Environmental, social, and corporate governance (ESG) investments are becoming more defined and regulated in Europe, such as through the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the EU’s taxonomy for sustainable activities. A clear set of criteria that determines if an activity is environmentally sustainable will reduce greenwashing.
In APAC, vast political, economic, and social differences among countries translate into diverse sustainable finance regulations. Even for ESG factors that are easiest to measure and compare — carbon emission, for example — there are still no common goals in the region. Only China (pledged to become carbon-neutral in 2060), South Korea (2050), Japan (2050), New Zealand (2050), and Indonesia (2060) have set a net-zero target, leading to different approaches and progress in regulating sustainable finance activities.
We found some regional commonalities and trends, however, in ESG disclosure requirements, sustainable finance product standards, and financial incentives for sustainable finance products and activities.
ESG Disclosures: Firms Have To Comply As Listed Companies And Financial Institutions
All major markets in APAC already have ESG disclosure guidance in place and are partners of the UN’s Sustainable Stock Exchanges Initiative. The stock exchanges have also provided written guidance on ESG reporting that’s in line with global standards, such as the Global Reporting Initiative (GRI) Standards, the Task Force on Climate-related Financial Disclosures (TCFD), the Climate Disclosure Standards Board (CDSB), and/or the International Integrated Reporting Council (IIRC). This means that listed companies are mandated to publish annual ESG reports that cover material ESG information in both quantitative and qualitative manners.
Exchanges in Malaysia, Thailand, Vietnam, the Philippines, and Hong Kong have requested ESG reporting as a listing rule regardless of company size. Any company listed on the Philippine Stock Exchange that fails to submit an ESG report would be penalized for incomplete reporting.
Countries that have already set a net-zero target in the region have developed regulations and guidance at a state level. For example, the Bank of Japan (BOJ) and Financial Services Commission (FSC) of South Korea encourage financial institutions to enhance their disclosures based on the TCFD framework, which means they have to disclose the organization’s governance, strategy, risk management, metrics, and targets quantitatively and qualitatively in relation to climate-related risks.
With the EU stepping up and setting a new Corporate Sustainability Reporting Directive (CSRD) and making non-financial reporting mandatory, and with leading APAC countries committing to net-zero goals, more countries in the region will follow suit to set stricter regulations around sustainability reporting in the near future. In August of 2021, the Singapore Stock Exchange (SGX) also launched a public consultation on a plan to make climate-related disclosures mandatory in companies’ sustainability reports.
Product Standards: Green Taxonomies Are Being Formed And Standardized
Though products such as green loans and sustainability-linked loans have taken off in APAC, customers and investors are still cautious about greenwashing. According to the Climate Bonds Initiative (CBI), China was the second-largest green bond issuer in 2019 with $31.3 billion issued, after the US ($51.3 billion issued), but $24.2 billion of Chinese issuances of labeled green bonds were excluded from these figures because they were not in line with international green bond definitions.
With the climate mitigation and adaptation requirements of the EU taxonomy ready to be applied starting in January 2022, regulators in the APAC region have also been working on sustainable taxonomies.
China has issued a green bond catalog since 2015, which was updated in 2021. The country has also recently announced a collaboration with the EU to adopt a common taxonomy for green investments, aiming to implement a mutually recognized classification system for the environmental activities of businesses by the end of 2021.
In 2020, finance ministers and central bank governors from members of the Association of Southeast Asian Nations (ASEAN) announced their support for an ASEAN taxonomy of sustainable finance. The Korean government has also announced that it will establish a K-taxonomy to help define environmentally sustainable industries and economic activities.
With these taxonomies being formed and standardized, financial services firms in the region will have to set stricter standards for green finance products.
Funding: Regulators Are Incentivizing Financial Services Firms To Accelerate ESG Product And Process Innovations
Regulators are using monetary policy and grants to encourage the flow of capital to climate change efforts.
To support the net-zero goal, the Bank of Japan has introduced a new fund-provisioning measure in 2021; it will provide funds against investments or loans made by the financial institutions that contribute to addressing climate change at an interest rate of 0%.
The Hong Kong Monetary Authority (HKMA) launched the Green and Sustainable Finance Grant Scheme (GSF) in its 2021-22 budget to provide subsidies for eligible bond issuers and loan borrowers to cover their expenses on bond issuance (up to HK$2.5 million, equivalent to $320K) and external review services (up to HK$800K, equivalent to $100K).
The Monetary Authority of Singapore (MAS) launched the Green and Sustainability-Linked Loan Grant Scheme (GSLS), which seeks to support corporates in obtaining green and sustainable financing by defraying up to S$100,000 (US$75K) of the expenses of engaging independent service providers to validate the green and sustainability credentials of the loan.
These schemes have provided financial services firms with a solid business case to accelerate speed to market for ESG products and services. Since sustainable taxonomies in many APAC countries have not yet formed, however, investors, customers, and even practitioners will continue to struggle to determine good practices in the region.
Leading firms should refer to global standards and regulations to guide their ESG practices to ensure longer-term success.