HONG KONG SAR LANDSCAPE
The carbon markets regime in Hong Kong SAR.
There is rising global support for carbon trading to form a significant stepping-stone in the global transition to green and sustainable economies.
Hong Kong’s carbon markets are evolving rapidly as demand for offsets and trading grows. Core Climate, its voluntary carbon market, has attracted projects from around the region and beyond – including South America and Africa – since launching in October 2022.
Beyond local trading, Hong Kong has ambitions of growing into a carbon hub. This is fitting, given its strategic position as a financial hub and its proximity to Mainland China. The well-established financial services infrastructure and regulatory framework could facilitate cross-border carbon trading and finance.
The Hong Kong Exchanges and Clearing Market (HKEX) established an International Carbon Market Council in 2022 as a step towards this goal. This brings together corporates and financial institutions across the region, including the local branches of Australian and Chinese companies.
In this tracker, we lay out the significant shifts that have happened over the past decade in the evolution of Hong Kong’s carbon markets.
We also share significant upcoming dates. As carbon regulation and reporting obligations increase, it is critical to keep up: whether it’s a reporting deadline, a chance to submit to a policy review or a milestone change.
This tracker will evolve to keep you across the changes. Please reach out to your KWM contact if we can assist.
WHO ACTS?
GOVERNMENT
REGULATOR
COMPANY
MILESTONE
TOPIC AREAS
CARBON TRADING
CLIMATE DISCLOSURE
CARBON COMPLIANCE
2015
Release of the consultation conclusions regarding requirements for ESG reporting for listed companies (Appendix 27 of the Main Board Listing Rules and Appendix 20 of GEM Rules).
Listed companies must disclose ESG information on an annual basis for the same period covered in their annual reports, starting from financial years commencing on or after 1 January 2016.
Mandatory disclosure requirements:
- board statement on oversight, management approach and strategy on ESG issues and how ESG-related goals are tracked
- (materiality) identification and criteria for selection of material ESG factors and stakeholder identification and engagement process
- (quantitative) standards, methodologies, assumptions and calculation tools used for the reporting of emissions/energy consumption
- (consistency) changes in the methods or KPIs, and
- description of reporting boundaries.
‘Comply or explain’ disclosures and KPIs on various environmental and social subject areas such as emissions, use of resources, climate change, employment and health and safety. Reasons must be given if not reported on.
Corporate Governance Code creates an explicit link between ESG and corporate governance: issuers are required consider the effectiveness of their ESG governance structure.
REGULATORY UPDATE
2020
May 2020
Green and Sustainable Finance Cross-Agency Steering Group
Members include the Environment Bureau, Financial Services and the Treasury Bureau, Hong Kong Exchanges and Clearing Limited, Insurance Authority and the Mandatory Provident Fund Schemes Authority. Co-chaired by the Hong Kong Monetary Authority and the Securities and Futures Commission, the Steering Group aims to coordinate the management of climate and environmental risks to the financial sector, accelerate the growth of green and sustainable finance in Hong Kong and support the Government’s climate strategies.
REGULATORY UPDATE
2021
29 Jun 2021
SFC circular on disclosures by ESG Funds
Applies to SFC-authorised funds which incorporate ESG factors as their key investment focus and reflect such in the investment objective and/or strategy (‘ESG Funds’) (ie for SFC funds, 70% or more of the fund’s NAV; for UCITS funds, 2/3 NAV).
ESG Funds are required to disclose the following in their offering documents, among other things:
- Description of the ESG focus and a list of ESG criteria used to measure the attainment.
- The ESG investment strategy.
- The expected or minimum proportion of securities or other investments of the ESF Fund (in terms of net asset value) that are commensurate with the ESG focus.
- Reference benchmark and relevance to the ESG Fund (if applicable).
- Indication of additional information references where investors can find out about the ESG Fund, such as a website.
- Applicable risks associated with the ESG Fund’s ESG focus and associated investments strategies.
Applications to authorise ESG Funds must include a self-confirmation of compliance from the manager or a confirmation of compliance supported with independent third-party certification or fund label demonstrating compliance.
The manager should at least annually evaluate the underlying investments to make sure the ESG Fund continues to meet the stated ESG focus and SFC circular requirements and disclose information on that evaluation to investors.
REGULATORY UPDATE
20 Aug 2021
SFC circular on climate-related risks – fund managers
Expected standards for complying with baseline requirements for fund managers managing collective investment schemes and enhanced standards for fund managers with funds under management equal to or above HK$8 billion.
Requirements cover governance, investment management, risk management and disclosure.
Fund managers are expected to:
- establish a governance framework to consider the materiality and relevance of climate-related risks to their funds under management
- ensure that material risks are taken into account in its investment management process, and
- make relevant disclosures where responsible for the overall operation of a fund.
Officially titled ‘Circular to licensed corporations on management and disclosure of climate-related risks by fund managers’.
REGULATORY UPDATE
8 Oct 2021
Hong Kong's Climate Action Plan 2050
Four major decarbonisation strategies outlined:
- Net-zero electricity generation
- Energy saving and green buildings
- Green transport
- Waste reduction
These will lead Hong Kong towards the goal of carbon neutrality before 2050.
REGULATORY UPDATE
30 Dec 2021
HKMA - Supervisory Policy Manual GS-1 ‘Climate Risk Management’
Non-statutory guideline issued as a guidance note.
Provides high level guidance to AIs to build climate resilience by incorporating climate considerations into governance, strategy, risk management and disclosure.
AIs are required to develop an appropriate approach to disclosing climate-related information to enhance transparency and as a minimum make climate-related disclosures aligned with the Task Force on Climate-related Financial Disclosures recommendations as soon as practicable, with first disclosures no later than mid-2023 and then at least on an annual basis.
AIs may adopt ‘comply or explain’ approach.
HKMA will initially take a pragmatic approach in monitoring disclosures with a view to aligning no later than 2025.
REGULATORY UPDATE
2022
31 Mar 2022
Green and Sustainable Finance Cross-Agency Steering Group
Welcomes the publication of the International Sustainability Standards Board proposed standards for public consultation
REGULATORY UPDATE
30 Mar 2022
Green and Sustainable Finance Cross-Agency Steering Group
Carbon Market Opportunities for Hong Kong Preliminary Feasibility Assessment published. Preliminary assessment of feasibility for Hong Kong to pursue carbon market opportunities. Supports Hong Kong to develop a global, high quality voluntary carbon market, and foster cooperation with the Guangdong-Hong Kong-Macao Greater Bay Area and the Mainland.
INNOVATION
30 Jun 2022
Two-year plan to integrate climate risk into banking supervisory processes published.
Six key initiatives:
- including climate risk management as a standing item of prudential meetings
- updating the HKMA’s risk assessment framework for AIs to incorporate climate risk considerations
- conducting thematic examinations on selected areas of climate risk management
- integrating climate risk stress test into supervisor-driven stress testing framework
- enhancing the HKMA’s “greenness” assessment framework for Ais, and
- keeping the capital framework under review.
As part of the implementation of the two-year plan, the HKMA has issued a revised SPM module SA-1 on ‘Risk-based Supervisory Approach’ and enhanced the CAMEL assessment framework by incorporating climate risk into its risk-based supervisory process.
REGULATORY UPDATE
21 Jun 2022
Green and Sustainable Finance Cross-Agency Steering Group
Announces launch of information and data repositories and other progress in advancing Hong Kong’s green and sustainable finance development.
INNOVATION
Jul 2022
Formation of Hong Kong International Carbon Market Council
ORGANISATION LAUNCH
28 Oct 2022
Core Climate launched. An international carbon marketplace designed to allow for the trading of voluntary carbon credits and instruments. HKEX’s Core Climate is currently the only carbon marketplace that offers Hong Kong Dollar and Renminbi settlement for the trading of international voluntary carbon credits.
SCHEME LAUNCH
2023
2 Feb 2023
Financial Services Development Council (FSDC)
‘Road to Carbon Neutrality: Hong Kong's Role in Capturing the Rise of Carbon Market Opportunities’ research report released. Sets out key considerations conducive to the development of a VCM in Hong Kong.
INSIGHTS
30 May 2023
Circular on Prototype of a Green Classification Framework for Hong Kong published.
REGULATORY UPDATE
29 Aug 2023
HKMA
Circular on planning for net-zero transition published.
REGULATORY UPDATE
31 Nov 2023
Announcement that the HKEx intends to take into account the recommended approaches on the scaling and phasing-in of requirements available under the ISSB Adoption Guide when finalising the Listing Rule amendments. The implementation date of the Listing Rule amendments will therefore be postponed to 1 January 2025 to allow issuers more time to familiarise themselves with the new climate-related disclosure requirements.
REGULATORY UPDATE
7 Aug 2023
The Green and Sustainable Finance Cross-Agency Steering Group
Key priorities to further promote and consolidate Hong Kong’s role as a leading sustainable finance hub. Includes:
- adoption of IFRS S1
- workshops to help support SMEs in their sustainability planning and reporting.
REGULATORY UPDATE
2024
2024
Transition finance framework is under way to classify whether activities can help carbon-intensive firms reach net-zero emissions.
REGULATORY UPDATE
21 Feb 2024
The Green and Sustainable Finance Cross-Agency Steering Group
New greenhouse gas emissions calculation and estimation tools to support sustainability reporting published. Working with the Hong Kong University of Science and Technology.
REGULATORY UPDATE
2025
1 Jan 2025
HKEx - Disclosures
All issuers to report climate-related topics in accordance with IFRS S2 starting from 1 January 2025.
REGULATORY UPDATE
What’s next?
As regulatory frameworks develop in line with the increasing focus on sustainability and environmental responsibility, more compliance deadlines and business opportunities will arise.
In compliance markets, organisations have no choice - they must actively reduce emissions or invest in carbon offset projects. Yet many businesses, voluntarily opt to take the same path, seeking sustainability and meeting stakeholder demands.
Technology that enables more accurate measurement and reporting of emissions has amplified the need for businesses to demonstrate a commitment to carbon neutrality.
To ensure compliance, foster innovation and enhance reputation in the evolving low-carbon economy, organisations must stay informed about regulatory changes. They can also aspire to proactively adopt technologies and collaborate with government initiatives.
Collaboration between the government and private sector is crucial for the success of carbon market initiatives, fostering innovation and driving economic growth in a sustainable direction.
KWM is helping organisations with ESG strategies. This not only covers advice on suitable regulatory policies and processes to ensure compliance, but also to take advantage of the changes that lie ahead.
KWM KEY CARBON MARKETS CONTACTS
Richard mazzochi
PARTNER
HONG KONG
michael
lawson
Partner in charge
singapore
CLAIRE POTTER
Registered
Foreign Lawyer
hong kong
molly
su
Partner
shanghai
SUODI XI
Senior Associate
SHANGHAI
Minny
siu
Partner
hong kong
DALE
RAYNER
PARTNER
sydney
