Hong Kong’s Green Finance Aspirations

As Hong Kong makes strides to establish itself as Asia's green finance hub, public firms in the city are under pressure to meet an upcoming sustainability deadline. Experts emphasize the need for elevated professional standards and practices to help the city meet its ambitious carbon neutrality objectives by 2050.

Regulatory Compliance and Sustainability Reporting

In a significant move, publicly listed companies on the Hong Kong Stock Exchange (HKEX) must comply with international sustainability standards by 2028, a transformative process that is expected to reshape business reporting and unlock new opportunities within the burgeoning green economy.

Challenges Ahead

However, the road ahead is riddled with challenges. Over half of the companies currently struggle to fully track their carbon footprints, and a severe lack of environmental expertise threatens to undermine Hong Kong's aspiring green ambitions.

Phased Approach to Sustainability Reporting

To address these concerns, the city is implementing a phased approach to align its corporate sustainability reporting with the International Financial Reporting Standards Sustainability Disclosure Standards (ISSB Standards). This framework, introduced in June 2023, aims to establish a global baseline for sustainability disclosures.

Initial Reporting Requirements

The first phase begins this year, where companies listed on HKEX's main board will be required to report their climate impacts following a "comply or explain" structure similar to international climate disclosure protocols. A major compliance milestone will arrive in 2026 when top firms on the Hang Seng Composite LargeCap Index, accounting for roughly 80% of the index's market capitalization, will face mandatory reporting requirements.

Scope 3 Emissions Disclosure

Despite their previous experience—over eight years in sustainability reporting—Hong Kong companies face fresh hurdles in fully adopting ISSB Standards, particularly regarding the disclosure of Scope 3 emissions, which encompass indirect emissions across the value chain. As the global standard for carbon accounting, the GHG Protocol developed by the World Resources Institute illustrates emissions across three scopes: direct, indirect from energy, and those occurring throughout the supply chain.

Current Reporting Gaps

A recent study by KPMG and DBS Hong Kong reveals that 60% of the city's largest listed companies have yet to report Scope 3 emissions, which typically constitute about 70% of their total carbon footprint. Many cite challenges related to data availability and quality, alongside limited budget allocations for sustainability initiatives. Only 17% of surveyed companies utilized financial instruments for their green endeavors.

Sector-Specific Challenges

In the financial sector, unique problems arise with Scope 3 reporting, particularly for banks and insurers who must evaluate the carbon impacts of their investment portfolios. They need to distinguish between funding high-emission companies and supporting green initiatives.

Dual-Listed Firms and Disclosure Complications

For dual-listed firms on the HKEX, navigating green financing is even more complicated. These companies face competing disclosure requirements across various jurisdictions, complicating their compliance efforts. While the Hong Kong exchange enforces stricter requirements, mainland exchanges have less rigorous standards, leading to inconsistencies that hinder progress.

Technology and Reskilling Needs

As these regulations evolve, the focus shifts toward reskilling employees and harnessing technology for more efficient data management. Experts caution that the technological upgrade from an optional enhancement to an urgent necessity could prove to be a make-or-break factor in meeting regulatory demands.

Addressing the Skills Gap

However, the challenges do not stop at technology. There's a glaring shortage of technical environmental expertise in Hong Kong, which poses a significant barrier to achieving its green finance aspirations. The government has taken a step in the right direction by granting statutory recognition to the Hong Kong Institute of Qualified Environmental Professionals—a move aimed at standardizing professional qualifications across various environmental sectors.

Government Initiatives for Talent Development

The institute seeks to address this skill gap by focusing on critical areas such as climate risk assessment and investment portfolio redesign, thus laying a solid foundation for the city’s green finance ambitions. Furthermore, the HKSAR government initiated the Pilot Green and Sustainable Finance Capacity Building Support Scheme to enhance local talent, even adjusting immigration policies to attract international green professionals.

Contingency Plans and Carbon Markets

With just three years remaining before the significant green reporting deadline, companies may have to resort to the carbon market for interim solutions. Although companies can minimize their carbon footprints through technology and improved efficiency, some emissions may persist, prompting the necessity for a robust carbon market.

The Carbon Market Systems

The carbon market offers two distinct systems: a mandatory system where companies exceeding emission limits buy credits from more efficient firms, and a voluntary system allowing businesses to purchase credits to offset unavoidable emissions. Hong Kong made its foray into this area in 2022 with Core Climate, a voluntary carbon market initiative established by HKEX. However, experts criticize this system for lacking the necessary regulatory weight to drive substantial progress.

Proposed Solutions for Enhanced Carbon-Offsetting

To remedy this, suggestions have emerged for the government to implement a carbon levy, enabling a mixed-layers approach to significantly enhance carbon-offset practices among corporations. CPA Australia even proposed a carbon tax targeting firms emitting more than 25,000 metric tons of CO2 annually, with the potential for businesses to offset some of their taxable emissions through carbon credits.

Collaborative Carbon Trading Initiatives

In a strategic move, collaboration among carbon trading marketplaces in the Greater Bay Area could enable high-emission companies to access international investors through optimized carbon credit transactions. As the HKEX forges agreements with emissions exchanges in urban centers like Shenzhen and Guangzhou, the development of an integrated regional carbon market ecosystem could position Hong Kong as a leader in Asia's green finance landscape.

Conclusion: The Countdown Begins

Can Hong Kong bridge its green expertise gap in time? The countdown has begun, and the world is watching!