Apac suppliers feeling the heat from ‘buyer-led’ ESG regulations from EU players

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SUPPLY chains in the Asia-Pacific are feeling the heat of "buyer-led regulations" as companies reacted to the environmental, social and governance (ESG)-related directives of the European Union, HSBC's Hong Kong head of sustainable finance Carrie Ng said.

On the ground, she is seeing a trend of suppliers in Greater China being increasingly scored by their buyers, for instance.

"The buyer will literally come to the company and say: 'I want to understand these various aspects with regard to ESG. Can you tell me your data points? Can you tell me what you're doing, for example, with regard to human rights? What kind of policies have you in place? What kind of due diligence do you have in place in your work factory?'"

She was speaking on Tuesday (Nov 1) at a conference organised by Sustainable Fitch, the ESG data and analysis outfit of Fitch Group, and responding to Sustainable Fitch's Asia-Pacific head of ESG research Nneka Chike-Obi, who made the point that buyer-led regulations are going to heavily impact the region's supply chain, especially with the upcoming supply chain directive in the EU.

The new rules, proposed in February, are meant to oblige companies to carefully manage social and environmental impacts throughout their supply chains, including those outside Europe.

Pointing out that the directive is expected to affect almost 10,000 companies, Chike-Obi said the ripple effect it will cause in the Asia-Pacific will be significant, considering that much of the world's consumer goods come from this part of the world, and transparency is currently poor.

She went on to state that five of the top 10 textile exporters in the world are Asian countries, Indonesia produces more than half of palm oil exports in the entire world, and that four of the top 10 fish-exporting countries are in Asia.

The issue though, said Chike-Obi, is that many of them are unlisted, and currently fall outside of current ESG disclosure regulations, which implies that suppliers that will be most heavily impacted might not be the most well-prepared.

Chike-Obi, however, believes that it is unrealistic to expect the Asia-Pacific to come up with a regionwide common taxonomy to set the agenda on its own sustainability regulations.

Pointing out that EU's ability to implement change is based on its structure as a politically unified economic bloc, to which there is "no analogue to the EU anywhere else in the world", she said: "Asia is not just at a very different level of economic development within the region, but just doesn't have access to that type of uniformity in policy."

That said, the Asean taxonomy, which provides a framework for South-east Asian government and private stakeholders to achieve the region's climate change goals, is commendable, she said. 

It acknowledges different socio-economic conditions, and allows for countries to have more of a transition-oriented path without being penalised for not being perfectly green, she said.

Beyond Asean, "it's very unlikely that there's going to be a regionwide a common taxonomy", she said. "I think there may be some focus on interoperability, similar to kind of the EU-China common ground taxonomy, but I just don't think that it's possible."

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