A key challenge for listed firms is a proposed requirement to conduct scenario analysis on climate risks and opportunities. This proposal comes as parts of Spain, Italy, Japan, India, Pakistan and China suffered from earlier than normal heatwaves this year. Extreme floods have also hit eastern Australia and South Africa.

Just 17 per cent of 125 corporate respondents surveyed by the Hong Kong Chartered Governance Institute in May said they had conducted risks and opportunities analyses based on different climate change scenarios. Another 11 per cent were preparing this, while 25 per cent planned to do it within two years.

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This involves the projection of physical risks such as storms and droughts under different paces of global warming, and transition risks arising from decarbonisation policies that force businesses to transition to low carbon operations.

Unavailability of data, lack of resources and difficulty in applying methodologies were cited as top challenges, according to a joint report published on Tuesday by KPMG China, the institute and power utility CLP Holdings.

About 86 per cent said their companies had not set a climate-related business transition plan, while 47 per cent indicated that they were unlikely to set one.

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“Companies should prepare themselves for the inevitable ISSB standards,” the report said. “Governance professionals … play a vital role in providing advice and direction about the emerging climate reporting requirements and assisting the board in meeting [them].”

Once the proposed ISSB standards are adopted by Hong Kong regulators, listed companies will have to make extra disclosures on “material” climate-related information essential to decision-making by investors, creditors and regulators.

The materiality is considered according to the impact on their enterprise value, which reflects the amount, timing and certainty of their future cashflows over the short, medium and long terms. Once material issues are decided, companies need to quantify current and projected financial effects from climate issues on their financial positions and performance, and provide reasons if they fail to do so.

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This is followed by a scenario analysis for identifying and assessing the potential operational impact from future climate-related events. Also required are details about companies’ capacity to adapt their strategy and operations, to mitigate or cope with risks and take advantage of opportunities.

Those unable to do scenario analysis due to data gaps and difficulties in translating results from risk modelling into business decisions are allowed to use alternative approaches, including qualitative analysis and stress tests.

Next, companies need to formulate business transition plans and set targets for becoming low-carbon operations aligned with government climate action plans. Metrics for measuring progress of the plans’ execution and targets should also be disclosed.

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When asked to what degree those preparing reports will be held liable for the quality of disclosures under the ISSB requirements, which do not need to be audited, KPMG’s Woo said: “We are not saying you are predicting the future … what [is expected] is that the information is prepared based on a reasonable assessment of accepted scenarios.”