ESG is gaining momentum with regulators in Asia, but more work lies ahead

In 2024, regulatory bodies in Asia have intensified their focus on sustainability reporting. New regulations on green taxonomy, net zero transition plans, sustainability reporting standards, environmental, social and governance (ESG) ratings, and ESG investment products are being developed across the region.

These developments have accelerated as investors globally are increasingly relying on sustainability information for decision-making.

Notable developments since mid-2023 include Hong Kong's principles for Net Zero Transition planning, Singapore's green and transition taxonomy, Taiwan's International Sustainability Standards Board (ISSB)-aligned disclosures for large listed corporates, Japan's ISSB-linked sustainability disclosure standards, and India's regulation for ESG rating providers. While the increased focus on corporate ESG disclosures is a positive step, regulators must also ensure robust oversight to prevent the risk of greenwashing and maintain the integrity of sustainability efforts.

Increased sustainability reporting driving ESG investments

The growing integration of sustainability information by investors in their investment decision-making is driving a more comprehensive form of sustainability reporting by corporates. A study on global investors found that more than 83% investors incorporated sustainability information in their fundamental analysis in 2023, and 79% have sustainability policies in place, as against 20% in 2018.

ESG reporting has expanded in Asian markets, spurred by major corporations’ adoption of ESG practices. A global survey on sustainability reporting trends found that 89% of leading Asian corporates reported sustainability in 2022, a dramatic increase from 2011, when the figure was 49%.

This increasing momentum in sustainability reporting has positively influenced fund flows towards ESG investments in Asia. When global fundraising decreased in 2022 and 2023, ESG funds, especially those in Asia, witnessed stronger resilience than the broader market. Sustainable Bond issuance in Asia-Pacific in 2023 was 40% higher year-on-year and accounted for a third of global sustainable bond issuance of US$872 billion.

Focus on data-driven ESG investments invites greater investor scrutiny

As investors increasingly rely on sustainability information for decision-making and companies provide detailed reporting, the demand for external validation has grown, leading to greater third-party scrutiny of corporate ESG disclosures. For instance, a recent report found that 94% of investors globally use ESG ratings at least once a month to make decisions, and the influence of these rating tools in financial markets has surged. While these ratings offer insights into risks, opportunities and competitive positioning, they also invite scrutiny by rating providers into the ESG practices of companies. Another report by the International Federation of Accountants found that 69% of companies globally obtained assurance on at least some of their sustainability disclosures in 2022.

This underscores that alongside the growing number of ESG regulations in Asia, there is a strong focus on quality, emphasising the need for stricter regulations to reduce the risk of greenwashing, particularly due to the varying definitions between developed and developing markets. In the European Union, the European Sustainability Reporting Standards (ESRS) adopted in July last year, requires limited assurance of sustainability reporting by companies under the scope of the standards. Similarly, on the fundraising side, any labelled EU Green Bond (EuGB) by corporate issuers must have mandatory, pre- and post-issuance reviews and a bond impact report issued by external reviewers. ESG investors are likely to favour jurisdictions where regulations do not just ensure the scope of reporting, but also the quality of reporting.

Way forward for regulators and corporates in Asia

Japan’s first transition bond issuance in February 2024 is a classic example of how external reviews can supplement fundraising efforts. Japan issued a sovereign transition bond of US$11 billion for a 10-year period, at a coupon rate of 0.7%, whereas the average coupon rate for a 10-year bond was above 1%. These bonds have an independent certification by Climate Bonds Initiative (CBI) under the Climate Bond Standards (CBS), an independent verification conducted by the Japan Credit Rating Agency (JCRA), and a second-party opinion provided for the bond framework. Japan’s transition bond issuance is aimed at creating a domestic ecosystem of such issuances and demonstrating the effects of best practices on sustainable debt issuance for corporates.

For regulators in Asia, alongside the wider implementation of ESG regulations, there should be a focus on addressing the risks that arise from increased disclosures. For instance, guidelines should be established to ensure validation, or at the very least, disclosures should be verified to provide assurance on the accuracy of data. Assurance firms offering these services must be required to hold appropriate licenses and permissions. Similarly, sustainable debt issuance should be accompanied with mandatory pre- and post-issuance reviews. For broader applicability and stronger enforcement of ESG practices across a larger number of companies in Asia, there must be a shift from foundational or diluted regulations to clear and precise standards.