Editor's note: The Hong Kong Sustainable Disclosure Standards, based on ISSB guidelines, officially took effect on August 1. What profound implications will this new regulation bring to the ESG field in Hong Kong? How will companies respond? Today, we invite Dr. Shi Han, senior research fellow at HKU Center on Contemporary China and the World (CCCW)and the founding director of the ESG Center at HKU ICB (Institute for China Business), to explore the forefront issues in the global sustainable development field together.
【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. Dr. Shi, regarding the Sustainable Disclosure Standards, what position do you think they hold in Hong Kong's ESG roadmap, and what significance do they have?
【Shi】At the end of last year, the Hong Kong government launched the Green Finance Promotion Policy Roadmap, aiming to position Hong Kong as a global hub for green finance. Within this roadmap, the Sustainable Disclosure Standards, which are aligned with ISSB, play a central and critical role. Firstly, they are fully aligned with the latest international standards, ISSB S1 and S2 Standards. This allows Hong Kong, as an international financial center, to benchmark against the most advanced standards globally. This is a crucial step in maintaining its status as a financial hub.
We often say that disclosure promotes management. Therefore, the implementation of these new standards, which closely align with international benchmarks, will effectively drive listed companies, and eventually other non-listed entities, including financial institutions, to make substantive ESG implementation in the green transitions. Additionally, from this foundation, Hong Kong, as a platform for many mainland companies listed here, can further facilitate the progress of large domestic enterprises in their green transitions and help achieve national dual carbon goals more efficiently. This will also play a significant role in promoting green development across the Greater Bay Area.
【Anchor】After the implementation of these standards, what impacts do you think they will have on businesses in Hong Kong? Are there any examples you could share?
【Shi】The introduction of these standards sets higher requirements for businesses in Hong Kong, including many mainland companies listed here. It compels financial institutions to better assess material financial risks and opportunities arising from their financial activities, emphasizing a more quantitative and systematic approach.
We are now seeing many listed companies establish climate sustainability committees, ESG committees, or climate risk committees. While these committees have been formed under regulatory mandates, effectively utilizing them will require significant effort. It is not enough to simply have individuals knowledgeable about climate change, climate risk management, or ESG management at the board level. We need independent directors and others who understand these issues to engage meaningfully.
Additionally, it is essential to link ESG or climate management performance metrics to executive compensation frameworks. These aspects tend to be more challenging than merely establishing a sustainability committee at the board level and publicly sharing its structure.
A crucial point is that the next set of standards to be released will focus on the need for ESG practices to be based on quantifiable medium-to-long term targets. This requires clear climate control goals or sustainable development targets, along with quantifiable medium- to long-term objectives that genuinely drive businesses forward. For many existing large companies, especially those that will be required to start mandatory disclosures covering FY2025 data in 2026, these challenges will be significant.
【Anchor】After August 1, the next key milestone for ESG development, as you mentioned, is January 1, 2026. That's when constituents of the Hang Seng Composite Large Cap Index must start mandatory disclosures according to the new climate regulations. Although this effective date is in 2026, many companies are already preparing for these requirements. What insights do you have regarding this? For instance, what should companies do to meet these disclosure requirements?
【Shi】The mandatory disclosure in 2026 will require reporting on the 2025 data. This means companies must implement their strategies in 2025 to be able to disclose in 2026. Currently, a review of the sustainable development reports published by various listed companies shows a significant gap between what has been disclosed and what the standards require.
From the perspectives of regulation, strategy, risk management, and the goals and indicators outlined in the four pillars of TCFD, there are considerable shortcomings. Given this situation, for each listed company to submit a satisfactory report in 2026, time is already extremely tight. We can say that we are already behind.
In this context, some aspects need urgent attention to fill the gaps, while others require solid long-term planning. My personal view is that each company should conduct a comprehensive analysis of its shortcomings. This includes identifying which areas can be addressed quickly and which require more foundational work over the long term, allowing for a clear distinction between the two.
A fundamental change is necessary, particularly in promoting governance from the top down. ESG should be treated as a priority initiative, with governance being a core component in driving both ESG efforts and climate risk management. This work should be elevated to a higher level, as it serves as a critical point that can impact the entire organization.
Looking to the future, without a robust information system supporting performance management in areas like energy, carbon, and even ESG, achieving effective management, including setting targets—will be very challenging. However, it is encouraging to see many companies in Hong Kong and mainland China, such as Midea and Geely, beginning to publicly tender for the development of energy and carbon management systems, as well as ESG performance management information systems. These will serve as foundational elements for their efforts, but this will require a considerable investment in time and effort.
Another critical aspect is the accounting of greenhouse gas emissions, which is fundamental to climate management. Without measurement, there can be no management, and accounting is the first step. A significant challenge in this area, especially regarding Scope 3 emissions, lies in assessing a company's entire value chain emissions rather than just those from within its organizational boundaries. This is a very complex task.
This work is challenging and requires long-term commitment, but it is essential to take the first steps and make relevant attempts. The preparation for next year's ESG or sustainable development reporting process is already very close. We cannot wait until we start compiling the 2025 report in 2026 to begin focusing on this issue; that would mean falling behind and becoming even more passive in our approach.
【Anchor】What challenges do companies face in preparing for these requirements?
【Shi】Several important factors contribute to these differences. One key factor is the level of understanding of ESG and sustainable development strategies, which is often tied to the company's cultural DNA. Some companies have, from their inception, prioritized social benefits and environmental protection, making these considerations central to their profit-making strategies. Conversely, other companies may have cultural roots that do not emphasize these aspects and may even adopt profit models that compromise social equity and exhaust environmental resources. This fundamental difference is decisive.
Another important aspect is the role of investors. Investors significantly influence companies' ESG performance, but the current issue is that relatively few companies in both mainland China and Hong Kong truly feel direct demands from investors in this area. Not every company is subject to clear ESG requirements like those imposed by the Norwegian Sovereign Wealth Fund or some sovereign wealth funds from the Middle East, including Temasek.
【Anchor】According to Hong Kong's roadmap, the timeline for listed companies to fully adopt ISSB standards is January 1, 2028. During this two-year transition period, what actions do you think companies and regulatory bodies should take? What initiatives are worth promoting?
【Shi】At the corporate level, the challenges are enormous. The ISSB represents one of the highest global standards, comparable to EU requirements. However, in a practical sense, the overall ESG work, including the related conditions, has not been underway for very long. For both local companies and many mainland companies listed in Hong Kong, truly starting this work at such a high level is a relatively recent development, having only emerged in the past year or two.
Therefore, it is undeniable that our understanding, the management systems we have established, and our practical implementation in this area still lag behind those of our international peers and exhibit significant gaps when compared to these standards.
The Hong Kong Stock Exchange (HKEX) has been proactive in this area. Since 2020, it has emphasized the role of the board of directors in advancing sustainable development and ESG initiatives. In this regard, mainland China has not yet placed such a high emphasis on these issues. While listed financial institutions comply with HKEX requirements, non-listed financial institutions previously lacked clear disclosure obligations. Now, they are also required to advance in this area before 2028, which is crucial.
Regarding non-listed financial institutions, their current disclosure rates are relatively low and largely voluntary. A more significant issue is ensuring that their disclosures meet consistent and high standards. This will better satisfy expectations. Over the next two years, I believe regulatory bodies have much work to do. Ensuring that the high standards we are introducing can truly be effective will be a considerable test for the regulators.
【Anchor】Thank you, Dr. Shi, for joining us today. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.
Anchor: Laura Cheung | Edited: Kelly Yang, Laura Cheung, Rachel Liu | Translate: Kato Ip | Proofread: Chris Liu
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