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This leads Hong Kong to be among the first jurisdictions to align the local sustainability disclosure requirements with the ISSB Standards, positioning Hong Kong as a leader in global sustainability reporting standards adoption and reinforcing its role as an international financial center.

HKFRS S1 and S2 are critically important for Hong Kong companies for several strategic, regulatory, and competitive reasons:

Regulatory Compliance and Legal Requirements

‍Mandatory Implementation Timeline: Under Hong Kong's roadmap, companies listed on the Hong Kong Stock Exchange are already required to disclose Scope 1 and 2 GHG emissions starting January 1, 2025, under the 'New Climate Requirements' aligned with IFRS S2. All Main Board issuers will be required to begin reporting against the IFRS S2 Climate-related Disclosures on a "comply or explain" basis in 2025, with large cap issuers to begin on a mandatory basis in 2026, and the HKEX to subsequently consult on mandating sustainability reporting against the new Hong Kong Standards, with an expected date for all listed publicly accountable entities (PAEs) no later than 2028. This creates a clear regulatory obligation that companies must prepare for.

Global Market Access and Competitiveness
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‍International Alignment: The HKFRS SDS are fully aligned with the lSSB Standards, and this is critical to maintaining and enhancing Hong Kong's competitiveness in international capital markets. The Institute believes that Hong Kong's full convergence with the ISSB Standards has global significance as it would bolster the connection of global capital with local businesses as well as those in Mainland China and other regions. This alignment ensures Hong Kong companies can compete effectively in global markets where sustainability reporting is increasingly standard.

‍Investor Expectations: HKFRS S1 and S2 are crucial in aligning Hong Kong's sustainability reporting with the global baseline. By enhancing consistency and comparability, these standards will better meet the needs of investors seeking reliable sustainability information. International investors increasingly require standardized sustainability information to make informed investment decisions.

Strategic Positioning and Business Benefits

‍Early Adopter Advantage: It provides a pathway for large PAEs to fully adopt the ISSB Standards no later than 2028, leading Hong Kong to be among the first jurisdictions to align the local sustainability disclosure requirements with the ISSB Standards. Companies that adopt these standards early gain competitive advantages in attracting ESG-focused investors and partners.

‍Standardized Framework: The HKFRS SDS provide a standardized framework for enhancing the consistency and comparability of corporate sustainability reports. This eliminates confusion from multiple reporting frameworks and provides clear guidance for companies on what information to disclose and how to present it.

Financial and Risk Management Benefits

‍Enhanced Risk Management: The standards require companies to identify, assess, and disclose climate-related and sustainability risks that could affect their financial performance, helping companies better understand and manage these risks proactively.

‍Access to Capital: As global capital increasingly flows toward sustainable investments, companies with robust sustainability reporting under internationally recognized standards like HKFRS S1 and S2 will have better access to capital markets and potentially lower financing costs.

Regional Hub Strategy

‍Gateway to China: Hong Kong's role as a financial gateway to Mainland China means that companies operating there will need to meet international sustainability standards to facilitate cross-border business and investment. The alignment with ISSB standards positions Hong Kong companies to serve as intermediaries for Chinese businesses seeking international capital.

‍Asian Financial Center: The HKICPA will continue to work closely with other stakeholders in the areas of sustainability assurance, data and technology as well as skills and competencies to create an enabling environment for the successful implementation of the HKFRS SDS and to contribute towards the development of a comprehensive sustainability disclosure ecosystem in Hong Kong. This reinforces Hong Kong's position as Asia's leading sustainable finance hub.

HKFRS S1 and S2 are fully aligned with the IFRS Sustainability Disclosure Standards (ISSB Standards), which themselves consolidate and build on the work of market-led reporting initiatives—comprising the Climate Disclosure Standards Board (CDSB), the Task Force for Climate-related Financial Disclosures (TCFD), the Value Reporting Foundation's Integrated Reporting Framework and the Sustainability Accounting Standards Board (SASB).

Companies should consider following HKFRS even if they are technically out of scope for several compelling strategic and business reasons:

‍Supply Chain Pressure and Expectations: Whether your organization falls the reporting mandatory scope or is voluntarily reporting to align with stakeholders who must report and have heightened expectations for the supply chain – these new standards may still impact you. Even companies who don't meet the threshold themselves will need to know a certain amount of information because they will sit within the supply chain of an organization affected by the rules. This creates a cascading effect where larger companies will increasingly demand sustainability data from their suppliers and partners.

‍Future-Proofing and Market Position: Even companies who do not fall under the mandated scope, they should look to embark on emission accounting if they have not already. There will be increased demand for value chain emission data, spilling over to smaller companies, who in turn must disclose their own emissions data. Early adoption positions companies advantageously as the reporting framework expands to cover more entities in subsequent phases.

‍Investor and Stakeholder Confidence: This is an important first step for Hong Kong to introduce standardized reporting requirements in Hong Kong, providing investors with consistent and transparent information for their investment decisions. Voluntary compliance demonstrates proactive governance and transparency, which increasingly influences investment decisions, customer preferences, and business partnerships.

HKFRS defines materiality following the same approach as the international IFRS S1 and S2 standards, which it is aligned with.

All disclosures required by IFRS S1 and IFRS S2 are subject to an assessment of materiality. The International Accounting Standards Board's (IASB) definition of material information and primary users is consistent with the Conceptual Framework for Financial Reporting (Conceptual Framework). IFRS S1 uses definitions and requirements that are consistent with the IASB's Conceptual Framework, IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

‍Financial Materiality Focus: IFRS S1 and S2 are focused on financially material environmental, social, and governance (ESG) risks and opportunities that affect the overall bottom line. This represents a "single materiality" approach focused on financial impacts to the entity, as opposed to the "double materiality" concept used in some other frameworks like the European CSRD.

‍Specific Definition: HKFRS requires entities to disclose information about sustainability-related risks and opportunities that could reasonably be expected to affect the entity's cash flows, its access to finance or cost of capital over the short, medium or long term. Information is considered material if omitting or misrepresenting it can impact investors' decision-making.

‍Assessment Requirements: Assessment and disclosure of material climate-related risks and opportunities affecting entities business model and value chain including the effect on financial position, financial performance and cash flows. Financial materiality needs to be determined. These insights are sought by the investment community: Determining how business' sustainability actions could introduce climate-related risks or opportunities capable of affecting financial performance is crucial for transparent HKFRS reporting.

‍Practical Application: Companies must conduct a materiality assessment to determine which climate-related risks and opportunities are most relevant to their business, engaging with stakeholders, analyzing industry trends, and assessing the potential financial impact of these climate-related risks. This assessment is fundamental to determining what information must be disclosed under HKFRS, ensuring that companies focus their reporting on sustainability matters that have genuine financial relevance to investors and other capital providers.

The materiality definition under HKFRS is therefore investor-focused and financially-oriented, requiring companies to identify and disclose sustainability-related information that could reasonably be expected to influence economic decisions about providing resources to the entity.

HKFRS S1 and HKFRS S2 include reporting requirements across four content areas: governance; strategy; risk management; and metrics and targets. These core content areas are consistent with the TCFD's recommendations. HKFRS S2 focuses specifically on climate-related disclosures and covers governance of climate issues, strategy alignment with climate risks and opportunities, scenario analysis, metrics (including Scope 1, 2, and 3 emissions), and progress toward climate-related targets.

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