IPO · 2026-03-12

Climate Risk Assessment for Pre-IPO Companies: Physical and Transition Risks Under the TCFD Framework

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The Hong Kong Stock Exchange (HKEX) will enforce its enhanced climate disclosure requirements under Appendix C2 of the Main Board Listing Rules from 1 January 2025, mandating that all listed issuers report in alignment with the Task Force on Climate-related Financial Disclosures (TCFD) framework. For Pre-IPO companies targeting a listing in 2025 or 2026, this regulatory shift transforms climate risk assessment from a voluntary ESG exercise into a compulsory due diligence item that directly impacts the viability of a listing application. The HKEX’s 2024 consultation conclusions on climate disclosures, published in April 2024, confirmed that the new rules apply to all issuers regardless of sector, requiring disclosure of Scope 1, 2, and 3 greenhouse gas (GHG) emissions, climate scenario analysis, and a description of how physical and transition risks are integrated into governance and risk management. A Pre-IPO company that has not structured its climate risk framework by the time of its listing application faces a material deficiency in its prospectus (招股書) disclosures, which could trigger additional enquiries from the Listing Division or, in severe cases, a refusal to proceed. This article provides a technical framework for assessing physical and transition risks under the TCFD structure, tailored specifically for companies in the Pre-IPO pipeline, with reference to HKEX guidance, SFC codes, and international standards.

The TCFD Framework and HKEX’s Mandatory Disclosure Regime

The HKEX’s mandatory climate disclosure requirements, effective for financial years commencing on or after 1 January 2025, are codified in Part C of Appendix C2 to the Main Board Listing Rules and Part C of Appendix C2 to the GEM Listing Rules. These rules require issuers to disclose governance processes, risk management strategies, and metrics and targets related to climate-related risks and opportunities. The HKEX explicitly states in Listing Rule 13.91A that an issuer must disclose “how it identifies, assesses, and manages climate-related risks” and “how it integrates those processes into its overall risk management framework.”

The Four Pillars of TCFD Reporting

The TCFD framework, published in 2017 and updated in 2021, structures climate-related financial disclosures around four thematic areas: Governance, Strategy, Risk Management, and Metrics and Targets. For Pre-IPO companies, the Strategy pillar is the most demanding, as it requires scenario analysis to assess the resilience of the business model under different climate pathways—including a 2°C or lower scenario (transition risk) and a 4°C scenario (physical risk). The HKEX’s 2024 guidance note on climate disclosures explicitly references the TCFD’s recommended scenario analysis as the baseline methodology.

Materiality Thresholds and Scope of Disclosure

The HKEX requires disclosure of climate-related risks that are “material” to the issuer’s business. Materiality is assessed using the same standard as for other financial disclosures—information is material if its omission or misstatement could influence the economic decisions of users of financial statements. For a Pre-IPO company, materiality must be evaluated against the company’s specific operations, supply chain, and customer base. A semiconductor manufacturer in the Pearl River Delta, for example, faces different physical risks (typhoons, flooding) than a logistics company operating in Southeast Asia (heat stress, sea-level rise). The HKEX’s Listing Rule 13.91A(2) requires issuers to disclose “the scope of the climate-related risks and opportunities that the issuer has identified.”

Physical Risks: Assessment and Quantification for Pre-IPO Companies

Physical risks arise from the direct impacts of climate change on a company’s assets, operations, and supply chains. These are categorised into acute risks (extreme weather events such as typhoons, floods, and wildfires) and chronic risks (long-term shifts in climate patterns such as rising sea levels, temperature increases, and water scarcity). For a Pre-IPO company, the failure to quantify these risks can lead to understated provisions for asset impairment, business interruption, or supply chain disruption in the prospectus.

Acute Physical Risks: Typhoon and Flood Exposure in Hong Kong and the Greater Bay Area

Hong Kong and the Greater Bay Area (GBA) are among the most exposed regions globally to acute physical risks, particularly typhoons and flooding. The Hong Kong Observatory recorded 24 tropical cyclones affecting Hong Kong in 2023, with three requiring the issuance of the No. 8 Gale or Storm Signal. For a Pre-IPO company with manufacturing facilities in Shenzhen or Dongguan, a single typhoon event can cause production downtime of 3–7 days, as observed during Typhoon Saola in September 2023, which shut down the Shenzhen Stock Exchange and paralysed logistics across the GBA for 48 hours. The HKEX’s 2023 guidance on climate disclosure recommends that issuers use historical data from the Hong Kong Observatory and the Intergovernmental Panel on Climate Change (IPCC) to model the probability and financial impact of such events.

Chronic Physical Risks: Sea-Level Rise and Water Scarcity

Chronic physical risks are often overlooked by Pre-IPO companies because their financial impact is gradual, but they are material for companies with long-lived assets such as ports, warehouses, or data centres. The IPCC’s Sixth Assessment Report (AR6), published in 2021, projects that sea levels around Hong Kong will rise by 0.3–0.6 metres by 2100 under a high-emissions scenario (SSP5-8.5). For a logistics company with a container terminal in Kwai Tsing, this translates into increased capital expenditure for seawall reinforcement or relocation of low-lying equipment. The HKEX’s Listing Rule 13.91A(4) requires issuers to disclose “the time horizons over which the climate-related risks are assessed,” which for chronic risks must extend to 2030, 2050, and 2100.

Quantification Methodology: Value-at-Risk and Probability-Weighted Losses

The SFC’s 2022 circular on climate risk management for fund managers (SFC/IS/03/2022) provides a framework for quantifying physical risks using a value-at-risk (VaR) approach. For a Pre-IPO company, the methodology involves: (1) identifying the location of each material asset, (2) overlaying climate hazard maps from the IPCC or the Hong Kong Observatory, (3) estimating the probability of a hazard event occurring within a given time horizon, and (4) calculating the financial loss per event. The output is a probability-weighted loss figure that must be disclosed in the prospectus’s risk factors section. The HKEX’s 2024 guidance note explicitly states that “issuers should use quantitative metrics where possible” and that “qualitative descriptions alone are not sufficient.”

Transition risks arise from the shift to a low-carbon economy, including policy changes, legal liability, technological disruption, and market sentiment shifts. For Pre-IPO companies, transition risks are often more immediate than physical risks because they affect revenue models, cost structures, and access to capital.

The HKEX’s mandatory climate disclosures are themselves a policy risk for Pre-IPO companies that have not yet established GHG emissions tracking. However, the more material policy risk comes from carbon pricing mechanisms in the company’s operating jurisdictions. The PRC’s national Emissions Trading Scheme (ETS), launched in 2021, currently covers the power sector but is expected to expand to cement, steel, and aluminium by 2025, according to the Ministry of Ecology and Environment’s 2023 work plan. A Pre-IPO company in the cement sector, for example, must project the financial impact of carbon costs at HKD 50–100 per tonne of CO2, based on the PRC ETS’s 2023 trading range of CNY 50–80 per tonne. The HKEX’s Listing Rule 13.91A(6) requires disclosure of “the climate-related targets the issuer has set and the progress made against those targets.”

Technology Risk: Stranded Assets and Capital Expenditure

Technology risk refers to the potential that existing assets or processes become economically obsolete due to low-carbon innovations. For a Pre-IPO company in the automotive supply chain, the shift from internal combustion engines (ICE) to electric vehicles (EVs) represents a material technology risk. The HKEX’s 2023 climate disclosure survey found that 78% of listed companies in the automotive sector identified technology risk as their primary transition risk. For a Pre-IPO company, the prospectus must disclose the proportion of revenue derived from ICE-related products versus EV-related products, and the capital expenditure required to pivot production lines. The SFC’s 2022 circular on climate risk management (SFC/IS/03/2022) requires fund managers to assess “the potential for stranded assets” in their portfolios, a standard that Pre-IPO companies must anticipate from their prospective investors.

Market and Reputation Risk: Access to Capital and Customer Preferences

Market risk refers to changes in investor sentiment, customer preferences, and supply chain requirements. The HKEX’s 2024 consultation on climate disclosures noted that institutional investors, particularly those signatory to the Net Zero Asset Managers Initiative (NZAMI), increasingly require climate risk disclosures as a condition for participation in IPOs. A Pre-IPO company that cannot demonstrate a credible transition plan may face a higher cost of capital, as investors demand a risk premium for climate exposure. The HKEX’s Listing Rule 13.91A(7) requires issuers to disclose “the metrics used to assess climate-related risks and opportunities,” which for market risk includes metrics such as the percentage of revenue from low-carbon products or the carbon intensity of operations.

Scenario Analysis and Resilience Assessment for Pre-IPO Companies

The TCFD framework requires companies to conduct scenario analysis to assess the resilience of their business model under different climate pathways. For Pre-IPO companies, this is the most technically demanding component of the climate risk assessment, as it requires modelling financial outcomes under at least two scenarios: a 2°C or lower scenario (representing an orderly transition) and a 4°C scenario (representing a high-emissions, high-physical-risk world).

Selecting Scenarios and Time Horizons

The HKEX’s 2024 guidance note on climate scenario analysis recommends that issuers use scenarios from the Network for Greening the Financial System (NGFS) or the IPCC’s Shared Socioeconomic Pathways (SSPs). For a Pre-IPO company, the most practical approach is to use the NGFS’s “Net Zero 2050” scenario (2°C) and the “Current Policies” scenario (4°C). The time horizons must align with the company’s business planning cycle, but the HKEX expects at least a 10-year horizon (to 2035) and preferably a 30-year horizon (to 2055). The analysis must be disclosed in the prospectus under the “Business” or “Risk Factors” section, as required by HKEX Listing Rule 13.91A(3).

Financial Impact Modelling: Revenue, Costs, and Capital Expenditure

The scenario analysis must translate climate pathways into financial impacts on revenue, operating costs, and capital expenditure. For a Pre-IPO company in the property development sector, the 4°C scenario would model increased cooling costs (due to higher temperatures), higher insurance premiums (due to increased typhoon risk), and potential impairment of land bank in coastal areas. The 2°C scenario would model carbon costs, compliance costs for energy efficiency standards, and revenue loss from reduced demand for high-carbon properties. The HKEX’s 2023 climate disclosure survey found that only 42% of listed companies had conducted quantitative scenario analysis, indicating that Pre-IPO companies that do so gain a competitive advantage in the listing process.

Resilience Assessment and Disclosure Requirements

The final output of the scenario analysis is a resilience assessment, which describes the company’s ability to adapt to climate risks and capitalise on opportunities. The HKEX’s Listing Rule 13.91A(3) requires issuers to disclose “the resilience of the issuer’s strategy, taking into consideration different climate-related scenarios.” For a Pre-IPO company, this disclosure must include a description of the key assumptions, the time horizons used, and the limitations of the analysis. The SFC’s 2022 circular on climate risk management (SFC/IS/03/2022) emphasises that “scenario analysis should be integrated into the issuer’s overall risk management framework,” meaning that the Pre-IPO company must demonstrate that the results of the analysis feed into board-level decision-making on capital allocation, M&A, and product development.

Actionable Takeaways for Pre-IPO Companies

  1. Conduct a materiality assessment for climate risks by Q3 2025, using the HKEX’s 2024 guidance on materiality thresholds, to identify which physical and transition risks require quantitative disclosure in the prospectus.

  2. Establish a GHG emissions baseline for Scope 1, 2, and 3 emissions, using the GHG Protocol Corporate Standard, and ensure that the data is auditable by the sponsor’s due diligence team, as the HKEX’s Listing Rule 13.91A(5) requires disclosure of absolute emissions and intensity metrics.

  3. Perform quantitative scenario analysis using the NGFS’s Net Zero 2050 and Current Policies scenarios, with time horizons extending to 2035 and 2055, and integrate the results into the company’s financial projections and risk factor disclosures.

  4. Document the governance structure for climate risk management, including board-level oversight, management-level responsibility, and the integration of climate risks into the existing risk management framework, as required by HKEX Listing Rule 13.91A(1).

  5. Prepare a transition plan aligned with the TCFD’s recommended disclosures, including targets for emissions reduction, capital expenditure for low-carbon technologies, and metrics to track progress, as the HKEX’s 2025 mandatory regime will require these disclosures in the annual report and, by extension, in the prospectus for a listing application.