The absence of standardised rules and consistent approaches, combined with a fast-evolving regulatory environment, requires asset managers and banks to be fleet-footed in order to keep up, let alone stay ahead.
Asset managers in Asia could be forgiven for thinking ESG stands for Ever-Shifting Ground. The good news is that developments are afoot that stand to usher in a more homogeneous future.
Notably, the International Sustainability Standards Board (ISSB) – launched at COP26 in Glasgow in 2021 – has been tasked with developing a comprehensive global baseline of sustainability disclosures for the world’s capital markets. Its draft rules were released in March, and final guidelines are due to be published by the end of the year.
“There is an alphabet soup of many, many standards,” said Emmanuel Faber, ISSB Chair, in a Bloomberg TV interview. “The ISSB could play a role in trying to bring everyone within a […] unified global baseline and building blocks on the themes of ESG topics.”
The initial standards will cover requirements for sustainability-related and climate-related disclosure, building on work by the Taskforce on Climate-related Financial Disclosure (TCFD) – set up by the Financial Stability Board – and the Sustainability Accounting Standards Board.
“There is an alphabet soup of many, many standards. The ISSB could play a role in trying to bring everyone within a […] unified global baseline and building blocks on the themes of ESG topics.”
– Emmanuel Faber, ISSB Chair
The ISSB “will bring further transparency on the financial impacts of climate change,” said Mary Schapiro, Head of the TCFD Secretariat. According to consultancy KPMG, the development could “signal a new era in corporate reporting where the same rigour is demanded for sustainability reporting as for financial information”.
Fund manager Invesco said the participation of Asian countries will be “critical to enabling consistent and purposeful comparisons” of sustainability reporting across sectors and geographies.
Financial companies in Asia are already adapting to a plethora of regulations, including a growing volume of mandatory disclosures.
Hong Kong, which aims to implement the ISSB standards by the end of 2022, requires fund managers to include climate risks in their processes as well as make appropriate disclosures. The regulator there has established rules for funds seeking to use ESG, or green, in their names, highlighting the major regulatory concerns over “greenwashing”.
In Singapore, environmental risks must be tallied in research and portfolio construction, while asset managers need to undertake scenario analysis when the environmental risk is seen as “material”. Under Monetary Authority of Singapore (MAS) guidelines, banks must disclose their approach to managing environmental risk and its potential impact on their business at least once a year.
Japan is seeking to mandate disclosures from larger listed companies in 2022, and eventually from all companies that produce annual reports. India has implemented sustainability-related reporting requirements for the top 1,000 listed companies by market value.
China requires key polluting companies and subsidiaries to publish environmental information. A mandatory disclosure system will come into effect by 2025, mostly covering large polluters, and listed companies and bond issuers with a poor record in environmental protection.
China’s central bank undertakes quarterly assessments of 24 major banks on their green finance performance. In a potentially significant development, a mash-up of state and private bodies – China Enterprise Reform and Development Society (CERDS) – has compiled the country’s first ESG disclosure standards, albeit not mandatory. China’s regulators are urging listed companies to report ESG information with a view to introducing mandatory disclosure in the future.
Wrestling with data
Whatever the rules, the availability of accurate and appropriate data is crucial.
Hong Kong’s central bank has drafted regulations requiring banks to improve their ability to fill any information or data gaps. Malaysia plans to create a catalogue of climate data to support scenario analysis and various needs, while Australia’s regulator is seeking help on physical climate risk modelling.
For asset manager Amundi, covering some 10,000 companies using 37 ESG criteria requires the input of no fewer than 15 data providers.
“This produces a lot of data that takes a long time to compute,” said Eric Bramoulle, the company’s CEO in South Asia, on a call organised by The Asset magazine and Deutsche Bank. “This is where we are focusing a lot of our energies.”
He is not alone. Different asset managers and banks require different types of data or different granularities of data, and this creates a reporting, collation and operational burden on companies, said Jason Norman Lee, Managing Director of Legal and Regulatory at Temasek International in Singapore.
Lee pointed to initiatives such as the European Single Access Point, which offers a one-stop shop for public financial and sustainability-related information about EU companies and investment products as useful developments. Technology will also play a bigger part.
Globally, the market for ESG data is on a tear, surpassing US$1 billion annually for the first time in 2021, according to U.S. consultant Optimas. That figure may jump to US$1.3 billion in 2022.
Another strain on institutional investors comes simply from operating in places where climate policy is less supportive than, say, in the EU, according to Zoe Whitton, a Partner at climate consultancy Pollination. This has contributed to “a material extension of the scope and responsibility of the traditional institutional investor,” since they are required to navigate inconsistencies between standards.
A report by Goldman Sachs highlighted the emergence of fund requirements across Asia, mirroring developments in Europe that have seen funds attract greater inflows as the system has developed.
“As a read-across for what may evolve in the APAC market, European ESG funds have benefited from tightened ESG fund requirements,” the bank’s report said, noting that Asia had potentially overtaken the US in terms of ESG corporate disclosure.
“If you were to have asked 18 months ago whether banks and asset managers really wanted to talk about the financial risks associated with biodiversity loss, you would have been met with a healthy degree of scepticism. That is no longer the case.”
– Gilly Hutchinson, Linklaters’ Head of ESG Regional Development in Asia
And while Asia Pacific may lag Europe, regulators have used that gap to evaluate global policies before adapting them to their domestic markets, according to Magnus Cattan, Vice President at ICE Fixed Income and Data Services.
An already challenging situation faces further complexity, with the Taskforce for Nature-related Financial Disclosure (TNFD) – dubbed “TCFD for nature” – developing quickly. More than half of the world’s economic output – US$44 trillion of economic value generation – is moderately or highly dependent on nature, so nature loss represents a significant risk to corporate and financial stability, according to the taskforce.
“If you were to have asked 18 months ago whether banks and asset managers really wanted to talk about the financial risks associated with biodiversity loss, you would have been met with a healthy degree of scepticism. That is no longer the case,” wrote Gilly Hutchinson, Linklaters’ Head of ESG Regional Development in Asia, in a January 2022 report.
“There is now a general acceptance that biodiversity loss and the climate crisis go hand in hand even if there is an ongoing struggle to find bandwidth to engage with another, more complex new area.”