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Hong Kong, mainland firms trail peers in credibility of climate targets

Hong Kong, mainland firms trail peers in credibility of climate targets
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Climate change: Hong Kong, mainland China firms trail regional peers for credibility of emissions targets, MSCI study finds

Hong Kong and mainland China’s big listed companies have underperformed their peers in the Asia-Pacific region when it comes to the credibility of their environmental targets and disclosure of greenhouse gas emissions attributed to supply chain partners, according to new research.

Only 1 per cent of 70 large-cap Hong Kong-listed firms that are included in the MSCI AC Asia-Pacific IMI index have set greenhouse gas reduction targets considered “fully” credible, according to a report by MSCI ESG Research, the environment, social and governance research unit of index provider MSCI. The regional gauge covers 4,242 constituents across 13 markets.

This trails 2 per cent to 22 per cent of large-cap constituents in the rest of the region besides mainland China and New Zealand.

Some 29 per cent of Hong Kong’s large-cap firms have “less than fully” credible goals, trailing a range of 33 to 86 per cent of companies listed in other countries in the region, except mainland China’s 6 per cent.

This is partly due to a lower propensity among the Hong Kong firms to have third party verification of whether their climate targets are aligned with global climate ambitions, said Wang Xiaoshu, MSCI ESG Research’s head of Asia-Pacific ESG and climate research.

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“It is very easy for companies to commit to net zero by 2050 or 2060, but it is really too long a time frame,” she said in an interview. “What we need from companies to demonstrate credibility is shorter term targets like 2030 or earlier, a track record in meeting prior targets, besides verification by third parties such as the Science Based Targets initiative (SBTi).”

MSCI ESG Research uses a decarbonisation target credibility weighting system. To be considered “fully credible”, a company must have at least one short-term target, at least one externally-validated target, a track record of achieving previous targets and be on course to meet some targets.

Having credible corporate reduction targets is key for achieving the ambitions of most nations in the region to reach carbon neutrality by 2050, or 2070 at the latest. Last year, the Asia-Pacific region contributed 40 per cent of global emissions.

Excessive emissions of greenhouse gases are responsible for climate change and a higher frequency of extreme weather events across the world, according to scientists.

Climate change has resulted in growing food insecurity, population displacement, biodiversity loss and productivity losses, which in turn threaten the stability of corporate supply chains. Asia-Pacific is particularly exposed to climate risks.

If the world warms up by 3 degrees Celsius by the end of the century from pre-industrial times, the potential losses suffered by the 4,242 companies that make up the MSCI AC Asia-Pacific Investable Market Index due to extreme climate events could amount to a 10th of their enterprise value, MSCI estimated. That compares with an estimated 4 per cent for the 5,595 constituent stocks of the MSCI World IMI index.

The MSCI study found that disclosure rates for so-called scope 3 emissions – attributable to supply chain partners – among small and mid-cap firms lagged behind their larger peers by over 25 percentage points across the region, except in Hong Kong and mainland China.

In Hong Kong, the small and mid-cap disclosure rate of 36 per cent was better than peers in other regional markets except for the 60 per cent in New Zealand where disclosure is mandatory. However, Hong Kong’s large-caps firms have a scope 3 reporting rate of 41 per cent, below the range of 53 to 86 per cent in the rest of the region.

Such reporting will be expected by regulators for all listed firms from January 1 next year. Those failing to do so will have to provide explanations.

For the 119 constituents of the Hang Seng Composite LargeCap Index, such disclosure will become mandatory with no excuses accepted for financial years commencing on or after January 1, 2026.

Scope 3 emissions are part of the disclosure requirements recommended by the International Sustainability Standards Board for global securities regulators to adopt.

“If Hong Kong and mainland Chinese companies want to show global investors that they are really working hard on low carbon transition, they should be adhering to international disclosure standards to demonstrate their performance and make their profile more attractive,” Wang said.

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