HKEX climate disclosure policy to enhance ESG data quality
The Hong Kong Stock Exchange's (HKEX) move to mandate climate reporting aligned with the global ISSB standards for all issuers should improve ESG data quality and asset owners' understanding of climate risks financially, said ESG analysts.
“The potential impact of climate risks on a company’s financial position should be clearer as a result of these measures, making it easier for asset owners to understand the impact of these risks on individual companies,” said Cathrine De Coninck Lopez, global head of responsible investments at HSBC Asset Management.
“This will also lead to higher quality, more comparable and consistent corporate climate disclosures, enabling ESG data providers and asset managers to better capture climate data. The benefits will trickle up the investment chain to asset managers and asset owners,” De Coninck Lopez told AsianInvestor.
In April, the Hong Kong bourse published a consultation paper on proposals to enhance climate-related disclosures, which will mandate all listed companies make climate-related disclosures in their ESG reports, and introduce new climate-related disclosures aligned with the International Sustainability Standards Board (ISSB) Climate Standard.
The new rules come into effect on January 1, 2024 and apply to ESG reports in respect of financial years commencing on or after the effective date.
This makes HKEX the first stock exchange in Asia to mandate ISSB’s scope 1-3 greenhouse gas emissions rules. The Singapore Exchange is also expected to adopt such reporting for listed issuers in 2025.
“The ISSB brings a more in-depth lens to climate reporting focusing on climate impacts and disclosures that will ultimately affect a company’s bottom line,” De Coninck Lopez said.
She noted that the new HKEX standard has a stronger focus on scope 3 emissions and scenario analysis, which should increase data availability while encouraging companies to be more aware of their exposure to climate risks both within their operations and in the broader value chain.
URGENCY IN QUALITY
Among thousands of ESG data points that an institutional investor has access to, only about 10% is decision-useful, according to Calvert Research and Management.
The quality of data on ESG factors has been something that asset owners across Asia Pacific are demanding urgently.
Nippon Life Insurance’s special advisor to the board Takeshi Kimura said at an AsianInvestor event in May that asset owners need to receive better and more comprehensive ESG data to improve the monitoring of investment outcomes.
While welcoming steps to increase transparency, one expert said Hong Kong could do more in utilising public investors’ leading roles in promoting ESG investing, following what pension funds in Japan and Australia have been doing.
Huang Chaoni, executive vice president of Hong Kong Green Finance Association said the enhanced HKEX reporting rule would help increase transparency, availability, comparability as well as quality of data.
Huang anticipates everyone to be on the same level playing field on disclosure, instead of adopting whatever framework they find suitable. This in return will help ESG data users when they want to assess performance, including for ESG rating providers.
“It would bring a lot of conformity, which has been the challenge that a lot of key stakeholders have voiced in the last few years,” Huang told AsianInvestor.
She said the disclosure standards are going to be the most stringent in Asia, as it will adopt the latest ISSB, which is a global template, by phase for all companies listed in Hong Kong.
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Key elements of the disclosure rules include governance, risk management, strategy, and actual climate matrix data points.
The new rules bring transition plan, climate-related target setting, and recent transition finance opportunity into context, which are things that investors have been asking for over the last decade, she noted.
“Finally, it's written very clearly in the rule and companies just have to do it,” she said.
“This will arguably bring Hong Kong to a world-class standard when it comes to ESG disclosure.”
Huang is also the head of sustainable capital markets Asia Pacific at BNP Paribas.
While Japan and Australia led ESG investing in the Asia Pacific via powerful pension funds, Huang believes Hong Kong could leverage public investors more.
“Generally speaking, as an industry body we certainly welcome more efforts from asset owners,” she said.
“The pension fund systems [in Japan and Australia] play a critical role in catalysing the market because when asset owners demand or reward ESG investing strategies as part of the mandates, asset managers react very quickly, markets adapt very efficiently to the demand,” she added.
GLOBALISED STANDARDS
Agreeing with Huang, Anthony Eames, managing director of responsible investment strategy at Calvert Research and Management, said he was fully supportive of efforts to get companies to make ESG disclosures.
“We would always rather get the information directly from a company. But many times, investors will use information from a data provider because it's easier to gather information on many companies from the data provider,” Eames told AsianInvestor.
Calvert Research and Management is Morgan Stanley Investment Management’s dedicated ESG investing team.
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Eames noted that the trouble of using third-party data providers is that when it comes to the carbon emission numbers, it can be unclear whether the data is an estimate or an actual disclosure, and whether they are based on scope 1, 2, or 3 emissions.
“We have access to roughly 20 different data providers and have access to over 7000 data points. But through the data quality assessment process that we use, less than 10% of the data is actually decision-useful,” he said.
“If we move to a system where ESG data is required to be disclosed and gets audited like financial data, that's going to be a big development,” he said.
He also called for more globalised standards on ESG data disclosure across geographies.
Many companies are operating across the world, which makes it difficult for them to meet different standards, he said.