RISING pressure on companies and financial institutions to put out better environmental, social and governance (ESG) disclosures, and a more urgent need for markets such as Singapore to adopt alternative energy sources, will be the top two themes defining the ESG investing landscape in Asia this year.

In particular, investors will want to look out for growing financial regulation aimed at ensuring accurate fund labelling, and the pressure put on renewable energy policies because of rising natural gas prices, said ISS ESG in its latest report, Actionable Insights: Top ESG Themes In 2023 (Regional Edition).

ISS ESG is the responsible investment arm of Institutional Shareholder Services, which provides ESG solutions for asset owners, asset managers, hedge funds, and asset servicing providers.

Regulatory moves

Financial regulators in Asia have been honing their sights on ESG-related disclosures, largely because regional governments have advanced on net-zero emissions policies and begun adopting regulation aimed at turning their financial centres into sustainable finance hubs.

Regulatory pressures will probably continue to drive demand for ESG data among Asia-based investors in 2023 – but the region’s initial focus on corporate climate disclosures and green bond standards is now shifting towards fund disclosures and broader taxonomy approaches, ISS ESG said.

The push for better fund disclosures comes from concerns around greenwashing related to ESG funds and fund labelling. Such regulation aims to avoid misleading statements and to promote clear alignment with actual fund objectives and strategies.

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ISS ESG noted that fund-labelling and fund-naming regulations targeting ESG-branded funds are now well underway across multiple jurisdictions, most prominently in the finance hubs of Singapore, Hong Kong and Japan. The Association of Southeast Asian Nations’ (Asean) Sustainable and Responsible Fund Standards disclosure requirements are also expected to influence member states and to further intensify regulation in these countries.

“These developments mean asset managers across most Asian countries will need to be able to substantiate why they deserve an ESG label in an increasingly granular and yet comprehensive way, and to make a public case about why their fund is true to that label,” ISS ESG said.

Investors should expect an increased focus on disclosures at the product, portfolio and provider levels, similar to requirements under the European Union’s Sustainable Finance Disclosure Regulation (SFDR) and the proposed UK Sustainability Disclosure Requirements (SDR), it added.

Fund regulation aside, ESG rules in Asia will continue to focus on climate issues – with the emphasis being on planning and financing the region’s transition, rather than on meeting specific transition-outcome benchmarks.

For that reason, regulators here are likely to closely follow the United Kingdom’s Transition Plan Task Force, which may produce the most advanced and detailed guidance on transition planning globally, ISS ESG said. The outputs from this process could influence what Asian policymakers will prescribe for companies and investors in 2023.

Stewardship Codes could also be in the limelight again, as mechanisms to increase disclosures and transparency. Singapore updated its Code last year, and Japan is expected to announce the review of its Code later this year. Stewardship discussions reflect a growing interest in tagging qualitative strategies with quantified metrics, said ISS ESG.

Energy diversification

Increased natural gas prices, partly caused by Russia’s invasion of Ukraine, will give further impetus to Japan, South Korea, and Singapore to diversify and prioritise their energy transition strategies towards alternative energy sources, the report opined.

These three economies currently depend heavily on natural gas – with imported natural gas making up one-third or more of the electricity generated for each of them.

The proportion is markedly greater in Singapore, where 95 per cent of electricity generated domestically is powered from natural gas. Based on 2021 data, some two-thirds of Singapore’s natural gas was imported as piped natural gas (PNG), with the remaining being liquefied natural gas (LNG).

Prices have spiked: PNG and LNG provided under long-term contracts saw price increases of 20 per cent and 50 per cent, respectively, year on year from August 2021 to August 2022. The LNG spot price saw a 224 per cent increase during this same period. Global competition for natural gas is expected to continue to intensify this year as well, given the ongoing crisis.

Still, ISS ESG expects Singapore to continue relying on natural gas, even as it diversifies its energy supply sources via the “Four Switches” – natural gas, solar, regional power grids, and emerging low-carbon alternatives – an approach it has adopted to enhance energy security.

This is mostly because alternative energy sources present challenges: space constraints limit solar deployment, while importing renewable energy faces hurdles such as infrastructure funding and susceptibility to energy nationalism. Singapore also regards natural gas as the cleanest-burning fossil fuel which can ensure energy security, in contrast to the intermittency of renewables.

But ISS ESG believes the overall momentum for alternative renewable energy sources and low emissions technologies such as nuclear will continue in the medium to longer term. It notes that Singapore, Japan and South Korea are cognisant about the global call for climate action and their respective commitments to reduce greenhouse gas emissions.

“Consequently, a push for businesses and consumers operating in the three countries to shift away from natural gas to alternative forms of low-carbon energy is expected,” it said.

“Such a push could come in the form of incentives and policies that reduce the barrier for businesses and consumers in Asia to take up alternative low-carbon energy forms, while natural gas prices remain high.”