IMPACT ANALYSIS: ESG regulations in Asia gather momentum

Regulators in the Asia-Pacific region have prioritised environmental, social, and governance (ESG) factors into their approach and outlook. Although ESG in the Asian region is gathering momentum, it still remains in relative infancy with investors and analysts waiting for an agreement on an ESG reporting standard that could streamline the data collection process and produce more quality data to assess ESG advances in the financial markets.

Asia’s major financial centres have all implemented ESG regulations, compliance and quality disclosures to try to improve ESG reporting. ESG integration, however, needs a more consistent approach and clear standard or definition in Asia to properly assess data and assist regulators, promoters, and investors.

Regulatory development

Climate change and the push towards to green power has prompted a significant shift in mindset in the Asian economies that are now more directed towards sustainability and implementing plans to reduce reliance on fossil fuels and attract green investments. This increase of sustainable objectives has especially gained momentum during the COVID-19 pandemic that has revealed the over-reliance on supply chains from one or two commercial hubs and the lack of diversion in Asia in the supply of goods and services and medical resources, for example, can also impact economic performance.

According to a recent OECD report, (ESG Investing: Practices, Progress and Challenges), the amount of professionally managed portfolios that have integrated key elements of ESG, exceeds $17.5 trillion globally and the growth of ESG-related trade investment products to institutional and retail investors exceeds $1 trillion, “and continues to grow quickly across major financial markets.” It is not clear what proportion of this amount relates to the Asia-Pacific region.

Definitions differ regarding the form and consideration of ESG risks but broadly speaking, the general approach from recent regulatory outcomes, is an approach that seeks to incorporate environmental, social, and governance factors into allocation and risk decisions in order to generate sustainable and long-term financial returns.

Regulatory developments in different jurisdictions

China

China is emphasising the importance of ESG for investors and in 2020, changed the framework in China’s Corporate Governance Code and has also implemented ESG regulations in China and included climate change as a priority in its recent five-year plan.

Hong Kong

There have also been increased regulatory measures in Hong Kong to develop the financial centre as a sustainable banking and green finance hub. The Hong Kong Monetary Authority has introduced several measures to make it easier for companies to specialise in green finance and the Hong Kong Stock Exchange has introduced ESG focus listing requirements to improve corporate governance transparency and other disclosure requirements.

Singapore

Regulators in Singapore standout from the other major markets and have promoted the financial hub to be a sustainable financial centre. The Monetary Authority of Singapore (MAS) announced that it set aside $2 billion to implement ESG integration and attract investors and companies. The Singapore Stock Exchange has also introduced sustainability reporting for listed companies. In parallel, Singaporean banks have been involved in agreeing on issuance and are reducing their exposure to fossil fuels.

Australia

In Australia, at the Commonwealth level, ESG has been a matter of national interest and there is a range of regulations and laws that control waste emissions by industry. There are ESG disclosure regulations that stem from a number of sources. Regulatory guidance in relation to the Corporations Act, requires companies to disclose whether there are ESG risks facing a company where those risks could impact the company’s financial performance or other material issues.

In addition, for listed companies, there is ASX corporate guidance (ASX Corporate Governance Counsel Principles and Recommendations 4th ed) that require listed companies to make disclosures in an annual corporate governance statement which may include ESG risks and how to manage those risks. There is also ASIC regulatory guidance, and the Commonwealth has introduced a Modern Slavery Act 2018.

Malaysia

The Securities Commission of Malaysia has released a sustainable and responsible investment road map for the Malaysian capital markets and Bursa Malaysia has implemented ESG reporting as a listing requirement.

Japan

Japan has also put much effort into developing its ESG regulations. The Ministry of Economy, Trade and Industry, has created guidelines for companies that require them to report on ESG performance. Last year, the Tokyo Stock Exchange published requirements for ESG disclosure. There has been a major step forward in Japanese banks and the government, being involved in “green loans” among major Japanese funds investing in sustainable indexes.

Without a proper standard ESG will be hard to provide analysis for Asia

One of the major hindrances of being able to track the development of ESG integration is a limited understanding of ESG issues and the lack of comparable data. Although ESG data has come a long way, nonetheless ESG ratings can vary from one ESG provider to another. Different countries and indeed, different companies, are using varying methodologies to translate more data into a more sophisticated rating and therefore there is a wide variance of result.

The impact of this is that if investors are relying on different service providers, the score inputs and the shape of the ESG investment selection, can be manipulated by the rating provider and this will have an outcome on how its different funds compare to their credit rating of ESG firms.

OECD Secretariat found an inconsistent co-relation between high ESG scores and returns such that different providers led to different results: “The predictive power of ESG scores is inconsistent, and there is evidence that while some high ESG indices and portfolios can outperform the market, the same is true for low ESG portfolios using different providers of data.”

It would be helpful if internationally, regulators, issuers, and investors could agree on a single ESG reporting standard that could streamline the data collection process and produce more quality data. If the problem is not solved and the divergence continues, it will cause confusion for investors and large discrepancies in ESG ratings across providers and reduce the meaning of ESG portfolios or even create bias between companies.

Developments need to occur in ESG definitions

ESG integration is gaining momentum in all the Asian financial hubs with increased regulations, compliance, and disclosures. However, ESG integration needs a more consistent approach in Asia by regulators, promoters, and investors, which set out to create standard procedures to introduce a single ESG reporting standard that will assist firms and regulators to assess ESG investment penetration in the Asian market in the future.

At the moment, it is still very much guess work and a matter of evolution. There is no doubt that if they get ESG investing right, where firms are able to incorporate long-term financial risks and opportunities into their investment decision making, then better risk decisions can be made.

Niall Coburn is the Regulatory Intelligence Expert at Thomson Reuters in the Asia-Pacific region and a Barrister at the Queensland Bar.

As an expert on regulatory issues at Thomson Reuters, Niall writes articles, white papers, gives presentations in the region and liaises with the banking industry internationally concerning regulatory developments in the Asia-Pacific region.

Prior to joining Thomson Reuters, he was the regional Managing Director at FTI consulting, responsible for leading its Regulatory and Forensic Investigation Practice in Australia. FTI is a global consulting firm listed on the New York Stock Exchange with 500 offices worldwide.

Niall was also a Senior Lawyer and Specialist Adviser at the Australian Securities and Investments Commission. In this role he led high-profile investigations into complex corporate crime cases. He has also worked internationally, being part of a team that created the regulatory structure for the Dubai International Financial Centre (DIFC).

Niall was appointed Director of Enforcement at the DIFC in 2003 and worked with international law enforcement agencies to combat financial crime.

Niall has also worked in the Asia-Pacific region in his own consultancy, Coburn Intelligence in China and Hong Kong, investigating major frauds and misleading conduct in the investment industry.

Niall was awarded an Australia Day Honour from the Commonwealth Government for his work leading major criminal investigations at ASIC. He is a Barrister of the High Court of Australia and a member of the Queensland Bar Association and the International Bar Association.

 

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