CWR talks to SFC’s New CEO on What ISSB Standards Means for HK

By Julia Leung 22 March, 2023

As ISSB standards soon become the single global baseline for corporate sustainability reporting, we chat with Leung, SFC of HK's CEO, to find out more about its enormous impact on capital markets in HK & beyond

IOSCO is now rigorously assessing the ISSB standards – if the final standards meet IOSCO’s expectations, it will endorse the standards, which could lead to its 140+ members using them to set their own national-sustainability disclosure requirements
The standards will require corporates to understand their exposure to both physical and transition climate risks and have plans in place to manage them
‘Enormous potential’ lies in HK’s capital market, as successful implementation of the standards will help mobilize capital for countries to meet their climate goals
Author: Julia Leung
Ms Julia Leung has been Chief Executive Officer (CEO) of the Securities and Futures Commission (SFC) since 1 January 2023. Ms Leung joined the SFC in March 2015 as Executive Director of the Investment Products Division. She became Executive Director of the Intermediaries Division in June 2016 and took on the additional capacity of Deputy CEO in March 2018. In more than 25 years of public service, Ms Leung has extensive experience in financial regulation, market development and international cooperation. Prior to joining the SFC, Ms Leung was the Under Secretary for Financial Services and the Treasury from August 2008 to December 2013. Before that, she served at the Hong Kong Monetary Authority for 14 years, spending the last eight years as the Executive Director responsible for financial cooperation with Mainland and other international regulators. Ms Leung graduated from The Chinese University of Hong Kong and earned a master's degree from Columbia University in the City of New York. In 2014, she authored a book on how Asia has surmounted various financial crises. Ms Leung chairs the SFC’s Executive Committee, and sits on the Advisory Committee, Investment Committee, Budget Committee and SFC (HKEC Listing) Committee.
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One way to accelerate change will be the ISSB standards, the soon to be new global baseline for sustainability reporting. Companies will need to be on top of climate risks more than ever before. What does the ISSB mean for Hong Kong and global capital markets? What’s the timeframe for implementation? Get all the info in our interview with Securities & Futures Commission of Hong Kong’s CEO, Julia Leung.

CWR: Tell us about the role of the Securities & Futures Commission (SFC) in relation to International Organization of Securities Commissions (IOSCO) and the upcoming International Sustainability Standards Board (ISSB) standards.

Julia Leung (JL): The SFC has been very active in IOSCO’s sustainable finance initiatives from the outset. My predecessor as CEO of the SFC, Ashley Alder, was Chair of the Board of IOSCO for the past six years and a vocal supporter of the ISSB standards. The SFC is a Vice Chair of IOSCO’s Task Force on Sustainable Finance (STF) and I personally co-chair the task force’s Workstream on Corporate Reporting which oversees the IOSCO’s projects related to its endorsement of the ISSB standards.

IOSCO is now assessing the ISSB standards – if endorsed, its 140+ members can use them to set their own disclosure requirements

IOSCO is now conducting an independent and rigorous assessment of the ISSB standards to ensure they are fit for purpose and serve the needs of capital markets. If the final standards meet IOSCO’s expectations, IOSCO will endorse the standards and encourage its more than 140 members to consider them in setting their own national sustainability-related disclosure requirements.

CWR: ISSB says it is on track to deliver its final disclosure standards in mid 2023 – could you tell us more about this and why these disclosure standards are important?

JL: More and more investors are demanding meaningful sustainability information to help them better allocate capital to support the transition to a more sustainable economy. But a big challenge is that this information, when it is available, is not easily comparable because there are so many different voluntary disclosure standards out there.

Lack of unified disclosure makes the fragmented data difficult to compare…

…ISSB will solve this by consolidating existing standards & by building trust in reporting, which should put us on a path to mandatory disclosure

The release of the ISSB exposure drafts was a sign of significant progress. First, the ISSB has leveraged industry-led efforts which have gained widespread voluntary adoption. For example, it consolidated existing standard-setters such as the Climate Disclosure Standards Board and Value Reporting Foundation into the ISSB and it also built its exposure draft standards upon the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations. These steps will go a long way to reduce fragmentation in reporting.

Also, the ISSB standards are part of the IFRS Foundation framework and they closely interact with existing assurance practices and standards. This is a key feature which will help support the development of a credible assurance framework, build trust in the sustainability reporting ecosystem and combat greenwashing. It could also set us on a path to mandatory sustainability disclosures in the future, because the ISSB is not just another set of global standards, it instead represents a convergence of standards and standard-setters into a single global baseline for financially material sustainability disclosures.

CWR: Is there a timeframe for implementing these standards? What about in Hong Kong?

JL: The ISSB disclosure standards are expected to be ready for use by corporates for end-2024 reporting purposes. We are now considering how the ISSB standards can be implemented in Hong Kong. The Hong Kong Green and Sustainable Finance Cross-Agency Steering Group (CASG) which I co-chair with the HKMA, announced our support for the ISSB’s work. Although Hong Kong’s emission footprint is small, our capital market is enormous and influential. Successful implementation of the ISSB standards in Hong Kong will support the mobilisation of capital needed for developing economies, in particular Mainland China, to meet their climate goals in a timely and orderly manner.

ISSB standards will be ready for corporate reporting purposes by end-2024…

…‘Enormous potential’ lies in HK’s capital market, as successful implementation will mobilize capital for developing economies – esp. the Mainland – to meet their climate goals

As a priority, the SFC is working with the Hong Kong stock exchange on a climate-first approach to implementing the ISSB standards for Hong Kong listed companies and the HKEx is expected to launch a public consultation on this later this year. This is by no means an easy task, as we need to consider implementation in a way that is proportionate and practical for companies listed in Hong Kong. Many of them are Mainland Chinese companies or have very significant value chain exposure on the Mainland. We are working closely with our Mainland counterpart to ensure cross-border consistency and address any potential implementation issues.

 

CWR: Can you give us any insights on how other major jurisdictions are thinking about the ISSB standards?

JL: Many jurisdictions have voiced their support for the ISSB and some are already actively considering how to implement the ISSB Standards. The Sustainable Finance Working Group under the IOSCO Asia Pacific Regional Committee recently conducted a survey of securities regulators in the region which showed that there is general awareness of the ISSB standards.

Challenges for successful implementation incl. availability & reliability of data relating to a co’s supply chain

Key challenges for successful implementation will include the availability and reliability of data relating to a company’s supply chain as well as the readiness of the reporting and assurance sector to support economy-wide demand.

This highlights the importance of implementation guidance and the need for scalability and proportionality. Jurisdictions and companies are at different phases of their ESG journeys. Capacity building will be crucial key and both the ISSB and IOSCO have work to do to help companies and regulators get ready.

CWR: Typically, sustainability disclosure on the environment has focused on carbon emissions and less so on physical risks – from what you’ve seen will that be different in these standards?

JL: There has been a great deal of emphasis on carbon emissions and specifically the direct emissions of carbon-intensive companies. The TCFD has continued its efforts not only to increase disclosures, but also to assess disclosure quality against its recommendations, and it has highlighted some significant gaps, particularly in strategy and risk management.

Co’s will have to disclose their climate risks for both physical & transition risks & devise strategies to address them

Of course, the TCFD recommendations have been embedded within the ISSB standards, and this should help investors understand companies’ exposures to significant sustainability-related risks and opportunities. For example, the ISSB’s draft Climate-related Disclosures would explicitly require companies to disclose climate-related risks as well as climate-related opportunities, and in particular how these risks and opportunities will affect their financial position, financial performance and cash flow, and how the company is addressing them.

This will require companies to have a thorough understanding of the potential impact of their exposure to climate-related risks, both physical and transition, as well as related opportunities and to devise strategies to address them on an ongoing basis. Emissions should be a metric to support the narrative associated with the company’s strategy, and to provide evidence of its progress.

CWR: What would you say have been the biggest challenges in pulling this together in your role at IOSCO?

JL: The “building blocks” approach adopted by the ISSB enables jurisdictions to further build their specific requirements on top of the ISSB global baseline. A few advanced economies have already put out their proposals for sustainability reporting. The good news is that significant progress has been made by the EU and ISSB to achieve maximum interoperability, which is key to achieve compatible and comparable disclosures on a global level.

However, some developing economies are less familiar with sustainability reporting, so to achieve a truly global baseline, the final ISSB standards should embed sufficient flexibility to take into account the specific circumstances and considerations of local jurisdictions.

ISSB must embed sufficient flexibility to account for specific circumstances & considerations of local jurisdictions…

…Another challenge is whether ISSB standards fit into the development of a sound audit & assurance framework

This does not suggest that jurisdictions will have so much flexibility that it will deflate the global ambition. A balance needs to be struck. It is of utmost importance for the ISSB to develop implementation guidance with sufficient application support and capacity building for jurisdictions and preparers to ensure there is sufficient global consistency in implementation.

Another key challenge is whether the ISSB standards could form the basis for the development of a sound audit and assurance framework. This is unchartered waters. Traditional financial audit typically deal with historical information, but assurance opinions for sustainability information are often forward-looking analysis or estimates. IOSCO is working closely with the International Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants to promote the development of profession-agnostic standards which can support the reasonable assurance of sustainability-related information.

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