Hong Kong SAR publishes exposure drafts of two Hong Kong sustainability disclosure standards for public consultation

On 16 September 2024, the Hong Kong Institute of Certified Public Accountants (the HKICPA) published the Exposure Drafts for HKFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and HKFRS S2 Climate-related Disclosures (the HK Sustainability Disclosure Standards) for public consultation. The consultation closes on 27 October 2024.

The HKICPA is the sustainability reporting standard setter in Hong Kong who is developing the HK Sustainability Disclosure Standards as a set of local sustainability disclosure standards aligned with the International Sustainability Standards Board (ISSB)’s sustainability disclosure standards - IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures (the ISSB Standards). For information on the ISSB Standards, see our previous blog post.

The Hong Kong SAR Government issued a vision statement in March 2024 (the Vision Statement) which outlined the goal for Hong Kong to be among the first jurisdictions to align its sustainability disclosure requirements with the ISSB Standards (see our previous blog post). This latest development forms part of the Hong Kong SAR Government’s and regulators’ commitment to developing a robust sustainability disclosure ecosystem in line with international standards.

HKICPA published: 

• the Exposure Drafts for HKFRS S1 and HKFRS S2, and Accompanying Guidance and Basis for Conclusions are annexes to the Exposure Drafts; 
• an explanatory memorandum; and 
• FAQs as an annex to the explanatory memorandum.

What are the proposed HK Sustainability Disclosure Standards?

In the Exposure Drafts, the HKICPA is proposing full convergence of HKFRS S1 and HKFRS S2 with the ISSB Standards, in that the HK Sustainability Disclosure Standards are the same as IFRS S1 and IFRS S2 subject to only having an effective date of 1 August 2025 (see HKICPA press release). The HKICPA’s proposal of full convergence with IFRS S1 and IFRS S2 also means that the full range of proportionality mechanisms embedded in the ISSB Standards are available in the HK Sustainability Disclosure Standards.

The proposal for full convergence relates to IFRS S1 and IFRS S2 only and does not, however, extend to any future ISSB Standards which are published. When the ISSB publishes any new standards in the future, the HKICPA have said they will engage with relevant stakeholders to decide on the potential adoption of those new standards in Hong Kong as appropriate.

The Exposure Drafts propose that entities provide disclosures required by HKFRS S1 and HKFRS S2 as part of its general purpose financial reports. Entities shall report sustainability-related financial disclosures at the same time as related financial statements and covering the same reporting period as the related financial statements. Sustainability-related financial disclosures shall be for the same reporting entity as the related financial statements.

Who will the proposed HK Sustainability Disclosure Standards apply to?

As indicated in Vision Statement, the application of HKFRS S1 and HKFRS S2 will prioritise “publicly accountable entities” or “PAEs”, including listed entities and regulated financial institutions in Hong Kong such as banks, fund managers, insurance companies and MPF trustees.

Relevant authorities / regulators (including the HKEX, HKMA, SFC, MPFA and IA) will conduct their own consultations to determine the approach and timing of adopting HKFRS S1 and HKFRS S2, although the ISSB Inaugural Jurisdictional Guide indicates that a jurisdiction’s process completion date of the adoption or other use of the ISSB Standards should be no later than end-2029. 

In the meantime, entities that are required to prepare sustainability disclosures will continue to report in accordance with the rules, regulations or guidelines specified by relevant authorities/regulators. Entities may also voluntarily opt to prepare sustainability disclosures in accordance with the proposed HK Sustainability Disclosure Standards in the interim.

When will the proposed HK Sustainability Disclosure Standards apply?

The HKICPA proposes an effective date of 1 August 2025 for HKFRS S1 and HKFRS S2.

How will the proposed HK Sustainability Disclosure Standards relate to the HKEX’s climate-related disclosure requirements?

For listed entities in Hong Kong, HKEX published the new climate-related disclosure requirements in April 2024 (the HKEX New Climate Requirements) which will apply on a phased approach for financial years commencing on or after 1 January 2025 (see our previous client briefing). 

As indicated in HKEX’s consultation conclusions, the HKEX New Climate Requirements serve as an interim step to prepare listed entities for the eventual adoption of the HK Sustainability Disclosure Standards. When the HK Sustainability Disclosure Standards are available, HKEX will consider how to transition towards sustainability reporting in accordance with the HK Sustainability Disclosure Standards, including whether to replace its current ESG regulatory framework with a straightforward Listing Rule requirement directing listed issuers to publish sustainability reports in accordance with those HK Sustainability Disclosure Standards. This is a moving area so one for listed entities to keep a watch on.

The HKICPA’s FAQs summarises the following four main differences between the HKEX New Climate Requirements and the ISSB Standards, as follows - under the HKEX New Climate Requirements: 

• entities may decide which entities or operations to include in their ESG report, whereas under the ISSB Standards, all entities covered by the consolidated financial statements must be included in the ESG report;
• entities are encouraged but are not required to disclose industry-based metrics; 
• disclosure of scopes 1 and 2 GHG emissions for the consolidated accounting group and other investees separately is encouraged but not mandatory; and
• disclosure of remuneration linked to climate-related considerations is not required.

What next?

The two questions posed by the consultation are: 

• Question 1: Do you agree with the proposal to issue HKFRS S1 and S2 on a fully converged basis with IFRS S1 and S2 with an effective date of 1 August 2025? 
• Question 2: Do you have any other comments on the HK EDs?

The consultation closes on 27 October 2024. 

The HKICPA aims to publish the final HKFRS S1 and HKFRS S2 by the end of 2024.

To support industry, the HKICPA emphasises that capacity enhancement programmes will be developed for preparers, reporting and assurance professionals and sustainability-related service providers, and “active efforts” will be made to improve data availability, support data collection and reporting, and promote the use of green and sustainable financial technology solutions.