SustainabilityConnect Newsletter October 2024

Hong Kong Proposes Global Standard Sustainability Reporting to Enhance Corporate Transparency.

Hong Kong is taking a significant step towards standardizing sustainability reporting by aligning its new reporting framework with global standards. The Hong Kong Institute of Certified Public Accountants (HKICPA) has proposed two key standards, HKFRS S1 and S2, mirroring the International Sustainability Standards Board (ISSB) under IFRS guidelines. This move aims to provide more consistent and comparable ESG data, offering better insights for investors into sustainability risks and opportunities companies face.

The introduction of HKFRS S1 and S2 follows a detailed stakeholder consultation and technical feasibility study. These standards will primarily apply to publicly accountable entities, including banks, insurance firms, and large corporations. By aligning with the International Sustainability Standards Board (ISSB) framework, the HKICPA aims to bolster investor confidence and position Hong Kong as a leading hub for sustainable finance in the region.

As part of this initiative, the government plans to release a comprehensive roadmap, which will outline the future of sustainability reporting for businesses across various sectors. The roadmap will serve as a guide for companies to adapt to these evolving requirements, emphasizing the importance of integrating ESG factors into corporate strategies.

Updapt Views: Adopting HKFRS S1 and S2 will provide businesses with a comprehensive framework to effectively manage sustainability risks and opportunities. Companies will be able to benchmark their ESG performance globally, which will enhance their operational resilience and competitiveness. Aligning with international standards will open access to global markets and investment opportunities, particularly for businesses looking to expand beyond Hong Kong.

EPA Introduces New Standards to Strengthen Sustainable Federal Procurement.

The U.S. Environmental Protection Agency (EPA) has introduced updates to its Recommendations of Specifications, Standards, and Ecolabels for federal procurement. These updates aim to guide government buyers in selecting more sustainable, climate-friendly products. The proposal adds 14 new standards across healthcare, laboratories, and clothing categories, and expands guidelines for food service ware to include reusable and compostable items. The initiative helps reduce environmental impact, including the use of harmful chemicals like PFAS.

The EPA rigorously assessed the environmental sustainability of third-party standards and ecolabels through its Framework for the Assessment of Environmental Performance Standards and Ecolabels, ensuring that they meet high environmental performance standards. By enhancing federal purchasing strategies, the EPA seeks to streamline the identification of eco-friendly products in various sectors. The move aligns with broader sustainability goals, which aim to cut federal procurement-related emissions and promote products that conserve energy and water. These recommendations will help federal buyers make informed decisions, reducing pollution and fostering sustainable practices.

Updapt Views: The federal government, as the largest purchaser of goods and services with annual spending exceeding $700 billion, is set to create widespread ripple effects across industries through the adoption of new EPA standards. These changes will require businesses that supply the government to meet higher environmental criteria, likely driving innovation and encouraging the adoption of greener production methods. As federal agencies prioritize sustainable, eco-friendly products, companies will need to align with these standards to stay competitive, leading to more environmentally responsible practices across supply chains and industry operations.

Australia Mandates Climate Disclosures to Boost Corporate Transparency.

Australia has strengthened corporate responsibility with the passing of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024. The legislation mandates that large businesses and financial institutions include climate-related financial disclosures in their annual reports starting in 2025. The Bill has passed both the Senate and the House of Representatives.

A major amendment by the Senate requires companies to conduct scenario analyses in their climate statements. Businesses must now assess how their strategies would hold up under two scenarios: a temperature rise exceeding 2°C and one limited to 1.5°C. This helps companies prepare for both physical climate risks and the shift to a low-carbon economy.

The reporting requirements will be phased in, starting with large entities in 2025. Mid-sized firms will have until mid-2026, with smaller companies following by mid-2027. This phased approach ensures businesses can adjust while prioritizing corporate climate accountability.

Companies will need to report on governance, risk management, strategy, and emissions. From the second year, they must also disclose Scope 3 emissions. These reports will highlight the financial impacts of climate risks on revenue, cash flow, and asset values.

The reports will be subject to audits, with standards set by the Auditing and Assurance Standards Board (AUASB). Full audit requirements will be phased in by 2030 to ensure the reliability of these climate disclosures.

Updapt Views: To prepare for the new climate disclosure law, companies should start by conducting a thorough gap analysis of current sustainability practices, ensuring alignment with upcoming regulations. Developing robust data collection systems for Scope 1, 2, and 3 emissions, integrating scenario analysis into strategic planning, and setting clear governance structures are critical steps for compliance.

EU introduces flight emissions labels to drive transparency in aviation.

The European Commission has introduced a Flight Emissions Label (FEL) to improve transparency on the environmental impact of air travel, a sector responsible for approximately 2-3% of global greenhouse gas (GHG) emissions. As the aviation industry expands, its emissions are projected to rise significantly, potentially contributing up to 22% of global emissions by 2050 if left unregulated. The European Union (EU) aims to address this issue by providing passengers with clear carbon footprint data when booking flights.

The FEL will use a standardized methodology to calculate CO? emissions based on factors like aircraft type, average passenger load, and fuel type, including sustainable aviation fuels (SAF). This standardization addresses the current problem of inconsistent emissions data across airlines, which makes it difficult for passengers to compare flights based on environmental impact. The data will be displayed alongside other flight information, empowering consumers to choose lower-emission options.

As part of the broader EU aviation decarbonization strategy, which includes SAF mandates and carbon pricing mechanisms, the FEL is voluntary but expected to gain traction. By 2025, passengers will be able to compare emissions across airlines on a dedicated website, which could significantly influence travel choices. This initiative complements other EU climate goals, such as achieving a 55% reduction in GHG emissions by 2030.

Updapt Views: The European Commission, through its labeling initiative, seeks to promote greater transparency and authenticity in the environmental claims made by airlines. By ensuring accuracy in sustainability efforts, the initiative encourages airlines to adopt more fuel-efficient aircraft and embrace sustainable aviation fuels (SAF). This move is expected to drive healthy competition across the industry, with airlines striving to enhance their environmental performance.

ESG Emerges as a Key Driver of Sustainable Investing for Asset Owners.

A recent global survey shows that ESG (Environmental, Social, and Governance) factors have become increasingly critical to asset owners, with over two-thirds acknowledging their heightened importance. This shift is seen in how investors are applying ESG principles to more of their portfolios, addressing climate transition readiness, labor practices, and governance reforms as key concerns in investment decisions. The integration of ESG is steadily growing as asset owners seek to align with sustainability goals.

While ESG data has improved, asset owners face challenges such as the lack of standardized metrics and concerns about the impact on returns. For instance, nearly half of those surveyed see the need for more accurate data, particularly in North America. Additionally, asset owners are increasingly relying on internal resources for managing ESG initiatives, often supported by dedicated ESG teams. Active ownership, including direct engagement with companies, is also seen as a crucial strategy for driving ESG initiatives forward, with 78% of asset owners viewing this approach as highly effective. This trend is particularly strong in APAC, where 84% of respondents favor active ownership methods.

On a broader level, technological advancements are poised to further enhance ESG integration. Many asset owners are optimistic about the role of artificial intelligence (AI) in improving data collection, portfolio construction, and ESG analysis. More than 80% of respondents expressed hope for increased AI adoption to streamline ESG processes, signaling a shift towards more tech-driven approaches to sustainable investing. Meanwhile, regulations remain a double-edged sword: while 53% see them as helpful, particularly in improving company and fund reporting, others cite burdensome bureaucracy as a hindrance to effective ESG implementation.

Updapt Views: ESG has firmly established itself as a core element of investment strategies, extending beyond regulatory or ethical obligations to become a key driver of risk management and long-term value creation. Asset owners are increasingly recognizing the broader impact of their investments, aligning their financial objectives with global sustainability goals. By doing so, they are positioning themselves as leaders in driving the transition to a more sustainable and responsible future.

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