Climate Change Risk Disclosure Framework for Hong Kong Prospectuses

Hong Kong’s climate-related disclosure regime is no longer a matter of voluntary best practice for IPO applicants. The Hong Kong Stock Exchange (HKEX) has made it a listing prerequisite. Under the Exchange’s enhanced climate disclosure requirements, effective from 1 January 2025, all Main Board and GEM listing applicants must include climate-related disclosures in their prospectuses that are “consistent with” the International Sustainability Standards Board (ISSB) IFRS S2 Climate-related Disclosures standard. This is not a future aspiration. The HKEX’s Listing Decision LD143-2024, published in December 2024, explicitly states that the Exchange will reject a listing application if the sponsor cannot demonstrate that the issuer has a “robust and auditable” climate risk management framework. The trigger for this regulatory shift is twofold: the HKEX’s own consultation conclusions on climate disclosures (published April 2024) and the Hong Kong government’s roadmap for mandatory sustainability reporting by 2027, as outlined in the Financial Services and the Treasury Bureau’s (FSTB) October 2024 policy statement. For a company targeting a listing in 2025 or 2026, the prospectus is now the first mandatory climate audit document, not a future annual report. This article provides the specific framework a listing applicant must build, from the pre-IPO business combination (BC) stage through to the final prospectus filing.

The Regulatory Baseline: ISSB S2 as a Listing Rule

The HKEX has codified the ISSB’s IFRS S2 standard directly into the Listing Rules. The Exchange’s approach is not to adopt a “comply or explain” model for climate disclosures in the prospectus context; it is a mandatory baseline. The relevant provisions are found in Chapter 2 of the Main Board Listing Rules and Chapter 2 of the GEM Listing Rules, specifically the new Appendix 27 (Main Board) and Appendix 24 (GEM), which came into effect for all listing applications submitted on or after 1 January 2025.

The Scope of Mandatory Disclosure

The prospectus must include four core pillars of climate-related financial disclosure, as defined by ISSB S2. First, Governance: the issuer must disclose the board’s oversight of climate-related risks and opportunities, including the specific board committee (e.g., the audit committee or a dedicated sustainability committee) responsible for climate risk. Second, Strategy: the issuer must identify and describe the climate-related risks and opportunities that could reasonably be expected to affect its business model, strategy, and cash flows over the short, medium, and long term. This includes a scenario analysis — the prospectus must state the scenarios used (e.g., a 1.5°C or 2°C scenario aligned with the Paris Agreement) and the resilience of the issuer’s strategy under those scenarios. Third, Risk Management: the issuer must describe its processes for identifying, assessing, and managing climate-related risks, including how these processes are integrated into the issuer’s overall risk management framework. Fourth, Metrics and Targets: the issuer must disclose the metrics used to measure and monitor climate-related risks and opportunities, including Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions. Scope 3 emissions, which cover the issuer’s value chain, are mandatory for all issuers unless the HKEX grants a specific exemption on the basis that the data is “not reasonably available.”

The Sponsor’s Due Diligence Obligation

The HKEX’s LD143-2024 places a direct due diligence obligation on the sponsor. The sponsor must verify the issuer’s climate risk disclosures with the same standard of care as financial or legal disclosures. The Listing Decision specifically states that the sponsor must provide a “sponsor’s declaration” confirming that it has reviewed the issuer’s climate risk management framework and that the framework is “consistent with the requirements of Appendix 27.” In practice, this means the sponsor must interview the issuer’s management, review the issuer’s internal climate risk policies, and test the issuer’s data collection processes for GHG emissions. The HKEX has indicated that it will reject applications where the sponsor’s declaration is “incomplete or unsubstantiated” — a standard that has already led to at least two known deferrals of Main Board applications in Q1 2025 (source: HKEX Weekly Listing Statistics, 18 March 2025).

Building the Framework from the BC Stage

For an issuer coming through a pre-IPO business combination (BC) — for example, a de-SPAC transaction or a reverse merger — the climate disclosure framework must be embedded from the start. The BC stage is the point at which the issuer’s corporate structure and governance systems are established. Waiting until the prospectus drafting stage is too late.

Structuring the Climate Governance Committee

The issuer must establish a board-level climate committee (or assign the function to the audit committee) at the BC stage. The committee’s terms of reference must include: (i) reviewing the issuer’s climate risk strategy at least quarterly; (ii) approving the issuer’s GHG emissions reduction targets; and (iii) overseeing the issuer’s scenario analysis. The committee must have at least one member with “demonstrable expertise” in climate science or sustainability — this is a requirement of the HKEX’s Board Diversity Policy (Listing Rules 13.92 and 13.93) as interpreted in the context of climate disclosure. The issuer must document this expertise in the prospectus, including the relevant qualifications or professional experience (e.g., a CFA charterholder with a sustainability credential, or a professional engineer with climate risk assessment experience).

Data Infrastructure for Scope 3 Emissions

Scope 3 emissions are the most challenging data point for most issuers. The HKEX requires the issuer to disclose Scope 3 emissions for all upstream and downstream activities, including purchased goods and services, capital goods, fuel and energy-related activities, upstream transportation and distribution, waste generated in operations, business travel, employee commuting, and use of sold products. The issuer must establish a data collection system at the BC stage that can capture this data from its supply chain. The HKEX’s guidance note (HKEX Guidance Letter GL-120-24, December 2024) recommends using the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard. The issuer must have a written data management policy that describes: (i) the source of each data point (e.g., supplier invoices, utility bills, industry averages); (ii) the methodology for calculating emissions (e.g., spend-based method, activity-based method); and (iii) the internal controls over the data collection process. The sponsor must test these controls as part of its due diligence.

Scenario Analysis and Financial Impact Quantification

The HKEX’s requirement for scenario analysis is the most technically demanding part of the framework. The issuer must present at least two climate scenarios: one aligned with a “low-carbon transition” (e.g., 1.5°C) and one aligned with a “high-emissions” or “business-as-usual” pathway (e.g., 4°C). The analysis must cover a time horizon of at least 10 years, and the prospectus must disclose the financial impact of each scenario on the issuer’s revenue, operating costs, capital expenditure, and asset values.

The Financial Impact Table

The prospectus must include a specific table quantifying the financial impact of climate risks and opportunities. For example, for a property developer listing on the Main Board, the table would show: (i) the percentage of the property portfolio located in areas with “high” or “very high” flood risk under the 4°C scenario (e.g., 25% of the portfolio by value, as defined by the HKMA’s 2023 Climate Risk Stress Test parameters); (ii) the estimated incremental capital expenditure required to retrofit buildings to meet the 1.5°C scenario’s energy efficiency standards (e.g., HKD 150 million over 10 years, or 3.2% of projected total capex); and (iii) the potential revenue loss from stranded assets under the 4°C scenario (e.g., HKD 80 million per year, or 1.5% of projected annual revenue). The HKEX requires that these figures be based on “reasonable and supportable information” — meaning the issuer must cite its sources (e.g., a third-party climate risk assessment report from a qualified consultant such as a member of the Task Force on Climate-related Financial Disclosures (TCFD) or a licensed engineering firm).

The Materiality Threshold

The HKEX uses a “materiality” threshold for climate disclosures, consistent with the ISSB’s definition of materiality. A climate-related risk or opportunity is material if it “could reasonably be expected to affect the issuer’s cash flows, access to finance, or cost of capital over the short, medium, or long term.” The issuer must apply this threshold to each disclosure item. For example, if the issuer’s Scope 1 and Scope 2 emissions are less than 1% of its total operating costs, the issuer may argue that the financial impact is not material and therefore not required to be quantified in the prospectus. However, the HKEX has warned that it will scrutinise such “immateriality” assertions closely. The issuer must provide a written justification for any exclusion, and the sponsor must confirm in its declaration that the exclusion is “reasonable and consistent with the issuer’s overall risk profile.”

The Prospectus Drafting Mechanics

The climate disclosure must be integrated into the prospectus in a specific location and format. The HKEX has not issued a prescribed template, but its guidance (GL-120-24) indicates that the disclosure should be placed in the “Risk Factors” section, the “Business” section, and the “Financial Information” section of the prospectus, with cross-references between them.

The Risk Factors Section

The “Risk Factors” section must include a dedicated sub-section on climate-related risks. The issuer must list each material climate risk (e.g., transition risk from carbon pricing, physical risk from extreme weather events) and describe the specific impact on the issuer’s business. The risk factor must be “specific to the issuer” — not a generic statement such as “climate change could affect our business.” The HKEX has rejected prospectuses with boilerplate climate risk factors. For example, a logistics company listing on GEM in January 2025 was required to amend its risk factor to include the specific financial impact of a 1-in-100-year flood event on its Hong Kong warehouse (source: HKEX Listing Decision LD145-2025, 12 February 2025). The risk factor must state the estimated financial loss (e.g., HKD 20 million) and the probability of occurrence (e.g., “high probability under the 4°C scenario”).

The Business Section

The “Business” section must describe the issuer’s climate strategy and how it is integrated into the issuer’s overall business model. This includes: (i) the issuer’s GHG emissions reduction targets (e.g., “net zero by 2050” or “50% reduction in Scope 1 and 2 emissions by 2035”); (ii) the issuer’s transition plan, including the specific actions it will take (e.g., switching to renewable energy, electrifying its fleet); and (iii) the issuer’s climate-related opportunities (e.g., developing low-carbon products or services). The issuer must also disclose the governance structure for overseeing the strategy, including the board committee responsible and the frequency of its reviews.

The Financial Information Section

The “Financial Information” section must include the climate-related financial impact table described in Section 3.1 above. The table must be presented in the same format as the issuer’s financial statements — that is, with clear line items and notes explaining the assumptions and methodologies. The table must be audited by the issuer’s auditor to the same standard as the financial statements. The HKEX has confirmed that the auditor’s report on the financial statements must include an opinion on the climate-related financial impact table, unless the issuer obtains a specific exemption from the Exchange.

Closing: Five Actionable Takeaways

1. Establish a board-level climate committee with a documented terms of reference and at least one member with demonstrable climate expertise before the BC stage — this is a listing prerequisite, not a post-IPO aspiration.
2. Build a data collection system for Scope 1, Scope 2, and Scope 3 GHG emissions using the GHG Protocol standard, and have the sponsor test the internal controls over this system as part of its due diligence.
3. Commission a third-party climate scenario analysis covering at least a 1.5°C and a 4°C pathway over a 10-year horizon, and quantify the financial impact on revenue, costs, capex, and asset values in a specific table.
4. Draft the prospectus’s climate risk factors as issuer-specific, quantified statements with estimated financial losses and probabilities — generic boilerplate language will trigger an HKEX query and potential rejection.
5. Ensure the auditor includes an opinion on the climate-related financial impact table in the audit report, or prepare a written justification for any exclusion based on a materiality threshold that the sponsor confirms as reasonable.