Regulatory developments in Asia have been a key push to bolster the ongoing ESG momentum. The growth of the ESG landscape in the region is led by rapid wealth accumulation and rising ESG investing opportunities. Asia’s major financial hubs have managed to achieve this high level of ESG regulations, compliance, and quality of disclosures in just a few years. Regulators and industry bodies have played major roles in forwarding the ESG and sustainability agenda. Frameworks, standards, and reporting requirements for the ESG landscape are constantly evolving in the region.
Amid rising ESG opportunities, Asia has been a potential lookout for local as well as foreign investors. This is because ESG-forward companies from the region have managed to downside risk better. They have also identified high‑quality businesses driving positive change in the future. As per Eastspring Investments, the Asia Pacific region is expected to see up to $250 bn in new renewable investments by 2025.
Strong economic growth and ESG regulations have allowed the region to stand out as a compelling investment proposition, PwC said in a recent note. “These include stewardship codes, ESG risk management guidelines, forming of the steering committee, and cross-collaborations among industry players,” the brokerage added.
Asia’s regulatory developments bolster ongoing ESG momentum
The green-labeled instruments played a key role in funding renewable energy projects in Asia, Economist Intelligence Unit (EIU) said. The Renewable Energy Country Attractiveness Index (RECAI) has ranked China, India, and Japan the highest in Asia for investment and implementation opportunities in the renewables space. Data compiled by World Economic Forum suggests that the investments into renewable energy, have seen industry leaders emerge in Korea, China, and India.
There’s a pick-up in bond issuances from the renewables energy sector, especially from China and India, said Eastspring investments in the latest report in April. It expects the banking, energy, transportation, and real estate sectors to take the lead in green financing innovation in Asia. Data compiled by Moody’s Investors Service and the Climate Bonds Initiative show newly issued green bonds rose to around $296 bn last year from $100 bn in 2016 globally.
The cumulative value of sustainable issuance in Asia has surged sevenfold in just four years to $275 bn in 2020. China and South Korea combined to account for two-thirds of the total. Meanwhile, Hong Kong and countries like Japan, India, and the Philippines split the rest.
Has ESG regulations in Asia improved?
There has been tremendous change in Asia over the past decade, however, the ESG landscape continues to evolve. In the US, for instance, 85% of S&P 500 companies disclosing some level of their ESG and sustainability performance.
Climate change has recently prompted a significant paradigm shift in the ESG landscape. Asia’s economies have been increasingly pushing toward sustainability and reducing reliance on fossil fuels. The growth in sustainable issuance has come as investors look towards driving positive change through investment. The ESG hub-China announced that it wants to become carbon neutral by 2060. Meanwhile, other Asian financial hubs like South Korea, Japan, and Hong Kong pledged to do the same by 2050.
McKinsey in its ‘Climate risk and response in Asia’ report highlighted that “Asia is well-positioned to capture the opportunities that come from managing climate risk effectively.”
The potential for investing with sustainable objectives has gained momentum, especially during the pandemic. ESG principals-based global funds topped $1 tn in assets amid the coronavirus crisis, data by Morningstar suggested.
Backed by investor demand and stricter regulation, there has been robust progress in the quality of ESG regulations in China. Thanks to proactive government policy, Xi Jinping’s Beautiful China initiative, the nation has introduced a series of significant measures. The Chinese government puts a priority on climate change in its recently announced 14th 5-year plan.
China is emphasizing the importance of ESG for investors and also changed the framework in China’s corporate governance (CG) code. Asian Corporate Governance Association (ACGA) watch 2020 report finds that China’s score has slightly improved over the last couple of years. Moreover, the State Council of China also plans for a “green silk road” within its international Belt and Road strategy.
People’s Bank of China has also decided to exclude clean coal from its list of projects eligible for green bonds. The bank has started accepting green bonds as collateral for its medium-term lending facility program.
There is a relatively low level of ESG integration in Hong Kong SAR. Hong Kong Monetary Authority (HKMA) introduce several measures in 2019. It is seeking to develop the city as a regional hub for sustainable banking and green finance. Hong Kong’s stock exchange regulator (HKEX) has introduced ESG-focused listing requirements, for enhancing CG transparency, and updating reporting guidelines.
There is increasingly more ESG integration in Singapore. Sustainability is a key pillar supporting Singapore’s 2020 budget initiatives. Singapore unveiled Green Plan 2030 recently. It charted its green targets over the next ten years, to advance the national agenda on sustainable development.
In a move to promote a green finance hub and promote sustainable financing in the financial sector, the Monetary Authority of Singapore has set aside around $2 bn in 2019. Singapore’s stock exchange has also introduced sustainability reporting guidelines for listed companies.
Furthermore, Singaporean banks have introduced climate change policies with the aim of reducing their financing of coal-fired power generation. Green bond issuance has also been rising in Singapore.
Meanwhile, Bank Negara Malaysia plans to implement a green taxonomy. This can eventually be used to help differentiate financial institutions, on the basis of their support for climate goals.
Securities Commission of Malaysia has earlier released the Sustainable and Responsible Investment (SRI) Roadmap for the Malaysian capital markets. Meanwhile, Bursa Malaysia, has written guidance on ESG reporting and has ESG reporting requirements as a listing rule.
In India, Bombay Stock Exchange (BSE) has published a guidance document on ESG regulations to companies as well as investors. The exchange provided 33 specific issues and metrics on which companies should focus.
Securities and Exchange Board of India (SEBI) has taken significant steps towards bringing sustainability reporting at par with financial reporting. SEBI has notified new disclosure norms on sustainability reporting for the top 1,000 listed companies by market cap by FY23.
Japan’s ESG regulations stand out among other major markets in the Asia-Pacific region. Japan Exchange Group and Tokyo Stock Exchange published ESG disclosures last year. Meanwhile, Japan’s Ministry of Economy, Trade and Industry (METI) has created a label to identify companies that are reporting on ESG performance.
The size of green loans in Japan has further jumped to $29 bn in 2019 from $1 bn in 2016. This dropped to $16.5 bn in 2020, data by Environmental Finance and the Ministry of Environment of Japan suggested. The Japanese government has recently announced that the most inefficient coal plants will close by 2030.
In addition to this, Japan’s Government Pension Investment Fund (GPIF) is also investing in sustainable indexes. This will help in promoting innovative investment practices and improving ESG standards in its passive portfolios.
Thailand’s Securities and Exchange Commission (SEC) publishes annually a list of companies that meet their ESG performance criteria. In addition, The Stock Exchange of Thailand (SET) has made stunning progress in the ESG landscape. In 2020, Thai ESG funds enjoyed a fourfold increase with net inflows of $486 mn from $100 mn in inflows in 2019.
Thailand has gained recognition for its progress in the corporate governance and ESG area in just a few years. Thailand’s national development strategy has led high level of compliance and quality of disclosures from Thai companies.
As per the 2019 survey on corporate governance by Asia Corporate Governance Association (ACGA) and CLSA, Thai companies are among the best in the region in sustainability disclosures. The Dow Jones Sustainability Emerging Market Index includes 20 Thai companies among the 94 constituents, at par with Taiwan.
The Social and Governance (ESG) disclosure scores, Taiwan ranks number one in ESG disclosure in Asia, as per Bloomberg Environment. Taiwan and Taipei Stock Exchanges and the Financial Supervisory Commission have made concrete steps over the past decade to encourage companies on reporting their Corporate Social Responsibility (CSR) activities. Taiwanese listed companies have been more aware of sustainability issues and taken a leadership stance on ESG governance and reporting. Taiwan’s government has also promoted green finance products.
Listed companies from South Korea have also pushed towards sustainable business practices amid the recent ESG investment hype. The new guidelines by the country’s market regulator suggest that companies listed on the Korea Exchange (KRX) will be required to submit detailed ESG reports from 2025 onwards.
The Financial Services Authority (OJK) of Indonesia issued ESG regulations that require corporations to prove their sustainability credentials every year to the authority. It also laid out the standards for green bond issuance.