Ernest Lee FCG HKFCG(PE), Institute Past President and Technical Partner, Deloitte China, talks to CGj about the development journey of sustainability reporting in Hong Kong, and outlines the challenges and opportunities associated with the new sustainability reporting standards.

Sustainability reporting is becoming a more critical component of corporate governance in Hong Kong, as companies prepare to comply with the newly introduced disclosure standards. Can you tell us about the principal developments behind this shift?

‘Absolutely. The journey started back in September 2020 when the International Financial Reporting Standards (IFRS) Foundation issued a consultation paper on sustainability reporting. The establishment of the International Sustainability Standards Board (ISSB) under the IFRS Foundation was announced in November 2021 at the United Nation’s Climate Change Conference in Glasgow (COP26). This independent standard-setting body is mandated to deliver a comprehensive global baseline of sustainability-related disclosure standards that will provide investors and participants with information about companies’ sustainability-related risks and opportunities. The final versions of IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information – and IFRS S2 – Climate-related Disclosures – were issued in June 2023.

Then, in early December 2024, Hong Kong launched a roadmap on sustainability disclosure that outlined a structured plan for adopting the ISSB standards. This was informed by extensive public consultations and feedback from a wide variety of stakeholders, ensuring that the standards meet local needs and, at the same time, conform with global benchmarks.

Also in December 2024, the Hong Kong Institute of Certified Public Accountants (HKICPA) issued the Hong Kong Financial Reporting Standards (HKFRS), HKFRS S1 and HKFRS S2, which are fully aligned with the ISSB standards and which have an effective date of 1 August 2025.’

What does this mean for businesses in Hong Kong and who will be affected by these new standards?

‘The new HKFRS standards will impact a broad range of businesses, particularly listed companies and regulated entities such as financial institutions, asset managers and insurance companies. The alignment with international standards strengthens Hong Kong’s position as an international green finance hub.

The implementation will follow a phased approach. LargeCap issuers (defined as Hang Seng Composite LargeCap Index constituents) and non-listed financial institutions carrying a significant weight will be among the first to comply. They are expected to fully adopt HKFRS S1 and HKFRS S2 no later than 2028.

What are the key differences between Hong Kong’s sustainability reporting standards and the new climate requirements issued by HKEX in April 2024?

‘While the new climate requirements issued by HKEX in April 2024 closely accord with the climate-related disclosure requirements of Hong Kong’s sustainability reporting standards (HK standards) and the ISSB standards, there are four main differences. One key difference is in reporting boundaries. The new climate requirements allow issuers to determine boundaries based on the ESG Code, whereas the HK standards and the ISSB standards mandate alignment with financial reporting boundaries.

Another difference is in industry-based metrics. The HK standards and the ISSB standards require mandatory disclosures for certain regulated industries, whereas the new climate requirements adopt a more flexible, voluntary approach. Disclosure for Scope 1 and Scope 2 greenhouse gas emissions is another area in which the new climate requirements have opted for a voluntary approach, encouraging but not mandating separate disclosures.

Additionally, the HK standards and the ISSB standards require companies to disclose the percentage of executive remuneration linked to climate-related goals, but this is not a requirement in the new climate requirements. However, Hong Kong regulators strongly encourage companies to follow international best practices.’

In your experience, what are the biggest challenges companies face when implementing these new requirements?

‘One major challenge is data collection, particularly for Scope 3 emissions, which encompasses indirect emissions from a company’s value chain. Many businesses struggle to obtain accurate and reliable data. For instance, some companies operate in countries where emissions data is either scarce or of questionable credibility and reliability, especially when sourced from third-party vendors.

In the context of Hong Kong and the Chinese mainland, stakeholders have raised concerns that existing emissions data is often incomplete, outdated or fragmented. As a result, companies sometimes rely on data from other countries. However, this can lead to discrepancies, as such data may not accurately reflect the emissions profiles of businesses with the majority of their operations in Hong Kong or the Chinese mainland.

The final point here concerns the practical challenges in quantifying the anticipated financial impact of climate-related factors. One significant challenge is isolating the effects of climate change from other influencing factors. For example, consider an increase in cocoa prices. This may be partly due to poor harvests caused by low rainfall, but it could also be driven by market expectations, which influence price fluctuations. Accurately disclosing the anticipated financial effect of a single factor is challenging because multiple variables often contribute to the final number, making it difficult to attribute changes to climate impacts alone.’

What are some of the support measures available to help companies transition to the new sustainability reporting standards?

‘To support this transition, the HKICPA has released a detailed explanatory memorandum, which includes useful links and resources. Additionally, the ISSB has introduced proportionality relief measures to help companies implement the requirements more effectively.

There are two types of relief in the Hong Kong standards. The first is a temporary first-time transition relief, which allows companies to initially disclose climate-related information only, without the need for comparative data or Scope 3 emissions reporting. The second is a permanent proportionality relief, which ensures that disclosure requirements remain practical and achievable, while maintaining reporting integrity. The fundamental concept here is the use of reasonable and supportable information available at the reporting date without undue cost or effort. If companies lack the capacity to provide quantitative financial impact assessments, they can opt for qualitative disclosures instead.

To assist businesses, regulators have provided extensive guidance, including implementation-support platforms and capacity-building efforts. Organisations like the Green and Sustainable Finance Cross-Agency Steering Group, co-chaired by the Hong Kong Monetary Authority and the Securities and Futures Commission, are also working to enhance data availability and quality.’

How does assurance factor into sustainability reporting and what are the next steps?

‘Assurance will play a crucial role in enhancing the credibility of sustainability reporting. Investors and stakeholders expect sustainability disclosures to be as reliable as financial statements. To address this, the International Auditing and Assurance Standards Board issued its International Standard on Sustainability Assurance 5000 in November 2024, which sets the global benchmark for sustainability assurance.

Hong Kong will follow suit. HKICPA has made it clear that it will develop local assurance and ethics standards on a full convergence basis with these international standards, and aims to publish the final standards by the end of 2025.’