In October 2021, the Government of Hong Kong published its Climate Action Plan 2050. The plan affirms, inter alia, its target of achieving carbon neutrality by 2050, states a new target of reducing carbon emissions by 2035 by half relative to 2005 levels, and outlines the Government’s strategies for decarbonisation and budgets for mitigation and adaptation.1 The proposed policies may have substantial impacts on the operations of Hong Kong corporations, in particular those which are in, or are closely connected to, high emission sectors.
Hong Kong regulators recognise the foreseeability of climate-related financial risks and are proactively addressing them.2 In December 2020, the Hong Kong Monetary Authority (HKMA), a member of the NGFS, announced that reporting in accordance with TCFD recommendations will be mandatory for companies in the banking, asset management, insurance and pension fund sectors by 2025.3
Additionally, the HKMA issued a circular regarding best practices by major international banks in managing climate risks, as well as several other publications regarding green and sustainable finance and the pricing in of climate transition risks by banks.4 In June 2022 the HKMA wrote to all authorised institutions to set out its two-year plan to integrate climate risk into its supervisory role, and in December 2022, issued revisions to its Supervisory Policy Manual which included climate change as an emerging risk type which authorised institutions should consider.5
The Hong Kong Securities and Future Commission (SFC) and the HKMA also co-chair Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group. The Steering Group includes several government agencies and aims, amongst other things, to coordinate the management of climate and environmental risks to the financial sector and to accelerate the growth of green and sustainable finance.
In November 2020, the Chief Executive of the HKMA acknowledged that “[c]limate risk is one of the biggest threats to our planet and future generations” and that regulators must determine how the financial sector can “play its part in tackling this risk”.6 In February 2021, speaking about the international climate finance agenda, the CEO of the SFC, warned that:
International organisations, national authorities and the private sector now have no real option other than to participate. If they do not, they risk being left behind as investments shift in favour those businesses which can properly describe how they are managing the strategic risks resulting from climate change.7
Directors' Duties and Climate Change
Hong Kong is a common law jurisdiction. Directors’ duties in Hong Kong are informed by a combination of statute (principally the Companies Ordinance (Cap 622)) and common law. Directors owe fiduciary duties to the company including the duty to act bona fide in the best interests of the company, the duty to avoid unauthorised conflicts of interest and unauthorised receipt of profits, and the duty to act for proper purposes. However, these duties have not been codified; only the common law duty to exercise reasonable care, skill and diligence has been. Section 465 of the Companies Ordinance provides that a director of a company must “exercise reasonable care, skill and diligence”.
A 2021 legal opinion from Alexander Stock SC and Jennifer Fan of Temple Chambers found that, to the degree that climate risks intersect with and affect the best interests of a company, directors are both “entitled” and “obliged” to take these into account when discarding their obligations.8 With respect to climate change, the two most salient directors’ duties are the duty to act bona fide in the best interests of the company and the duty to exercise reasonable care, skill and diligence. In Hong Kong, the best interests of the company are broadly understood as being commensurate with the financial interests of the members as a whole.9 As such, under the law of Hong Kong, directors are entitled to consider climate risks in their decision-making processes to the extent that they have, or are likely to have, an impact upon the financial interests of the company’s members. In fact, directors who fail to consider climate risks may fall short of their duty to act in the best interests of the company given the prominence and foreseeability of climate-related financial risks. Notably, a failure to consider could encompass situations where climate risks were considered but not given adequate weight or considered on the basis of inadequate or incorrect information. Furthermore, in a jurisdiction such as Hong Kong where financial regulators have undertaken concerted and coordinated efforts to improve climate risk literacy and governance, the objective standard expected of directors in addressing climate risks could foreseeably be higher than in other jurisdictions.
Under the law of Hong Kong, the duty of care, skill and diligence comprises an objective and subjective element. The standard of reasonable care, skill and diligence expected is based on what could reasonably be expected of a person carrying out the functions of a director,10 as well as the subjective knowledge, skill and experience the impugned director actually has.11 Importantly, the subjective characteristics of the director in question can only raise the expected standard.12
The duty of care, skill and diligence owed by directors under the law of Hong Kong is relevant to climate risks in several respects. These include:
- the establishment and maintenance of risk management processes;
- due diligence and informed decision making;
- supervision of management and committees;
- assessment of financial statements; and
- disclosure of material information in accordance with the Hong Kong Stock Exchange Listing Rules.
Consequently, directors who dismiss, or unduly diminish the significance of climate risks, foreseeably face personal liability on several fronts under the law of Hong Kong.13
Directors' Disclosure Obligations and Climate Change
Part XIVA of the Securities and Futures Ordinance (Cap 571) (SFO) provides that listed corporations, and therefore their directors, have an obligation of continuous disclosure regarding information which is likely to materially influence the price of their shares in certain circumstances. The SFO imposes potential liability on those responsible for issuing public communications for failure to take reasonable care in respect of the accuracy of information involved.14
The Hong Kong Stock Exchange’s (HKEX) Main Board Listing Rules require disclosure of information regarding profit forecasts, among other matters. Relevantly, such disclosure could foreseeably be precipitated by a climate-related financial risk being realised.
Under rule 13.24B (1) of the HKEX Main Board Listing Rules, if an event occurs during the profit forecast period which makes the assumptions underlying the profit forecast materially different, the issuer must announce this information. Furthermore, rule 13.24B (2) provides that if there are activities outside the issuer’s ordinary course of business that materially contributes to or reduces the profit stated in the profit forecast, the issuer must announce this information. In addition, rule 13.91 requires companies to furnish an annual ESG report on a comply or explain basis. In the report, it is mandatory to disclose, amongst other matters:
- the board’s oversight of ESG issues;
- the board’s ESG management approach and strategy, including the process used to evaluate, prioritise and manage material ESG-related issues; and
- how the board reviews progress made against ESG-related goals and targets with an explanation of how they relate to the companies’ operations.
The HKEX is pressing for greater awareness and disclosure of climate-related financial risks as well as increased uptake of sustainable finance practices. In December 2019, the HKEX introduced new ESG requirements, requiring that issuers must, amongst other things, disclose ‘significant’ climate-related issues which have, or may have, an impact on the company.15 HKEX conducted a review of issuers’ ESG disclosures in 2022, and found that the introduction of the rules had driven behavioural changes amongst issuers, and encouraged efforts in managing climate change risk.
The SFC has stated that it supports the ISSB standards, and will work with the HKEX to consider a framework aligned with the ISSB standards for listed companies in Hong Kong.16
In April 2023, HKEX published a consultation paper seeking market feedback on proposals to enhance climate-related disclosures under the ESG framework.17 The proposed amendments of the ESG reporting framework under the Listing Rules are designed to align the framework with international standards, including the upcoming ISSB standards on climate, and to make such disclosures mandatory (rather than continuing on the existing ‘comply or explain’ basis). The proposals mark a significant milestone in achieving the commitment to mandate TCFD-aligned disclosures by 2025 as announced by the Hong Kong Green and Sustainable Finance Cross-Agency Steering Group. Acknowledging the readiness of the issuers and their concerns, the HKEX has proposed interim provisions for certain disclosures (e.g. financial effects of climate-related risks and opportunities, scope 3 emissions and certain cross-industry metrics) for the first two reporting years following the effective date of 1 January 2024.
In December 2020, HKEX launched the Sustainable and Green Exchange (STAGE), the first of its kind in Asia. The STAGE is an online portal designed to provide greater information, access, and transparency on a wide range of sustainable green and social investment products. In October 2022, HKEX launched Core Climate, an international carbon market, to facilitate effective and transparent trading of carbon credits.18 In addition, financial institutions and funds will be subject to increased climate disclosure obligations. As noted above, the HKMA will also require directors in the banking, asset management, insurance, and pension fund sectors to ensure that their companies provide TCFD-aligned disclosures by 2025.19 More recently, however, the HKMA has issued guidance on how authorised financial institutions are to manage climate-related risks, and has stated that it expects such institutions to prepare climate-related disclosures no later than mid-2023.20 Asset managers in particular are likely to face more onerous disclosure obligations.
The SFC has issued a circular to management companies of SFC-authorised unit trusts on the disclosures which ESG funds should make, including a description of the ESG focus of the fund and its investment strategy.21 In addition, in August 2021, the SFC issued upcoming amendments to the Fund Manager Code of Conduct, which require fund managers to consider climate risks (defined as physical, transition and liability risks) in their investment and risk management processes, and managers of at least HK$8 billion in assets to make a reasonable effort to report their investees’ and funds’ Scope 1 and 2 greenhouse gas emissions from November 2022.22 Therefore, both ESG-focused funds and other funds will be required to disclose ESG-related information (including, where relevant, information relating to climate change).
Hong Kong boasts a relatively high biodiversity despite its area coverage, including one third of the total bird species in China.23 The CCLI has published a report on how companies in Hong Kong and other jurisdictions may depend on biodiversity for the functioning of their business models.24 Biodiversity risks may constitute material financial risks which boards are required to consider within the purview of their duties and disclosure obligations.
Regulatory expectations in relation to biodiversity loss may be increasing. HKEX views governance of environmental issues as inextricably linked to good corporate governance. With TCFD recommendations becoming mandatory for companies in Hong Kong’s banking, asset management, insurance and pension fund sectors by 2025, adoption of the TNFD framework into regulations may follow.25 More ESG related policy and regulatory initiatives, which may include biodiversity issues, are expected as Hong Kong develops its ambition to be the global ESG investment hub of Asia.
ESG and climate litigation is not common in Hong Kong. However, in light of the increased environmental litigation in other parts of the world and its likelihood in Asia, there is a possibility of environmental lawsuits in Hong Kong.26 If biodiversity risks were to intersect with and affect the best interests of a company, their relevance may be similar to that of climate risks, prompting biodiversity related litigation against a company or its directors, including for failure to disclose transition risk, or for greenwashing.27 These factors may have a bearing on the relevance of biodiversity risk to the discharge of directors’ duties.
Practical Implications for Directors
Given that Hong Kong’s regulators have become increasingly emphatic regarding the need for companies and their directors to adopt climate resilience measures in business practices and disclosure, and in particular the above-noted facts that the HKMA will be making TCFD disclosure mandatory for its supervised entities by 2025; the involvement of HKMA and SFC in the Green and Sustainable Finance Cross-Agency Steering Group, and new ESG requirements by the HKEX, with specific attention to climate, well-counselled boards should:
- delegate climate risk identification and evaluation to a clearly-identified team in management which reports directly to the CEO and board;
- put on the agenda for the board within 3 or 6 months a process to start developing a climate transition roadmap to 2050 with transparent carbon neutrality or reduction targets, with clear interim targets to 2040, 2030, and within the current rolling multi-year strategic plan, and periodically thereafter report back to the board;
- delegate to the appropriate committee(s) of the board, such as risk, audit, legal and governance, scenarios/strategy, nominations/remuneration, or sustainability/corporate responsibility, the task of translating the long-term strategy into a clear decision-making process for each aspect that is relevant to each committee; and
- discuss with disclosure counsel, to develop an external engagement and communications plan and to oversee rigorous disclosure and accounting.
- Commonwealth Climate and Law Initiative