On 1 September 2026, China's Ministry of Ecology and Environment (MEE) issued its latest national carbon emissions trading market allowance plan covering the power sector for 2025 and 2026 and the steel, cement and aluminium sectors for 2026. Public summaries show that the plan sets sector scope, allowance totals, allocation methods and compliance arrangements for China's national ETS over the 2025–26 window.
For Hong Kong listed issuers, this is not just another Mainland environmental circular to file and forget. At the same time that China tightens the design of its ETS, Hong Kong's Hang Seng Composite LargeCap Index (HSCLI) constituents face mandatory climate disclosure under Part D of HKEX's ESG Reporting Code (Appendix C2) for financial years commencing on or after 1 January 2026, with Scope 1 and Scope 2 greenhouse gas emissions already mandatory for all issuers from financial years starting on or after 1 January 2025.
We see it this way: Mainland ETS allowance surplus or deficit, benchmarks and surrender outcomes are already inputs to HKEX Part D climate metrics, financial-effect narrative and transition plans for Hong Kong issuers with Mainland operations. Treating the ETS as a siloed Mainland compliance topic creates a gap in FY2026 LargeCap climate year quality.
Problem: Compliance silos versus HKEX Part D's financial-effect lens
Many corporate groups still park national ETS responsibilities in Mainland plant-level EHS teams. Verification, pre-allocation, final allocation and allowance surrender are managed locally; the Hong Kong ESG report later notes "ETS obligations fulfilled" in a short regulatory paragraph. That habit worked when climate disclosure was largely topic-based. It collides with HKEX's new focus on financial effects.
Part D of Appendix C2 requires issuers to disclose climate-related risks and opportunities that could reasonably be expected to affect cash flows, access to finance or cost of capital over the short, medium and long term. Allowance deficits that require purchases, surpluses that can be sold, tightening benchmarks that change marginal cost, and policy pressure on inefficient or captive capacity are all financial-effect inputs, not optional background colour.
When ETS ledgers live only inside provincial compliance files:
- Group finance cannot explain year-on-year movements in carbon cost or the impact of changing allocation rules on operating margins.
- Treasury cannot stress-test working-capital needs around the annual surrender deadline.
- Boards cannot demonstrate how Mainland operating decisions around efficiency, fuel mix and capacity feed into group-level transition plans.
Investors reading FY2026 LargeCap Part D climate chapters will look for numbers and linkages. A generic statement that "our Mainland subsidiaries complied with ETS rules" will no longer satisfy that expectation.
There is also a boundary mismatch. Public descriptions of the ETS confirm that power, steel, cement and aluminium coverage is focused on direct emissions from fossil fuel combustion and, for some sectors, process emissions, while indirect emissions from purchased electricity and heat remain outside the ETS fence. Under HKEX amendments, all issuers must disclose Scope 1 and Scope 2 emissions regardless of ETS coverage. Equating "ETS surrendered" with "GHG inventory done" risks understating purchased power and steam, particularly for electricity-intensive aluminium operations and diversified industrials.
Method: Read the Plan through a Part D lens
Public reports on the plan highlight three policy layers that boards can use directly in Part D strategy and transition narratives.
Target orientation
The plan positions allowance allocation as a tool to support national carbon-peak and carbon-neutrality goals and to align ETS design with other policies such as capacity replacement and output control. For Hong Kong issuers, this means that changes in allowance rules are signals about China's preferred technology and capacity mix, and should feed into group scenario analysis and transition planning.
Gradualism
Free allocation based on intensity continues, especially for newly covered industrial sectors, with expectations that paid elements will increase over time. Boards should treat current free allocation as a temporary phase, not as an assumption that carbon has no cost. Scenario analysis under Part D can model pathways where free ratios decline and carbon pricing becomes more central.
Efficiency first
Policy statements emphasise "reward the advanced, spur the laggards", meaning that plants with lower unit-product carbon intensity receive more favourable allowance positions than those with higher intensity. This logic translates cleanly into Part D transition plans: energy-efficiency projects, fuel switches and process innovations are not only environmental improvements, they are routes to better allowance balances and reduced compliance costs.
From an operating standpoint, boards should ask management to capture a small set of ETS data fields into the group climate data dictionary:
- Verified emissions in each covered sector and year.
- Allocated allowances and any surplus or deficit.
- Key benchmark or performance values that explain changes in allowance positions.
- Use of offsets such as China Certified Emission Reductions (CCERs), subject to post-2024 rules.
- Surrender completion dates and any compliance issues.
These fields can then be mapped to Part D metrics and narrative. For example, allowance deficits become part of climate-related operating cost discussion; allowance surpluses and expected sales can be reflected in opportunity language; benchmark changes feed scenario analysis and sensitivity work.
Implication: What Hong Kong issuers should do in FY2026
For HSCLI / LargeCap issuers with Mainland power, steel, cement or aluminium operations
FY2026 is the first financial year for which HSCLI constituents must report Part D Climate Requirements on a mandatory basis. Rather than treating it as just a drafting year, boards should use it as a control year and request three practical items from management:
An ETS–Scope reconciliation
A short memo explaining how ETS-covered direct emissions align with group Scope 1, and specifying how purchased electricity and heat (Scope 2) are being measured and disclosed for Mainland operations that sit outside ETS boundaries.
A financial-effects note
A management paper that translates allowance surplus or deficit into cash-flow and working-capital implications, and shows how carbon cost developments are considered in pricing, capex and financing discussions.
A transition-plan skeleton
An outline of how efficiency, fuel mix, technology choices and potential offset use under China's voluntary market contribute to the group's climate transition, with clear assumptions and guardrails around offsets.
These artefacts can then be turned into Part D disclosures and board-level discussions that show climate oversight is integrated into broader risk and strategy, not relegated to an EHS footnote.
For other Main Board issuers still on comply-or-explain for Part D
Main Board issuers remain on a comply-or-explain basis for most Part D climate disclosures, but already must report Scope 1 and 2 emissions. "Explain" is not a long-term shelter. HKEX encourages issuers to provide timetables and work plans where information is incomplete. If an issuer already faces ETS-driven carbon costs or decisions and still offers only generic explanations about "building systems", that narrative will quickly feel dated.
FY2026 can therefore be used as a capacity-building year: consolidating ETS data into a single inventory, agreeing boundaries across subsidiaries, and piloting internal controls around climate metrics and scenario analysis, ahead of any future alignment between Part D and HKFRS sustainability standards.
For dual-listed groups and conglomerates
Groups with listings in both Mainland and Hong Kong markets, or with complex portfolios including captive power, heavy industry and services, should avoid running "Mainland ETS" and "Hong Kong ESG" as separate universes. A single disclosure controller or committee, with authority over climate boundaries, intensity denominators, scenario choice and language, can ensure that ETS information feeds consistently into both Mainland sustainability reports and HKEX Part D chapters.
This governance choice belongs in the same conversation as Corporate Governance Code expectations on risk management, internal control and internal audit.
What good looks like in a 2027 Part D climate chapter
For issuers affected by the plan, a credible FY2026 Part D climate chapter in the ESG report published in 2027 is likely to show:
- Clear reconciliation between ETS-verified emissions and Scope 1, and explicit Scope 2 disclosure for electricity and heat outside ETS coverage.
- Discussion of how allowance positions and expected carbon costs affect margins, cash flows and capital allocation.
- Explanation of how policy signals on efficiency, capacity and technology have informed transition plans and scenario analysis.
- Transparent disclosure of any use of offsets within China's voluntary market, framed as a bounded supplement to operational abatement rather than a substitute.
Investors and lenders reading both Mainland and Hong Kong disclosures will increasingly favour issuers that admit uncertainty where data are still maturing, and that show how "Mainland compliance numbers" are being converted into "Part D climate finance numbers".
Conclusion
Mainland carbon allowances are not an operating silo. In 2026, the competitive advantage is not having one more compliance certificate. It is having ETS data integrated into a single climate inventory, mapped consistently into HKEX Part D metrics, financial-effect analysis and transition plans, so that the same emissions and the same board do not tell two different stories.
Edited / written by: Amanda Cheung, Founder, AMMO Group
