The Glasgow Climate Pact was finally struck at the 2021 United Nations Climate Change Conference (COP26) after two weeks of meetings and events, negotiations, deliberations and last-minute drama.
There are mixed reactions to the outcome. Notably, the pact’s agreement to “phase down” rather than “phase out” coal has agitated many. Yet, many welcomed the reaffirmed recognition of the importance of keeping 1.5 degrees within reach, and an agreed framework under the pact to bridge the gaps between ambition and a 1.5-degree future. The key to success is to convert pledges into actions, and to galvanize support from corporates and other stakeholders in transitioning to a net-zero world at speed and at scale. As part of the agreement, countries will meet again next year to pledge even deeper emission cuts and more ambitious targets. More resources will be put together to help developing countries and vulnerable communities adapt to climate change.
Other than new climate commitments during COP26 was the announcement by the International Financial Reporting Standards (IFRS) Foundation of the formation of the International Sustainability Standards Board (ISSB) to develop a global baseline of sustainability disclosures primarily for financial markets. This potential “game-changer” in sustainability reporting aims to provide investors with information about companies’ sustainability-related risks and opportunities, and climate-related financial disclosures to help them make informed decisions.
What does this new development of sustainability disclosure standard mean for the evolution and efficacy of environmental, social and governance (ESG) reporting? ESG refers to a number of non-financial factors about a company that can sometimes prove material for investors and other stakeholders. At first, ESG reporting from a financial perspective or a risk angle was not a common practice among corporates and, with very few reporting guides or frameworks on sustainability-related financial disclosures, the financial information that was disclosed varied significantly. However, with time, ESG disclosures increasingly attracted the attention of investors. This influenced corporates to disclose the associated risk impact and financial aspects in more structured reports but the variation of disclosed information persists. We expect that the IFRS Foundation’s lead in driving convergence to a single internationally accepted reporting standard will facilitate a consistent approach to supporting the connection between financial and non-financial reporting.
Following the framework
The Business Environment Council has observed that this trend is consistent with the dynamic ESG development in the Hong Kong market over the years. Though we are still waiting to see the outcomes of the ISSB, we have already witnessed a convergence in one particular area, namely climate-related disclosures. As investors pay more attention to climate issues, internationally recognized frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD) have become increasingly popular as it effectively guides corporates to disclose their management approach, strategy, risk management and targets in dealing with climate challenges. Under the TCFD guidance, corporates have started to establish board-level committees and climate policies as the overarching management approach. To strategically tackle climate issues, companies have undertaken climate risk assessments to identify key climate risks, which would significantly impact their business performance. Furthermore, some companies conducted a scenario analysis – a “deep-dive” to understand company-specific climate transition risks. The scenario analysis would help companies navigate the potential effects of future climate scenarios. It serves as a tool for key decision makers to enhance critical strategic thinking and subsequently build climate resilience within the company.
The Stock Exchange of Hong Kong’s updated ESG Reporting Guide clearly took notes from the TCFD with the introduction of new climate-related key performance indicators, emissions targets and more direct board involvement in governing ESG. In addition, the TCFD framework has strong backing from the Securities and Futures Commission and the Hong Kong Monetary Authority through the Green and Sustainable Finance Cross-Agency Steering Group. In announcing the mandatory TCFD-aligned climate-related disclosures to financial institutions by 2025 at the latest, the steering group is forcing financial institutions to consider climate change during capital allocation. They will need to understand the climate aspects of every loan, investment, and other products and services. This means that companies will be fielding an increasing number of relevant questions in the coming years. Through this announcement, the steering group has essentially mandated TCFD-aligned disclosures to all companies in Hong Kong.
Building cross-team commitment
Our Sustainability and ESG Advisory Team has been working with clients from various sectors such as utilities, manufacturing and insurance to conduct climate risk assessment and disclosures enhancement. Through this experience, we have found that report disclosure is only a fraction of the work being done to enhance corporates’ climate resilience. It would require synergies between departments across the organization to drive climate strategy under a robust sustainability governance structure. We have observed that there is an increasing need from corporates for awareness training and capacity building, especially with issues around climate change. This is an indication that corporates are recognizing the value of sustainable development and the risks that they may face if material ESG issues are not adequately addressed.
From COP26 to sustainability disclosures, we are at a pivotal moment to further drive climate actions as well as the transition to internationally recognized, coherent, comprehensive and assured non-financial reporting that is as robust as financial reporting.