【True Vision ESG Trends】Grant Thornton: Only 64% of large Hang Seng Composite Index constituent companies disclose Scope 3 greenhouse gas emissions before the new disclosure rules take effect in January 2025.
Grant Thornton (Hong Kong) has released the Hong Kong Corporate Governance Survey Report for the 13th consecutive year. The 2024 report highlights concerning gaps in the disclosure levels of environmental, social, and governance (ESG) reporting among large listed companies in Hong Kong. In 2023, only 64% of large Hang Seng Composite Index constituent companies disclosed their Scope 3 greenhouse gas emissions, down from 69% in 2022 and significantly lagging behind Europe's 92% disclosure rate. With the Hong Kong Exchanges and Clearing Limited (HKEX) set to implement its "comply or explain" ESG disclosure rules in January 2025, large listed companies urgently need to accelerate improvements in their ESG reporting to avoid compliance issues and meet global sustainability standards.
To align with the standards issued by the International Sustainability Standards Board (ISSB), HKEX has updated its listing rules, requiring all large listed companies to provide more comprehensive ESG reports starting January 2026. The new rules mandate disclosures on governance processes for monitoring climate-related risks and opportunities, the impact of these risks and opportunities on the business, risk management processes, and detailed Scope 3 greenhouse gas emissions.
Scope 3 emissions cover all indirect emissions across a company's value chain and are one of the mandatory disclosure requirements under the new ESG rules. By sector, all large raw materials companies disclosed their Scope 3 emissions, while the healthcare sector had an 86% disclosure rate. Conglomerates saw the sharpest decline, dropping from 67% to 33%, tying with the telecommunications sector. The lag in disclosures may be due to the complexity of collecting reliable Scope 3 data from global supply chains or companies perceiving these emissions as less impactful on their direct operations.
Mr. Andy Ha, Advisory Partner at Grant Thornton (Hong Kong), commented: "Conducting climate-related scenario analysis is a complex but essential task for businesses to ensure resilience and sustainability in the face of climate change. With HKEX's new ESG disclosure rules approaching, we recommend that HKEX continue to provide clearer guidance and training while strengthening mechanisms to assess listed companies' compliance. Regulatory-driven corporate responsibility is critical for achieving real change."
The revised climate disclosure rules require companies to conduct scenario analyses to assess the impact of different climate scenarios on their operations, supply chains, revenue, and costs. In 2023, only 46% of large Hang Seng Composite Index constituent companies performed such analyses. The low overall disclosure rate suggests that companies generally find climate-related scenario analysis challenging, especially when it involves speculative assumptions. Notably, industries with infrastructure and equipment highly susceptible to climate-related impacts, such as property and construction (73%), telecommunications (67%), and utilities (70%), showed slightly higher disclosure rates.
In recent years, while the pandemic disrupted business operations, it also accelerated technological advancements and green computing practices. As companies increase investments in information technology (IT) to remain competitive, 83% of large Hang Seng Composite Index constituent companies disclosed tech applications implemented or planned in their ESG operations. This digital transformation has also heightened concerns about cybersecurity and data rights. Additionally, independent verification of ESG reports is gaining traction, with 60% of large Hang Seng Composite Index constituent companies engaging third-party verification in 2023, up 7% from 2022.
Grant Thornton (Hong Kong) analyzed the 2023 annual reports of 114 Hang Seng Composite Index constituent companies and the 2023 ESG reports of 109 such companies to assess disclosure levels on stakeholder engagement, climate-related disclosures, external ESG reporting standards, independent verification, carbon credits, green finance, and technological innovation.
Green Finance Drives Significant Growth in Renewables, but Carbon Credit Adoption Remains Slow
As sustainable investing grows rapidly, ESG regulations are becoming stricter. Among large Hang Seng Composite Index constituent companies discussing green finance in their 2023 ESG reports, 90% took concrete actions, such as issuing green bonds or participating in green finance. Green finance activities surged by 19% compared to 2021, even as the overall proportion of companies discussing the topic fell by 4 percentage points to 36%.
Financial firms dominated Hong Kong's green bond and green finance issuances, accounting for 45% of total activity, followed by property and construction at 33%. Notably, no large listed companies in the energy, healthcare, industrial, or telecommunications sectors issued green bonds or participated in green finance in 2023.
Hong Kong's green bonds and green finance primarily fund renewable energy (82%) and energy efficiency (77%) projects, such as purchasing energy-saving equipment and supporting renewable energy facilities. Companies' focus on energy indicates that, compared to less core-related ESG areas like biodiversity, energy remains a top priority for large listed companies.
Despite the growing importance of carbon credits in addressing climate change, only 5% of large Hang Seng Composite Index constituent companies mentioned purchasing carbon credits to offset their greenhouse gas emissions in 2023, a slight increase from 2% the previous year. Among these companies, four reported purchasing carbon credits, while two encouraged their clients and corporate customers to buy carbon credits from them to offset emissions.
Ms. May Wong, Advisory Director at Grant Thornton (Hong Kong), stated: "Hong Kong is rapidly emerging as a green finance hub. The Hong Kong Monetary Authority reported that, as of March 2024, issuances under its Green and Sustainable Finance Grant Scheme reached USD 110 billion. This success reflects the global surge in sustainable investing, driven by investors' increasing focus on long-term resilience, impact, and strong ESG performance. While Hong Kong has made significant progress, continued collaboration between the government and industry is essential to ensure all sectors benefit from the green transition and solidify Hong Kong's position as a global sustainable finance center."
Linking Executive Pay to ESG Performance to Elevate Hong Kong's ESG Disclosure Standards
The survey report reveals that while many large Hang Seng Composite Index constituent companies discussed climate change's impact on their operations in 2023, none disclosed specific financial data or performance changes, highlighting their lack of preparedness in analyzing these risks and opportunities. This suggests companies need to enhance transparency and deepen their understanding of climate-related financial impacts, despite potential challenges in data collection and analysis.
Ms. May Wong added: "Leveraging advanced technologies like AI to address data collection challenges and incentivizing companies to provide more comprehensive ESG disclosures are crucial to narrowing the gap in quantifying climate change's financial impact. Moreover, our survey shows that only 5% of large Hang Seng Composite Index constituent companies included sustainability-related KPIs, such as ESG performance and employee well-being, in their executive compensation packages in 2023. We advocate linking executive pay to ESG performance as a driver for substantive change. This can motivate leadership to prioritize sustainability, ultimately improving ESG performance and increasing disclosure transparency."
Mr. Andy Ha concluded: "As the ISSB pushes for more comprehensive climate-related disclosures, we applaud HKEX's proactive efforts to align with international standards. Practical implementation guidance and compliance monitoring measures are indispensable to encouraging local companies to adapt, invest in robust data systems, and adopt independent third-party verification, ultimately enhancing the accuracy and reliability of ESG reports."
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