Hong Kong’s New ESG Reporting Standards: What HKFRS S1 and S2 Mean for Your Business
Hong Kong is undergoing a significant transformation in sustainability reporting with the introduction of the Hong Kong Financial Reporting Standards (HKFRS) S1 and S2. These standards, fully aligned with the International Sustainability Standards Board (ISSB) frameworks, establish a new benchmark for ESG disclosures in the region.
Understanding HKFRS S1 and S2
On December 12, 2024, the Hong Kong Institute of Certified Public Accountants (HKICPA) published HKFRS S1 and S2, setting the stage for a comprehensive sustainability disclosure regime. HKFRS S1 outlines the general requirements for sustainability-related financial disclosures, while HKFRS S2 focuses specifically on climate-related disclosures. Both standards are set to take effect on August 1, 2025 .
Key Implementation Milestones
- January 1, 2025: All Main Board-listed companies must begin disclosing Scope 1 and Scope 2 greenhouse gas (GHG) emissions on a mandatory basis. Additionally, they are required to report on climate-related disclosures under a "comply or explain" approach.
- January 1, 2026: Companies listed on the Hang Seng Composite LargeCap Index are mandated to fully comply with the climate-related disclosure requirements.
- 2027: The Hong Kong Exchanges and Clearing Limited (HKEX) plans to conduct a market consultation on mandating sustainability reporting in accordance with HKFRS S1 and S2.
- 2028: Full compliance with HKFRS S1 and S2 is expected for large publicly accountable entities (PAEs), including significant financial institutions.
Implications for Businesses
The adoption of HKFRS S1 and S2 signifies a shift towards more transparent and standardized ESG reporting. Companies will need to integrate sustainability considerations into their governance, strategy, risk management, and performance metrics. This includes conducting materiality assessments, setting measurable ESG targets, and enhancing data collection processes.
For businesses, especially those in the supply chain of listed companies, aligning with these standards is crucial. It not only ensures compliance but also enhances credibility with investors, customers, and other stakeholders.
Preparing for Compliance
To navigate this new landscape, companies should:
- Conduct a Gap Analysis: Assess current reporting practices against HKFRS S1 and S2 requirements to identify areas needing improvement.
- Enhance Data Management: Implement systems to accurately track and report ESG metrics, particularly GHG emissions.
- Engage Stakeholders: Involve internal and external stakeholders in the ESG reporting process to ensure comprehensive and relevant disclosures.
- Seek Assurance: Consider obtaining third-party assurance to validate ESG reports, enhancing their reliability and stakeholder trust.
Conclusion
The introduction of HKFRS S1 and S2 marks a pivotal moment in Hong Kong's commitment to sustainable development. By proactively adapting to these standards, companies can not only ensure compliance but also position themselves as leaders in sustainability, fostering long-term value creation and resilience in an increasingly ESG-conscious market.
