Climate change

Market Turnover

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Board and governance Materiality assessment Climate change Social issues Review of ESG progress Adoption of International ESG reporting framework

Climate change

With climate change being a global concern and focus, investors are demanding more information on how climate issues and related policy change could impact an issuer’s assets, business operations and financials. With effect from 1 January 2025, Part D of the ESG Reporting Code sets out enhanced climate-related disclosure requirements (New Climate Requirements) which reflect the IFRS S2 Climate-related Disclosures published by the International Sustainability Standards Board (ISSB) closely.

Under the New Climate Requirements, issuers shall disclose information on climate-related risks and opportunities with reference to four core pillars:

Governance – the governance process, controls and procedures an issuer uses to monitor, manage and oversee climate-related risks and opportunities;
Strategy – an issuer’s strategy for managing climate-related risks and opportunities;
Risk management – the process an issuer uses to identify, assess, prioritise and monitor climate-related risks and opportunities; and
Metrics and targets – the metrics and targets an issuer uses to understand its performance in relation to climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.

Please refer to our e-learning for an overview of the New Climate Requirements and the Implementation Guidance for practical tips in preparing disclosures in accordance with the New Climate Requirements.

As contemplated in the Hong Kong sustainability disclosure roadmap, listed companies will ultimately be required to conduct sustainability reporting in accordance with the local version of the ISSB Standards (i.e. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures). As such, we encourage early adoption of the ISSB Standards. Issuers are further reminded that ESG reports prepared in accordance with the ISSB Standards will be considered to have complied with the New Climate Requirements. Issuers may refer to this e-learning on preparing ISSB sustainability disclosures for further guidance.

Climate change:
Scenario analysis

Power Assets Holdings Limited (00006), Sustainability Report 2023

(p.50)

Power Asset_50

…

(p. 51)

Aligning with the TCFD recommendations, a high emissions/business-as-usual pathway (4°C scenario) and a stringent pathway striving to achieve a lower-carbon economy (1.5°C scenario) are selected to serve as bookends to adequately consider both physical and transition risks and develop an understanding of how the key value drivers of our businesses might be affected under different future states.

…

(p. 52)

Determination of the scope and boundaries of scenario analysis

Our scenario analysis began by identifying the businesses most critical to the Group in terms of financial contributions. This was achieved by considering the contribution of each business unit to the EBIT and total assets of the Group. We also considered strategic importance to ensure comprehensive coverage of the majority of the financial value at risk, as well as diverse range of business sectors and geographical locations. Following the financial materiality review and strategic considerations, three business sectors spanning three geographical regions were selected for the scenario analysis. These selected operations account for over 80% of the Group’s EBIT and total asset values

…

(pp. 58-59)

Potential impact of assessed transition risks and opportunities

Power Asset_58to59_resize

(p. 60)

Opportunities for transition within the sectors we invest in are abundant, particularly in the electricity transmission and distribution sector, which is crucial for meeting the growing demand for electricity spurred by the ongoing shift towards renewable energy sources.

…

We adopt a prudent approach in assessing the exit strategies from fossil fuel-related assets.

….

By carefully managing the transition from traditional to renewable energy sources, we believe our strategic approach, paired with the diverse nature of our businesses, positions us to be resilient amidst the evolving energy market and equips us to seize opportunities arising from this transition, thus safeguarding and enhancing the long-term value for our stakeholders

Commentary

The issuer used a flowchart to present the steps taken in conducting its scenario analysis, enabling readers to understand how the issuer assessed its climate resilience.

The issuer determined the scope of scenario analysis with reference to financial materiality and strategic importance of its business operations. Two contrasting scenarios (4°C scenario vs. 1.5°C scenario) were adopted to analyse the potential impact of physical and transition risks on its key business drivers. Integrated climate assessment models, which were built upon prominent and publicly available scenario sources, were used to carried out scenario analysis.

In addition to assessing climate-related risks, the issuer also used scenario analysis to assess the impact of climate-related opportunities identified and presented the results through a heatmap. The results of the analysis supported the issuer’s strategic approach in shifting towards renewable energy sources.

Climate change:
Scenario analysis

HSBC Holdings Plc (00005), Annual Report and Accounts 2023

(p.225)

Our climate scenarios

In our 2023 climate scenario analysis exercises, we explored five scenarios that were created to examine the potential impacts from climate change for the Group and its entities.

The analysis considered the key regions in which we operate, and assessed the impact on our balance sheet across three distinct timeframes: short term up to 2025; medium term from 2026 to 2035; and long term from 2036 to 2050. The time horizons are aligned to the Climate Action 100+ framework v1.2.

We created our internal scenarios using external publicly available climate scenarios as a reference, including those produced by the Network for Greening the Financial System (‘NGFS’), the Intergovernmental Panel on Climate Change (‘IPCC’) and the International Energy Agency. Using these external scenarios as a template, we adapted them by incorporating the unique climate risks and vulnerabilities to which our organisation and customers across different business sectors and regions are exposed. This helped us produce the scenarios, which vary by severity to analyse how climate risks will impact our portfolios.

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(p. 226)

hsbc_226

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(p. 227)

Analysing the outputs of climate scenario analysis

hsbc_227

1. The counterfactual scenario is modelled on a scenario where there would be no losses due to climate change.

2. The dotted line in the chart shows the impact of modelled expected credit losses following our strategic responses to reduce the effect of climate risks under the Net Zero scenario.

3. The projections shown in this chart were modelled during 2023 and are not intended to reflect the final 31 December 2023 position that is disclosed elsewhere in the Annual Report and Accounts 2023.

While climate-related losses are expected to remain minimal in the short term, they are likely to increase compared with the counterfactual scenario in the medium and longer term, driven by the transition to a net zero economy.

These losses are lower in the Net Zero orderly transition scenario, than in the Delayed Transition Risk scenario where climate action begins later and is more rapid and disruptive as our customers will have less time to restructure their business models and reduce their carbon emissions. As the dotted line in the graph shows, losses in these scenarios can be mitigated through active management approaches, which include identifying new climate-related business opportunities and adapting our portfolios to reduce exposure to climate risks and losses.

By building a more climate-resilient balance sheet, we can reduce impairment risks and improve longer-term stability.

Under the Current Commitments scenario, we expect lower levels of losses relating to transition risks, although we would expect an increase in the effects of climate-related physical risks over the longer term. If the world does not align with a net zero path, physical risks in the medium to long term are expected to continue to rise due to the increasing frequency of extreme weather events.

…

(p. 229)

Use of climate scenario analysis outputs

Climate scenario analysis plays a crucial role helping us to identify and understand the impact of climate-related risks and potential opportunities as we navigate the transition to net zero.

Scenario analysis results have been used to support the Group’s ICAAP. This is an internal assessment of the capital the Group needs to hold to meet the risks identified on a current and projected basis, including climate risk.

In addition, scenario analysis informs our risk appetite statement metrics. As an example, it supports the calibration of physical risk metrics for our retail mortgage portfolios and it is used to consider climate impact in our IFRS 9 assessment.

From a financial planning perspective, internal climate scenario analysis results are used to assess whether additional short-term climate-specific ECL are required within our financial plan.

Next steps

We plan to continue to enhance our capabilities for climate scenario analysis including addressing model limitations and data gaps and developing our assessment of liquidity, resilience and insurance risks. We also plan to use the results for decision making, particularly in:

client engagement, by identifying climate opportunities and vulnerabilities in specific regions and sectors such as renewables, carbon capture technologies and electric vehicles, and using this information to engage and support clients in their transition to net zero;
portfolio steering, by using scenario analysis outputs to inform how to reallocate our portfolio to maximise returns and mitigate risk while achieving our net zero targets; and
looking beyond climate change by building capabilities to assess our resilience to wider environmental risks

Commentary

To assess the potential impacts of climate change on its portfolios and operations, the issuer developed five climate scenarios which covered its key business regions and three distinct time horizons. Based on publicly available climate scenarios, the issuer created in-house scenarios which had incorporated climate risks relevant to its business and customers. A table outlining the characteristics of each scenario facilitated an easy comparison of different scenario features.

The results of the scenario analysis have informed the issuer’s internal capital assessment, risk management, and financial planning processes. Last but not least, the issuer set out the plan to further enhance its climate scenario analysis capabilities and use the insights to engage with clients, steer its portfolio, and assess wider environmental risks.

Climate change:
Reporting on greenhouse gas emissions

CLP Holdings Limited (00002), 2023 Sustainability Report

(p.13)

Below are the Group's boundary definitions for each of the main categories of data included in this report.

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CLP_13

...

(p.170)

CLP_170

…

(p.201)

GHG accounting methodology

Greenhouse gas (GHG) reporting guideline

A Group-wide GHG Reporting Guideline was first developed in 2007 to specify the collection and compilation methodology of the Group’s GHG data. The Guideline was developed with reference to the following international standards and guidelines:

The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (Revised Edition) of the World Business Council for Sustainable Development (WBCSD) and the World Resources Institute (WRI);
The Greenhouse Gas Protocol: Corporate Value Chain (Scope 3) Accounting and Reporting Standard;
The Greenhouse Gas Protocol: Technical Guidance for Calculating Scope 3 Emissions (Version 1);
The 2006 Intergovernmental Panel on Climate Change (IPCC) Guidelines for National Greenhouse Gas Inventories;
The relevant IPCC Assessment Report;
The International Standard for GHG Emissions ISO 14064-1: Greenhouse Gases; and

Methodologies agreed with local authorities.

The CLP GHG Reporting Guideline is reviewed in accordance with CLP internal practices and updated with the latest references at least once every three years. The current Guideline was last updated in 2020.

…

Compilation bases

CLP reports the GHG emissions of its generation and energy storage portfolio on three consolidation bases to provide a comprehensive overview of its carbon footprint and progress in decarbonisation efforts. The three bases are:

Equity basis: This includes the electricity generated by CLP’s assets. It accounts for the Scope 1 and Scope 2 GHG emissions according to CLP’s equity share in the portfolio. The equity basis reflects economic interest, indicating the extent of GHG risks and opportunities CLP has from assets in which it holds a majority or minority share.
Equity and long-term capacity and energy purchases: This includes both electricity generated by CLP’s assets as well as the electricity purchased through capacity, energy purchase agreements and spot purchase. It allows stakeholders to better understand the GHG intensity of the electricity CLP delivers to customers. In addition to the GHG emissions from the equity basis, it also includes the direct GHG emissions from the generation of purchased electricity.
Operational control: This represents the total GHG emissions from generation assets where CLP has direct influence and control on operational matters. CLP has been disclosing its combined total Scope 1 and Scope 2 GHG emissions on this basis for over a decade, and will continue to demonstrate its long-term progress.

…

(p.202)

Calculation methodologies

Scope 1 & Scope 2 GHG emissions

The Scope 1 emissions and location-based Scope 2 emissions are calculated in accordance with CLP’s GHG Reporting Guideline outlined above.

Annually, CLP obtains emission factors from each business unit’s local government and authority in their respective jurisdictions. In cases where local emission factors are not available, other recognised sources are referenced.

Scope 3 GHG emissions

The table below summaries the Scope 3 categories that were identified as relevant to CLP, and how their emissions are calculated.

CLP_202

…

(p.204)

The following categories were identified as not relevant to CLP, and hence not included in the Scope 3 emissions profile for reporting.

CLP_204

Commentary

The issuer provided a comprehensive overview of its management and reporting approach to GHG emissions. With reference to international standards and guidelines, it developed a group-wide GHG reporting guideline to specify the collection and compilation methodology of the group’s GHG data, which is subject to review every three years. The issuer also explained in detail how it reports on GHG emissions based on three consolidation bases to help readers better understand the issuer’s approach.

In reporting scope 3 GHG emissions, the issuer analysed each scope 3 category described in the the Greenhouse Gas Protocol: Corporate Value Chain (Scope 3) Accounting and Reporting Standard, and explained why a particular category is relevant or irrelevant to its business. A five-year record of GHG emissions data was presented for readers to review the issuer’s carbon footprint and decarbonization progress over time. In addition, a breakdown of scope 3 GHG emissions by scope 3 category highlighted the major source of these emissions.

Scenario analysis

Reporting on greenhouse gas emissions