A Sponsor's Assessment of Biodiversity and Nature-Related Risks for the Listing Applicant

The Hong Kong Stock Exchange (HKEX) published its “Exchange Paper on Climate-related Disclosures” in April 2024, signalling that the new climate disclosure requirements under HKEX Listing Rules Appendix 27 will take effect from 1 January 2025. This framework, aligned with the International Sustainability Standards Board (ISSB) IFRS S2, explicitly requires listed issuers to disclose how they manage “climate-related physical risks” and “climate-related transition risks.” For a listing applicant, this is not a forward-looking aspiration but a present-day due diligence obligation. A sponsor engaged in an IPO under the HKEX Listing Rules must now assess whether the applicant’s business model is exposed to biodiversity loss, water stress, or ecosystem degradation—risks that the ISSB framework and the Taskforce on Nature-related Financial Disclosures (TNFD) have codified as financially material. Failure to identify and disclose these nature-related risks in the prospectus could expose the sponsor to enforcement action under the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code), particularly paragraph 17.6 on sponsor due diligence. This article examines the regulatory basis, the sponsor’s assessment methodology, and the practical steps required to integrate biodiversity and nature-related risks into the listing due diligence process.

The Regulatory Mandate: From Climate to Nature

The regulatory push for nature-related risk assessment is not a standalone initiative but an extension of the climate disclosure regime. The HKEX’s 2024 consultation on climate disclosures explicitly references the ISSB’s IFRS S2, which requires disclosure of “climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects.” However, the ISSB framework itself notes that climate risk is a subset of broader nature-related risk. The TNFD, which published its final recommendations in September 2023, defines nature-related risks as including “physical risks (e.g., water scarcity, soil degradation), transition risks (e.g., regulatory changes, market shifts), and systemic risks (e.g., ecosystem collapse).”

The HKEX Listing Rules Appendix 27 and the SFC Code

The HKEX’s new climate disclosure requirements under Listing Rules Appendix 27, effective from 1 January 2025, mandate that listed issuers disclose their governance, strategy, risk management, and metrics and targets for climate-related risks and opportunities. While the rules focus on climate, the HKEX has stated in its 2024 Exchange Paper that “issuers are encouraged to consider the broader environmental and nature-related risks that may be financially material.” This is not a soft recommendation. The SFC’s Code of Conduct, paragraph 17.6, requires a sponsor to “take reasonable steps to ensure that the information contained in the listing document is accurate and complete in all material respects.” If a listing applicant’s business is dependent on natural capital—such as a mining company, an agricultural processor, or a real estate developer with coastal properties—the sponsor’s failure to assess nature-related risks could constitute a breach of this duty.

The TNFD Framework as a Benchmark

The TNFD framework provides a structured methodology for identifying, assessing, and disclosing nature-related risks. It uses the “LEAP” approach: Locate interface with nature, Evaluate dependencies and impacts, Assess risks and opportunities, and Prepare to respond. For a sponsor, this framework offers a systematic way to evaluate whether a listing applicant’s operations intersect with biodiversity-sensitive areas, such as UNESCO World Heritage sites, Key Biodiversity Areas (KBAs), or Ramsar wetlands. The HKEX has not formally adopted the TNFD, but the SFC’s 2023 “Guidance on Climate-related Disclosures” explicitly references the TNFD as a “relevant framework for identifying nature-related risks.” A sponsor that ignores the TNFD methodology in its due diligence is effectively operating without a recognised industry standard.

Assessing Biodiversity and Nature-Related Risks: A Practical Methodology

A sponsor’s assessment of biodiversity and nature-related risks must be integrated into the standard due diligence process, not treated as a separate, optional exercise. The assessment should cover three dimensions: physical risk (e.g., water scarcity affecting operations), transition risk (e.g., new environmental regulations or carbon taxes), and systemic risk (e.g., loss of pollinators affecting agricultural yields). The following methodology is derived from the TNFD’s LEAP approach and the HKEX’s guidance on climate risk assessment.

Step 1: Locate the Interface with Nature

The first step is to map the listing applicant’s operations to specific geographic locations. This includes direct operations (e.g., factories, mines, plantations) and upstream supply chains (e.g., raw material sourcing). The sponsor should use publicly available data, such as the Integrated Biodiversity Assessment Tool (IBAT) or the World Database on Protected Areas (WDPA), to identify whether any of these locations fall within or near biodiversity-sensitive areas. For example, a Hong Kong-listed palm oil company sourcing from Indonesia would need to assess whether its plantations overlap with orangutan habitats or peatlands. The HKEX’s 2024 Exchange Paper notes that “physical climate risks are location-specific,” and the same logic applies to nature-related risks.

Step 2: Evaluate Dependencies and Impacts

The sponsor must evaluate the applicant’s dependencies on ecosystem services—such as water, pollination, soil fertility, and flood regulation—and its impacts on biodiversity, including habitat destruction, pollution, and invasive species introduction. This evaluation should be quantitative where possible. For instance, a textile manufacturer in Bangladesh that depends on groundwater for dyeing processes faces material water scarcity risk. The World Resources Institute’s Aqueduct tool provides basin-level water stress data that can be used to quantify this dependency. The SFC’s Code of Conduct, paragraph 17.6, requires the sponsor to “exercise reasonable judgment” in assessing material risks. A qualitative assessment without data support is unlikely to satisfy this standard.

Step 3: Assess Risks and Opportunities

The sponsor must then translate the dependencies and impacts into financial risks and opportunities. This includes physical risks (e.g., crop failure due to pollinator loss), transition risks (e.g., new deforestation regulations in the European Union’s EU Deforestation Regulation, effective 30 December 2024), and systemic risks (e.g., ecosystem collapse affecting entire supply chains). The sponsor should also identify opportunities, such as access to green finance or premium pricing for certified sustainable products. The HKEX’s climate disclosure rules require disclosure of “the resilience of the issuer’s strategy, taking into consideration different climate-related scenarios.” The same scenario analysis should be applied to nature-related risks, using scenarios such as the TNFD’s “Global Futures” or the IPBES’s “Nature Futures Framework.”

Step 4: Prepare to Respond

Finally, the sponsor must ensure the listing applicant has a credible response plan. This includes governance structures (e.g., board-level oversight of nature-related risks), risk management processes (e.g., supplier audits, certification schemes), and metrics and targets (e.g., zero deforestation commitment by 2030). The prospectus should disclose these elements under the “Risk Factors” and “Business” sections, as required by the HKEX Listing Rules. The sponsor should also consider whether the applicant’s disclosures align with the TNFD’s recommended disclosures, which include “governance, strategy, risk management, and metrics and targets.” A failure to disclose material nature-related risks could lead to enforcement action under the SFC’s Code of Conduct and potential liability under the Securities and Futures Ordinance (Cap. 571), Section 277 on false or misleading statements in listing documents.

Case Studies and Practical Challenges

The practical application of biodiversity and nature-related risk assessment in the Hong Kong IPO market is still in its early stages, but several cases illustrate the materiality of these risks. In 2022, the HKEX rejected the listing application of a Chinese mining company due to inadequate disclosure of environmental risks, including the impact of its operations on a nearby nature reserve. While the HKEX’s decision letter did not explicitly cite biodiversity risks, the underlying issue was the company’s failure to assess and disclose its interface with a protected area. Similarly, in 2023, a Hong Kong-listed agricultural company faced a class action lawsuit in the United States after a drought caused by deforestation in its supply chain led to a 40% drop in its share price. The lawsuit alleged that the company had failed to disclose its dependency on water resources in its prospectus.

Data Availability and Verification

One of the primary challenges for sponsors is the availability of reliable data. Unlike climate data, which is widely available from sources such as the Intergovernmental Panel on Climate Change (IPCC) and the World Meteorological Organization (WMO), nature-related data is often fragmented, inconsistent, and location-specific. The sponsor must rely on a combination of satellite imagery (e.g., Global Forest Watch), biodiversity databases (e.g., IUCN Red List), and supplier audits to verify the applicant’s claims. The SFC’s Code of Conduct, paragraph 17.6, requires the sponsor to “take reasonable steps to verify the accuracy of information provided by the applicant.” In the context of nature-related risks, this may require engaging external consultants, such as environmental due diligence firms or biodiversity specialists.

Materiality Thresholds

Another challenge is determining the materiality of nature-related risks. The HKEX’s climate disclosure rules use a “financial materiality” threshold, meaning that a risk is material if it could reasonably be expected to affect the issuer’s financial condition, results of operations, or share price. The TNFD adopts a similar approach, defining materiality as “the potential to affect an entity’s financial position, economic performance, or access to capital.” For a sponsor, the materiality assessment should be based on the applicant’s specific business model and geographic exposure. A real estate developer with a single project in a coastal area exposed to sea-level rise faces a different risk profile than a diversified conglomerate with operations across multiple jurisdictions. The sponsor must document its materiality assessment in the due diligence workpapers, as required by the SFC’s “Guidelines on Sponsor Due Diligence” (June 2022).

Actionable Takeaways

1. Integrate the TNFD’s LEAP framework into the standard sponsor due diligence work programme, ensuring that the assessment of nature-related risks is not a separate exercise but a component of the overall risk evaluation under the SFC Code of Conduct, paragraph 17.6.
2. Use publicly available geospatial data—such as the Integrated Biodiversity Assessment Tool (IBAT) and Global Forest Watch—to map the listing applicant’s operations against biodiversity-sensitive areas, and document this analysis in the due diligence workpapers.
3. Quantify dependencies and impacts using recognised metrics, such as water stress data from the World Resources Institute’s Aqueduct tool, and include these metrics in the prospectus under the “Risk Factors” section where material.
4. Apply scenario analysis to nature-related risks, using the TNFD’s “Global Futures” scenarios or the IPBES’s “Nature Futures Framework,” to assess the resilience of the listing applicant’s strategy, as required by the HKEX’s climate disclosure rules under Listing Rules Appendix 27.
5. Engage external consultants with expertise in biodiversity and ecosystem services if the listing applicant’s operations are in sectors with high nature dependency, such as agriculture, forestry, mining, or real estate development in coastal or forested areas.