What’s next for Asia in ESG corporate disclosures

THE series of measures taken by financial regulators to address environmental, social and governance (ESG) claims made by asset managers has become a much-discussed topic. For all asset managers looking to integrate ESG into their investment process, data from companies is the starting point. Therefore, to tackle potential ‘greenwashing’, investors are paying greater attention to where it all begins - in companies’ non-financial and ESG disclosures.

Europe is often viewed as the leader when it comes to ESG, and the region excels in terms of ESG disclosure rate, with 98 per cent of MSCI Europe constituents publishing sustainability reports. However, over the last year, the ESG disclosure rate of corporates in the Asia Pacific has been catching up – 83 per cent of MSCI Asia Pacific constituents have now published ESG reports. This disclosure rate is now on par with that of the US.

Moreover, 56 per cent of MSCI Asia Pacific constituents have stepped up their ESG reporting by adopting international guidelines. Corporates across markets including China, Hong Kong, India, Korea, Singapore, Taiwan, Australia, and Japan have boosted their environmental disclosures in some ways, such as disclosing their carbon emissions and carbon reduction targets, to bring them more into line with the net-zero commitments of these regions.

While there has been notable progress in disclosure rates in APAC, the next focus is how ESG disclosure standards should be defined, and, subsequently, what information companies should disclose to benefit both investors and wider stakeholders.

2022 has been a pivotal year for ESG disclosures so far, as regulators around the globe have set clearer standards on ESG disclosures. Regulators across APAC have been putting out their own disclosure guidelines. On top of that, in April the US Securities and Exchange Commission (SEC) released proposed rules on climate-related disclosures, while in May the EU released its initial draft of the European Sustainability Reporting Standards (ESRS) under Corporate Sustainability Reporting Directive.

Nonetheless, the abundance of disclosure guidelines across markets further accentuates the challenge that there are no globally consistent standards.

Launched by the IFRS Foundation at COP26, the International Sustainability Standards Board (ISSB) comes in as potential candidate to tackle this difficult point. Building on the work of existing disclosure frameworks, in February the ISSB issued draft standards for sustainability- and climate-related disclosures, which will likely become the global baseline for sustainability reporting.

Even so, global reporting standards are still not in sync.

Firstly, the regulators’ takes on materiality differ. While both the SEC and ISSB use the ‘single materiality’ approach (considering financial implications only), the EU adopts a ‘double materiality’ approach (environmental and social materiality as well). As for external assurance, the US SEC recommends imposing limited assurance of emissions as soon as FY2024, but no timelines are outlined in the ISSB standards or the EU ESRS.

APAC corporates operating internationally will have to abide by local regulations in other markets. Under the SEC's proposed rule, over 2,000 American Depositary Receipts (ADR), of which over 470 are domiciled in China and Hong Kong, are required to obtain additional assurances on emissions, but the timing is subject to potential legal challenges in the US's rule making. The EU's European Sustainability Reporting Standards will be applied to APAC corporates doing business in the EU. The EU's double-materiality approach, which is not yet explicitly required by APAC regulators, could have substantial impact on the scope of corporates' sustainability reports. Taking climate as an example, a single-materiality approach about climate change will only require companies to disclose how climate change would impact the company’s bottom line, while a double-materiality approach would require companies also to discuss the opposite – namely, their own impact on climate.

Finally, companies also need to monitor the development of the ISSB standards, which will likely form a disclosure baseline in APAC alongside possible local additions. The Taskforce on Climate-related Financial Disclosures (TCFD) is getting a lot of support from regulators in markets such as Hong Kong, Singapore, Australia, and Japan. However, ISSB requires additional, more granular information than TCFD, including explicit requirements around the disclosure of emission-reduction targets and the use of carbon offsets.

As a result, ESG disclosures in APAC will be impacted unevenly by the global standards, with APAC corporates facing a balancing act to ensure their disclosures are able to meet the various requirements.

The writer is head of sustainability research (Asia Pacific ex-Japan) at Morgan Stanley.