ESG Insights (Apr 2023): ESG Around the World

ESG Around the World

World’s largest green hydrogen project begins in Inner Mongolia [1]

China Petroleum & Chemical Corporation (Sinopec) has launched the world’s largest green hydrogen-coal chemical project in Inner Mongolia. The project would produce green hydrogen directly, leveraging the rich solar and wind energy resources in the region. US$828 million of investment has been made to this project, with 30,000 tons of green hydrogen and 240,000 tons of green oxygen expected to be produced annually. The project also covers 450MW wind and 270MW solar power generation, as well as hydrogen storage and transport. It is estimated that 1.43 million tons of carbon emissions would be reduced by the project annually. 

Insight: China has an ambitious plan of green hydrogen production - the Hydrogen Development Plan 2021-2035 stated the target of producing 100,000 to 200,000 tonnes of green hydrogen annually by 2025. This project is apparently a key milestone in China’s clean hydrogen journey, yet this is only one of the numerous hydrogen initiatives happening in China. For instance, Sinopec started operating China’s first methanol-to-hydrogen and hydrogen refueling service station [2] , and China’s first hydrogen-powered vessel entered operation [3] . In Hong Kong, the SAR Government’s 2023-24 Budget earmarked HK$200 million for commencing trials of hydrogen fuel cell electric double-deck buses and heavy vehicles. The SAR government also approved various trial projects, including hydrogen refuelling facility, hydrogen fuel cell bus and hydrogen extraction facility. [4]

China plans to mandate ESG disclosures for listed companies [5]

Mainland Chinese regulators are developing a framework to mandate ESG disclosures for companies listed in China market, Bloomberg reports according to people familiar with the matter. In collaboration with advisory bodies and rating agencies, regulators are designing a framework that would be accepted by the global community as well as applicable to the Chinese market. The disclosure standards would initially be on a “comply or explain” basis, and might transition to a fully mandatory disclosure requirements later. State-owned enterprises in China would be the first to comply with such requirements by earliest the end of 2023.

Insight: To achieve China’s ambitious “dual carbon” goals, corporates’ ESG disclosures are necessary to facilitate capital allocation decisions which are in line with the nation’s decarbonisation focus. There have been efforts to enhance ESG disclosures. For instance, state-council backed think tank China Enterprise Reform and Development Society issued voluntary disclosure guidelines in June 2022 [6]; Shenzhen Stock Exchange strengthened ESG disclosure requirements in February 2023 [7] . Meanwhile, International Financial Reporting Standards (IFRS) Foundation and the Ministry of Finance of China signed a Memorandum of Understanding to set up a Beijing office with focus of leading and executing International Sustainability Standards Board‘s (ISSB) strategy [8]. It is of no doubt that ESG disclosures will be under the spotlight for the years to come. 

ISSB expects to issue sustainability disclosure standards at the end of Q2 2023 [9]

The ISSB has confirmed all the technical content of the initial IFRS Sustainability Disclosure Standards after considering and addressing feedbacks received from last year’s consultation. The Standards is expected to be published at the end of Q2 2023 and would become effective in January 2024. In addition, to increase the interoperability of ISSB’s standards and European Sustainability Reporting Standards (ESRS), ISSB also agreed to reference ESRS in an appendix to the General Sustainability-related Disclosures Standards (S1). 

Insight: ISSB was established at COP26 in 2021, with the aim to create a global baseline of sustainability disclosure requirements. Market participants welcomed ISSB’s work to promote global convergence of sustainability reporting standards. The standards would consist of S1 General Sustainability-related Disclosures, where companies must disclose sustainability-related risks, opportunities, and relevant financial disclosures; and S2 Climate-related Disclosures, which was developed based on Task Force on Climate-Related Financial Disclosures’ recommendations, with industry-based disclosure requirements based on Sustainability Accounting Standards Board (SASB) Standards.

UNPRI announced new reporting framework for signatories

United Nations-supported Principles for Responsible Investment (UNPRI) released the 2023 Reporting Framework. Key changes in the reporting framework aim to address respondents’ feedback on reporting effort, suitability to asset owners, prescriptiveness, and applicability of practices as well as ambiguity in indicators and terminology. For instance, the number of reporting indicators would be reduced, and asset owners would no longer have to report on asset class module. The terminology of indicators has also been revised to avoid being too prescriptive or generic.

Insight: UNPRI represents signatories across financial sectors with assets amounting to US$ 121 trillion [10] . Signatories are committed to six responsible investment principles, for example, incorporating ESG issues in investment analysis, decision-making processes and ownership policies and practices, as well as seeking ESG disclosures from investees. These signatories are also required to report their responsible investment activities annually. The Hang Seng Indexes Company has also become a signatory of the UNPRI since 2022. 

Financial regulators worldwide actively take actions to combat greenwashing and to enhance ESG disclosures

The Financial Conduct Authority (FCA) of the United Kingdom issued Asset Management Supervision Strategy Letter, mentioning that given the risks of misleading or inaccurate claims about ESG and sustainable investing, FCA would test whether firms act according to the claims in their communication with investors [11]. In the United States, the Securities and Exchange Commission (SEC) announced ESG as one of the examination priorities – SEC would examine if funds are operating in line with their disclosures, and if ESG products are appropriately labeled [12]. Meanwhile, the European Central Bank and European Supervisory Authorities [13] announced that they are working to include new, proportionate and targeted climate-related information to enhance structured finance products disclosure standards, as securitisation transactions are often linked to assets with direct physical or transition climate-related risk exposures [14] . In addition, Canada published new climate-related financial disclosure requirements for banks and insurance companies [15], and India also announced proposals to strengthen disclosures on ESG investing, e.g. enhanced stewardship reporting, ESG schemes’ minimum investments in companies which provided assurance on sustainability disclosures [16] . 

Insight: To ensure financial capitals flow towards companies which truly integrate ESG and climate considerations into their business and operations, and companies which are truly sustainable, it is essential to enhance disclosures on company-level and investment portfolio-level. This would mitigate greenwashing risks and offer better investor protection as more transparent and comprehensive information would be available to facilitate investors’ decision-making. We expect to see more financial market regulators initiating or improving regulation of ESG disclosures in the coming years.

Hong Kong SAR government issued world’s first tokenised sovereign green bond [17]

HKSAR Government has become the world’s first government to offer tokenised green bonds. The HK$800 million one-year bond was priced at yield of 4.05%. The bond is cleared and settled on Hong Kong Monetary Authority ‘s Central Moneymarkets Unit. Coupon payment, secondary trading settlement, redemption during maturity and other processes of bond life cycle would be digitalised and performed on the private blockchain network.

Insight: Bond tokenisation means the ownership of bond is represented by a token on blockchain. Distributed ledger technology (DLT) has been adopted to issue the tokenised green bond, meaning that the beneficial interest in a bond is recorded on a DLT ledger instead of conventional computerised book entries. The immutability and transparency offered by the tamper-poof technology explains why we have seen more relevant use cases in the financial market. Indeed, HKSAR government has been active in promoting the sustainable development of virtual asset sector locally, by issuing the Policy Statement on Development of Virtual Assets in October 2022.

Disclaimer

The information contained herein is for reference only. Hang Seng Indexes Company Limited (‘Hang Seng Indexes’) ensures the accuracy and reliability of the information contained herein to the best of its endeavours. However, Hang Seng Indexes makes no warranty or representation as to the accuracy, completeness or reliability of any of the information contained herein and accepts no liability (whether in tort or contract or otherwise) whatsoever to any person for any damage or loss of any nature arising from or as a result of reliance on any of the contents of this document, or any errors or omissions in its contents and such contents may change from time to time without notice. 

Hang Seng Stock Connect China A Low Carbon Select Index (the "Select Index") is published by HSIL. HSIL has contracted with ISS and Sustainalytics respectively to use the data from ISS ESG and Sustainalytics which forms part of the data included to maintain and calculate the Select Index. ISS ESG and Sustainalytics are trademarks of ISS and Sustainalytics respectively and have been licensed for use by HSIL. The Select Index is not owned, sponsored, endorsed or promoted by ISS or Sustainalytics and they do not make any representation regarding the advisability of investing in products that are based on the Select Index or otherwise relying on the Select Index for any purpose and neither ISS, Sustainalytics nor HSIL shall have any liability for any errors or omissions in the Select Index or any values thereof.

The information contained herein does not constitute any express or implied advice or recommendation by Hang Seng Indexes for any investments. Investment involves risks. Prospective investors should seek independent investment advice to ensure that any of their decisions is made with regard to their own investment objectives, financial circumstances and other particular needs. Prospective investors should also note that value of securities and investments can go down as well as up and past performance is not necessarily indicative of future performance.

? Hang Seng Indexes Company Limited 2023. All rights reserved.

[1] Sinopec (22 Feb 2023): Sinopec Launches the World's Largest Green Hydrogen-Coal Chemical Project in Inner Mongolia

[2] Sinopec (16 Feb 2023): China's First Integrated Methanol-to-Hydrogen and Hydrogen Refueling Service Station Now in Operation

[3] China Yantze Power (20 Mar 2023): 国内首艘 500 千瓦氢燃料电池动力船“三峡氢舟 1”号下水

[4] news.gov.hk (28 Mar 2023): Trial projects on fuel tech approved

[5] Bloomberg (22 Feb 2023): China Mulls Mandatory ESG Disclosures for Domestic Public Firms

[6] China Enterprise reform and Development Society (18 Apr 2022): 《企业 ESG 披露指南》团体标准发布会暨中国企业大讲堂（第五期）在京成功召开

[7] Shenzhen Stock Exchange (10 Feb 2023): 深交所修订行业信息披露指引 优化制度供给推动上市公司高质量发展

[8] IFRS Foundation (29 Dec 2022): IFRS Foundation and MoF China sign an MoU to establish an ISSB office in Beijing

[9] ISSB (17 Feb 2023): ISSB ramps up activities to support global implementation ahead of issuing inaugural standards end Q2 2023

[10] As of 30 Mar 2021

[11] Financial Conduct Authority (3 Feb 2023): Portfolio letter: Our Asset Management Supervision Strategy

[12] U.S. Securities and Exchange Commission (7 Feb 2023): SEC Division of Examinations Announces 2023 Priorities

[13] European Supervisory Authorities include the European Authority Insurance and Occupational Pensions Authority (EIOPA) , the European Securities and Markets Authority (ESMA) and the European Banking Authority

[14] European Supervisory Authorities and European Central Bank (13 Mar 2023): Joint ESAs-ECB Statement on disclosure on climate change for structured finance products

[15] Office of the Superintendent of Financial Institutions (Mar 2023): Climate Risk Management

[16] Securities and Exchange Board of India (20 Feb 2023): Consultation Paper on ESG Disclosures, Ratings and Investing

[17] Hong Kong Monetary Authority (16 Feb 2023): HKSAR Government’s Inaugural Tokenised Green Bond Offering