Hong Kong corporates face a pressing need to shore up their environmental, social and governance ( ESG ) reporting practices to adapt to the evolving sustainable reporting landscape, according to a recent report.

New climate disclosure requirements by the Hong Kong Exchanges and Clearing for listed companies, which came into effect on January 1, put increased emphasis on mandatory Scope 1 and 2 emission disclosures and tightened rules on releasing Scope 3 emission-related data.

Meeting these demands, however, requires increased effort on the part of Hong Kong companies and a revamp of their reporting skills. Less than half, or 40%, of the surveyed corporates voluntarily release Scope 3 emission figures, despite two-thirds of them stating that this category is their largest carbon footprint contributor, finds the joint DBS Hong Kong- KPMG research report.

Scope 3 negligence

Measurement of Scope 3 emissions, which are tied to supply-chain operations, is often derailed by companies not understanding their value chain activities and not having a track record of them. These problems are due to the high cost of measurement, unaligned disclosure requirements involving Chinese regulators, and the lack of awareness among suppliers, all of which continue to undercut corporates’ journey towards comprehensive emission reporting.

Closer bonding between companies and suppliers, the report argues, is the key driver of a transparent supply-chain management as the intertwined supply network can spread sustainability practices to all companies involved in the network.

“By working closely with suppliers and other value chain partners to drive ESG improvement,” the report says, “companies can unlock a multiplier effect that amplifies the impact of their sustainability effort.”

Lack of defined targets

Another constraint to making effective ESG headway is the weak footing on which sustainability targets are grounded. Of the Chinese companies with carbon reduction targets, less than a quarter aligned their objectives with the Paris agreement and only a staggering 15% of them do so using a science-based framework.

Carbon reduction targets, more often than not, are designed without baselines, adding complexity when comparing progress and to gaining a comprehensive picture of the emission profile.

In the absence of well-defined targets and a consistent approach to their calculation, not only is the target credibility dented, but companies are prone to losing track of their progress and motivation for improvement. Digital platforms and existing target-setting methodologies, identified in the report, can be leveraged to enhance data reliability.

Untapped transition finance market

The sustainable transformation needs to be backed by a well-established transition plan. In stark contrast, the report finds, only 10% of respondents formulated a mature plan that lays out the ambition, action and accountability with full understanding and extensive details.

The transition market didn’t gain enough attention, particularly when it comes to related investments. Along with the already tepid use of sustainable finance, none of the surveyed respondents tapped transition finance, despite the Hong Kong Monetary Authority having  extended the scope of its Green and Sustainable Finance Grant Scheme to cover this type of financing.

To grapple with Scope 3 emission reporting, corporates are advised to adapt a more innovative approach to solutions and funding.

“These sustainable trade or supply-chain financing solutions remain largely unexplored by the companies we interviewed,” the report states. “This represents a potential opportunity for these organizations to access additional financing mechanisms to support their broader sustainability goals and emission reduction efforts across their value chains.”