Environmental, social, and governance (ESG) investments have seen a great acceleration in Asian countries throughout the past few years. The current number of PRI signatories in Asia is now at 421—a 23% increase from 2020 and double of what it was in 2017.
Requests for ESG content sets in particular gained momentum on the back of the COVID-19 crisis and the Paris agreement. Asia, one of the most vulnerable regions to the impact of climate change, has seen an increase in pledges, regulations, and policy announcements surrounding climate risk mitigation. Infrastructure and urban areas in some developing areas of Asia are still under construction, providing the opportunity to invest in sustainable infrastructure projects that result in real opportunities for investors in the field. For example, as a result of the Green Investment Principles (GIP) for the Belt and Road Initiative (BRI) that was launched in 2018, multiple aspects of sustainable development are being incorporated into China’s BRI.
Physical climate risk exposure is not the only driver for engagement in ESG investments in the region. Over the past few years, regulations and policies focusing on specific environmental engagements have largely increased. In December 2019, Hong Kong Exchanges and Clearing Limited (HKEX) issued new guidelines around mandatory disclosure on ESG reporting. The Green and Sustainable Finance Cross-Agency Steering Group, created in May 2020 and co-Chaired by Hong Kong Monetary Authority and the Securities and Futures Commission (SFC) of Hong Kong, is working toward aligning and mandating climate-related reporting with the Task Force on Climate-related Financial Disclosures (TCFD) for all relevant sectors by 2025.
In September 2018, the China Securities Regulatory Commission (CSRC) developed a standard template for public company disclosures, providing a new framework to disseminate ESG information and enhancing companies’ engagement on topics of sustainability.
In December 2020, the Monetary Authority of Singapore (MAS) published the MAS Environmental Risk Management framework. Closely aligned with the TCFD framework, it provides asset owners and asset managers with guidance on how to report on their climate risks exposure. It also looks at an implementation timeline of 18 months and demonstrates how MAS is closely engaging and monitoring the way in which large asset owners and asset managers are complying with the frameworks.
The Data Challenge
The recent regulatory push to move from voluntary to mandatory disclosures has increased the number of publicly listed companies measuring and reporting climate-related disclosures, specifically those related to Scope 1 and 2 emissions. However, even with an increase of 85% according to ISS, the amount of disclosures reported on greenhouse gas (GHG) emissions in China and across Hong Kong, Singapore, Korea, and Taiwan remains low. The total number of companies that report emissions also remains low. Companies that do not report their GHG emissions are less likely to have direct engagement in climate risk mitigation and low carbon transition, especially within sectors with high exposures.
Multiple steering committees across the region have been created throughout the last few years such as the Green Finance Industry Taskforce (GFIT) in Singapore and the Green and Sustainable Finance Cross-Agency Steering Group in Hong Kong. Part of their role and agenda is to increase awareness and educate different stakeholders in the financial industry. Asia Securities Industry & Financial Markets Association (ASIFMA) in Hong Kong has also organized multiple training sessions for institutional investors on how to integrate ESG considerations into their processes and, more specifically, how to interpret and use properly ESG data to make better decisions.
Climate finance is a concept that was coined by the United Nations’ (UN) Framework Convention on Climate Change (UNFCCC); it is defined as “financing that seeks to support mitigation and adaptation actions that will address climate change.” It is, by definition, a multi-disciplinary approach that requires understanding of climate science, finance, and data management. While there are various types of environmental datasets, properly leveraging them for the appropriate type of ESG strategies is key. The recent Deutsche Bank controversy highlighted the misuse of ESG data by “averaging other firms’ ESG ratings in a way that didn’t generate meaningful determinations on whether a company was good at, say, cutting carbon emissions or improving the diversity of its board.” With an increase in regulatory scrutiny on true sustainable investments, it is essential to have teams of experts trained in using adequate methodologies. Once Asia has established itself as an expert in sustainable finance , it will need to explore the sustainability of non-traditional financial products (e.g., those for blended finance).
The Sustainability Finance Disclosure Regulation (SFDR) and European Union (EU) taxonomy are the cornerstones of the European Green Deal. The main goal of these new policies is to establish and ensure a unified definition of sustainability that can be translated from issuers to investors. Both policies would mandate companies to report relevant information that the market needs to properly and more efficiently price assets. Different countries in Asia, such as Singapore and Malaysia, defined their own taxonomy on what sustainability and sustainable activities are. To be able to translate proper information to the market in theory taxonomies should be aligned, however sustainability is a multi-dimensional concept; regional, cultural, and economic development differences need to be considered, and Asian countries are yet to find a solution to this. A green bond issued in a developing country might be backed by genuine projects even if it does not fulfill requirements from another framework. Up until recently, the use of proceeds from green bonds issued in China could be used to finance “clean coal projects.” Such projects have been a standard practice in developed countries for some time; they reduce emissions of ash and sulfur dioxide. China is still heavily reliant on coal energy and in the short term had to adjust its list of projects eligible for green bond financing. This adjustment was done to align with global standards that were pressuring China’s energy industry to expedite its transition to renewable sources.
Asia’s take on ESG and sustainable investments have gained a lot of momentum. Often viewed as lagging behind Europe, the region has made some substantial progress. It has even paved the way on some topics including mandatory disclosures and viewing climate risk exposure with knowledge of the TCFD framework. Different regulations and steering committees across the region are pushing to bridge the gap in terms of data and knowledge. While Europe is trying to shift from managing external risk on portfolios to managing portfolios that have a positive impact on society, Asia is still very much focused on risk management. However, knowing the level of agility and innovation is usually part of the regional dynamic. Transitioning from ESG to sustainable finance could rapidly occur in the next couple of years.
Candice Coppere is Head of ESG, Client Solutions and Research, APAC at FactSet
Mrs. Candice Coppere is VP, Head of ESG Client Solutions and Research in Asia-Pacific. In this role, she offers ESG expertise to clients integrating sustainability goals into their investment processes, including thematic investing, the valuation process, portfolio construction, risk management, and corporate engagement. Prior to this, Mrs. Coppere was a Research Specialist, specializing in workflows and solutions for front office teams, including buy-side and sell-side fundamental and quantitative analysts. She holds master's degrees in Engineering Physics from the Institut National des Sciences Appliquées de Lyon and Global Politics from the University of London.
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