompleteness and inconsistencies.

Another challenge lies in tackling technical reporting items, such as performing climate-related scenario analyses and the quantification of climate risks.

A scenario analysis involves considering different scenarios, each packaged with its own sets of uncertainties and assumptions that challenge conventional expectations of the future. When applied to the realm of climate reporting, performing such scenario analyses requires integrating complex climate models, economic projections, and data.

Nevertheless, climate risks exhibit significant diversity and are inherently uncertain, encompassing physical risks like disruptions to business services from earthquakes and infrastructural damage from coastal flooding, as well as transition risks arising from policy changes and market shifts during the transition to a low-carbon economy.

Therefore, difficulties arise when performing a climate-based scenario analysis involves making logical assumptions about climate conditions, which are largely uncertain, to accurately estimate the potential impacts associated with each risk category.

To alleviate these challenges, the Hong Kong Special Administrative Region government and HKEX have made various efforts to help listed companies streamline reporting processes and adjust to the new climate disclosure requirements.

For instance, the Green and Sustainable Finance Cross-Agency Steering Group has developed greenhouse gas emissions calculation and estimation tools, and HKEX has published comprehensive implementation guidance for climate disclosures.

During the initial phases of implementation, four implementation reliefs introduced by HKEX will serve as crucial tools for companies to gradually adjust to the new requirements. They consist of Reasonable Information Relief, acknowledging the potential uncertainties in the disclosure of climate-related information; Capabilities Relief, recognizing limited internal capabilities for sophisticated climate assessments; Commercial Sensitivity Relief, allowing companies to withhold confidential and sensitive climate-related information; and Financial Effects Relief, enabling companies to provide qualitative information when incapable of providing quantitative information.

While companies must explore these readily available instruments to assist in compiling accurate and comprehensive reports, enhancing technology and robust data management systems also hold great potential to revolutionize data collection and analytic capabilities for emissions data, allowing companies to gain exhaustive insights into their value chains.

This process serves as a catalyst for identifying high-risk suppliers, allowing companies to factor in their level of emissions and make informed decisions when engaging with upstream and downstream business partners.

The upgraded and transparent reporting process would also facilitate communication with the board of directors and senior management, thereby assisting the navigation into carbon reduction strategies and decision-making.

These improvements will encourage individual companies to collaborate, and, in a combined effort, build and migrate into a sustainable ecosystem that integrates technology, dedicated expertise, and comprehensive reporting standards for long-term development.

To tackle the challenges related to technical reporting items, companies can enhance their reporting methodologies by leveraging resources on the global platform.

When creating climate-related scenario analysis, they can reference the publicly available scenarios, such as those published by the Intergovernmental Panel on Climate Change  and the International Energy Agency. These credible sources can provide reference points and a common set of assumptions that ensure consistency and comparability in companies’ scenario analyses.

Additionally, to accurately identify and measure risks, companies can make use of industry-based guidance. Guidance such as the IFRS S2 Industry-based Guidance on implementing Climate-related Disclosures can help companies identify specific items directly related to their business nature, facilitating a more targeted approach when quantifying climate risks.

In the long run, reporting climate-related risks is only one aspect of the journey. Assurance standards, such as ISAE 3000 and AA1000, play a pivotal role in enhancing the quality of sustainability reports.

Third-party assurance can enable external parties to effectively utilize the information for decision making. For investors, assurance provides confidence in making asset allocation decisions, while banks can assess a company’s climate risks and make lending decisions accordingly.

On a global scale, all large companies subjected to a “Corporate Sustainability Reporting Directive” (CSRD) will be required to provide limited assurance for their sustainability reports by October 2026.

Reporting with assurance can attract ESG-focused investors and unlock a wider range of green financing options. It is crucial for companies to recognize the potential benefits that assurance can bring and strive to implement it in their reporting processes.

Overall, companies should grasp the importance and significance of the ISSB-aligned climate disclosure rules mandated by HKEX. These regulations serve as powerful tools to encourage responsible practices. A high-caliber sustainability report that transparently discloses climate-related risks not only allows companies to precisely gauge their environmental performance and progress in reducing emissions but also aids investors and banks in allocating funds based on these climate risks.

While the path to mandatory sustainability reporting may seem arduous, it is essential to initiate the journey rather than striving for perfection from the start. With collective efforts and proactive measures, companies can navigate the challenges, embrace the reporting requirements, and contribute to a more sustainable future for Hong Kong.

Kenny Shui is vice-president and co-head of research at Our Hong Kong Foundation. Katie Ho is an assistant researcher at the foundation.

The views don’t necessarily reflect those of China Daily.