MNI INTERVIEW2: China Firms Must Prepare For HKEX Disclosure

Many mainland firms listed on the Hong Kong Exchange remain unprepared for incoming sustainability disclosure requirements and must act now to avoid running afoul of the new rules, a prominent policy advisor told MNI.

HKEX will finalise its International Sustainability Standard Board-aligned disclosure requirements at the end of the year and implement them on 1 January 2024. The bourse conducted a three-month consultation in April, which detailed plans to require listed companies to report climate-related disclosures in their environmental, social and corporate governance (ESG) reports.

The tightened disclosure regulation will make compliance difficult for Chinese firms which represent over 70% of HKEX's listed market capitalisation, said Ma Jun, chair of the Green Finance Committee at the China Society for Finance and Banking, and co-chair at the International Platform on Sustainable Finance Taxonomy Working Group.

The rules will require listed companies to disclose ISSB Scope 1 and 2 greenhouse gas emissions, which cover direct and indirect emissions, such as from electricity generation. The HKEX will provide a two-year reprieve from Scope 3 disclosure, which focuses on emissions along a company’s supply chain – a much more complex and involved endeavor, according to market participants.

Ma said many Chinese companies, particularly small- and mid-sized firms, are concerned about the rising compliance costs. The former People’s Bank of China Chief Economist argued, however, the disclosures will set a benchmark for domestic companies not listed in Hong Kong.

TRANSITION FINANCE

Transition finance, which focuses more on decarbonisation of hard-to-abate sectors, will also increasingly play a crucial role and help China achieve carbon neutrality, Ma commented.

He estimated China needs to finance about CNY4 trillion each year to deal with pollution, while the green-transition financing requirement will require multiples of that. China's financial sector represented a major contributor to the country’s rapid green-industry expansion with outstanding green products – such as loans, bonds, PE and mutual funds – totaling over CNY30 trillion to date.

“The green-finance theme in future will focus on how to help existing carbon-intensive sectors transition – for financial markets, there are both challenges and opportunities,” he said, stressing the existing green-finance frameworks must cover transition activities, while authorities should offer incentives.

Ma has been involved in the PBOC effort to craft a transition-finance taxonomy over the past year. Market participants expect the draft transition taxonomy release for public consultation soon.

He said the market will more actively participate in transition finance once the PBOC launches the framework, similar to the surge of green-bond issuance experienced in 2016 after the green-bond taxonomy published.

The PBOC should consider offering incentives for transition activities, similar to those supporting pure green projects, Ma added. Local governments should act under the “high-quality growth” requirement and provide interest subsidies and guarantees, he suggested.

Ma has also called on greater cooperation between the U.S. and China over climate-related issues (see: MNI INTERVIEW: China-US Should Set Green Whitelist - Ma).