Setting and Disclosing Environmental Targets Post-Listing: New Requirements

The Hong Kong Stock Exchange (HKEX) has moved beyond voluntary climate reporting. Effective 1 January 2025, all Main Board and GEM issuers must comply with the new climate-related disclosure requirements under Appendix C2 of the Listing Rules, which mandate the setting and disclosure of environmental targets. This is not a forward-looking suggestion; it is a compliance obligation. For issuers that have recently listed or are planning to list, the window for designing a credible, data-backed environmental strategy has effectively closed. The HKEX’s decision to align with the International Sustainability Standards Board (ISSB) framework, specifically IFRS S2, means that boilerplate statements about “reducing carbon footprint” will no longer satisfy the regulator. The Exchange expects issuers to disclose Scope 1, 2, and 3 greenhouse gas (GHG) emissions, set quantitative targets, and explain the methodology used to track progress. For newly listed companies, this presents a dual challenge: building an ESG infrastructure from scratch while simultaneously meeting the same disclosure standards as a Hang Seng Index constituent.

The Mandatory Framework Under Appendix C2

The HKEX’s enhanced climate disclosure requirements, codified in Appendix C2 of the Listing Rules, represent the most significant expansion of ESG obligations since the 2019 ESG Reporting Guide overhaul. The Exchange has adopted a phased approach, but the 1 January 2025 effective date applies to all financial years commencing on or after that date, meaning the first full reporting cycle under the new rules will be for FY2025.

Core Disclosure Components

Issuers must now disclose four core elements for each material climate-related risk and opportunity: governance, strategy, risk management, and metrics and targets. The metrics and targets component is where the most rigorous new obligations lie. Under paragraph 29 of Appendix C2, issuers must disclose their Scope 1, Scope 2, and Scope 3 GHG emissions, measured in tonnes of CO2 equivalent (tCO2e). For Scope 3, the HKEX has granted a transitional relief period until FY2028, but the Exchange has made clear that this is not a waiver; it is a deferral. Issuers must still disclose their Scope 3 categories and explain why any categories are omitted.

The requirement to set a target is explicit. Paragraph 30 of Appendix C2 states that an issuer must disclose any climate-related targets it has set, and if it has not set a target, it must explain why. For issuers that have set targets, the disclosure must include the specific metric used to measure progress, the baseline year, the target year, and the methodology used. The HKEX has also introduced a cross-industry metric: the use of internal carbon prices. Issuers that apply an internal carbon price must disclose the price per tonne of CO2e and how it is applied in decision-making, per paragraph 31 of Appendix C2.

Compliance Timelines for Newly Listed Issuers

For a company that listed on the Main Board in June 2025, its first annual report under the new rules will be due for the financial year ending 31 December 2025. This means the issuer must have its GHG inventory, target-setting methodology, and internal carbon pricing mechanism operational within six months of listing. The HKEX has not granted a general exemption for newly listed companies. The only relief is the Scope 3 deferral, which is available to all issuers regardless of listing date.

The practical implication is clear: an issuer’s pre-IPO ESG work is no longer a marketing exercise. The prospectus must contain a credible pathway to compliance with Appendix C2, and the sponsor must be able to demonstrate that the issuer has the systems in place to generate the required data. The SFC’s Code of Conduct for Sponsors (paragraph 17) requires sponsors to exercise due diligence on all material information in the prospectus, and material ESG disclosures now fall squarely within that scope.

Target-Setting Methodologies and Cross-Border Considerations

The HKEX has not prescribed a single methodology for target-setting, but the Exchange has signalled a strong preference for science-based targets aligned with the Paris Agreement. In its 2024 consultation conclusions, the HKEX stated that it would consider an issuer’s target to be “robust” if it is based on a recognised framework such as the Science Based Targets initiative (SBTi) or the Transition Pathway Initiative (TPI).

SBTi Alignment and the Absence of a Safe Harbour

Issuers that adopt SBTi-aligned targets must disclose the specific pathway used (e.g., 1.5°C or well-below 2°C) and the validation status of the target. The SBTi validation process typically takes 12 to 18 months from submission to approval. For a newly listed company, this timeline is incompatible with the first reporting deadline. The HKEX has acknowledged this tension but has not created a safe harbour for issuers that have submitted targets to SBTi but not yet received validation. In practice, the Exchange expects an issuer to disclose its submission status and the expected timeline for validation, and to provide an interim target that is consistent with the submitted target.

For issuers that choose not to pursue SBTi validation, the HKEX requires a detailed explanation of the alternative methodology. The Exchange has stated that it will scrutinise any target that is not aligned with a recognised framework, and that it may require additional disclosure on the assumptions and limitations of the methodology used.

Jurisdictional Nuances for PRC-Listed Issuers

For issuers incorporated in the Cayman Islands or Bermuda but operating primarily in the PRC, the target-setting process must account for PRC regulatory requirements. The Ministry of Ecology and Environment (MEE) has issued mandatory GHG reporting requirements for certain industries, including power generation, steel, and cement. A PRC-based issuer that is required to report to the MEE must reconcile its HKEX disclosure with its MEE reporting. The two frameworks use different scoping methodologies: the MEE’s reporting is generally limited to Scope 1 and Scope 2 for industrial facilities, while the HKEX requires Scope 3 disclosure.

The issuer must disclose the reconciliation methodology in its annual report. Failure to do so may result in a query from the HKEX Listing Division, which has the power to request additional information under Listing Rule 13.10. The Listing Division has already issued guidance in 2024 that it expects issuers to “clearly state the basis of preparation” for any GHG data, including any departures from the GHG Protocol Corporate Standard.

Internal Carbon Pricing and Scenario Analysis

The HKEX has introduced two new cross-industry metrics that are likely to be unfamiliar to many newly listed issuers: internal carbon pricing and climate scenario analysis. These are not optional disclosures. Paragraph 31 of Appendix C2 requires an issuer to disclose whether it applies an internal carbon price, and if so, the price per tonne of CO2e and the scope of application.

Implementing an Internal Carbon Price

An internal carbon price is a shadow price applied to investment decisions, procurement, and capital allocation. For a newly listed issuer with limited resources, the simplest approach is to use a proxy price based on the HKEX’s recommended range of HKD 100 to HKD 300 per tCO2e, which the Exchange published in its 2023 “Guidance on Climate Disclosures”. The issuer must disclose the specific price used and the rationale for selecting that price. If the issuer applies different prices to different business units or geographies, it must disclose the basis for differentiation.

The internal carbon price must be applied to material capital expenditure decisions. The issuer must disclose the total amount of capital expenditure that was subject to the internal carbon price during the reporting period. For a newly listed issuer that has not yet made any material capital expenditure decisions, the HKEX expects a statement to that effect, along with a commitment to apply the internal carbon price to future decisions.

Climate Scenario Analysis

Climate scenario analysis requires an issuer to assess the resilience of its business model to different climate scenarios, including a 1.5°C scenario and a 4°C scenario. Paragraph 11 of Appendix C2 requires the issuer to disclose the scenarios used, the time horizons considered, and the key assumptions. For a newly listed issuer, the HKEX has granted a one-year transitional relief: the first scenario analysis must be completed within 12 months of the issuer’s first annual report under the new rules. This means an issuer that lists in June 2025 must complete its scenario analysis by 31 December 2026.

The scenario analysis must be quantitative where possible. The issuer must disclose the financial impact of each scenario on revenue, operating costs, and capital expenditure. If the issuer is unable to quantify the impact, it must explain the limitations and provide a qualitative assessment. The HKEX has stated that it will not accept a generic statement that “climate change may affect our business” as a substitute for a detailed scenario analysis.

Enforcement and Liability Risks

The HKEX has made clear that the new climate disclosure requirements are subject to the same enforcement framework as other Listing Rule obligations. The Listing Division can issue a “guidance letter” for minor deficiencies, but material non-compliance can result in a public censure, a trading suspension, or a referral to the SFC for enforcement action under the Securities and Futures Ordinance (Cap. 571).

Director Liability

The directors of an issuer are jointly and severally liable for the accuracy of the annual report, including the climate disclosures. The SFC’s enforcement track record in ESG cases is limited, but the regulator has signalled its intent to pursue cases of “greenwashing”. In 2023, the SFC issued a circular reminding directors that “making false or misleading statements in ESG disclosures may constitute market misconduct” under Part XIII of the SFO. The SFC has also stated that it will consider the adequacy of an issuer’s internal controls over ESG data when assessing director liability.

For a newly listed issuer, the risk of a material misstatement in the first annual report is elevated. The issuer’s ESG data collection systems are likely to be immature, and the pressure to present a favourable picture may lead to overstatement of progress against targets. The sponsor and the legal adviser should ensure that the issuer’s ESG committee has a documented process for verifying data, and that the board has reviewed and approved the target-setting methodology.

Third-Party Assurance

The HKEX has not yet mandated third-party assurance for climate disclosures, but the Exchange has stated that it will review the need for mandatory assurance in 2026. In the interim, the HKEX strongly recommends that issuers obtain “limited assurance” from a qualified assurance provider. For a newly listed issuer, obtaining limited assurance on Scope 1 and Scope 2 emissions is a prudent risk management measure. The assurance report must be included in the annual report, and the issuer must disclose the assurance provider’s qualifications and the scope of the assurance engagement.

The cost of limited assurance for a mid-cap issuer is typically HKD 200,000 to HKD 500,000 per year, depending on the complexity of the operations. For a newly listed issuer, this cost is material but necessary. The HKEX’s 2024 “Review of ESG Disclosures” found that issuers with third-party assurance had significantly fewer disclosure deficiencies than those without.

Actionable Takeaways

• Pre-IPO ESG infrastructure is no longer optional: Sponsors must verify that the issuer has a documented GHG inventory, a target-setting methodology, and an internal carbon pricing mechanism before the prospectus is filed.
• Adopt an interim target immediately: If SBTi validation is not feasible within the first reporting cycle, set an interim target based on a recognised framework and disclose the validation timeline.
• Reconcile PRC regulatory reporting with HKEX requirements: For PRC-based issuers, ensure that MEE reporting data is mapped to the GHG Protocol Corporate Standard and that any scope differences are disclosed.
• Apply an internal carbon price from day one: Use the HKEX recommended range of HKD 100 to HKD 300 per tCO2e, and document how the price is applied to capital expenditure decisions.
• Obtain limited assurance on Scope 1 and Scope 2 emissions before the first annual report: This reduces the risk of a material misstatement and demonstrates board-level commitment to compliance.