In recent years, environmental, social and governance (ESG) practices and policies have become integral to organisations across the world. These practices allow businesses to showcase their dedication to ethical business conduct, which is crucial for retaining customers and developing reputations as trusted companies.
As the world’s largest continent, Asia has a pivotal role to play in reducing greenhouse gas emissions as the continent looks towards innovation with its ESG strategy according to Jonathan Berney, managing partner at Accelerated Infrastructure Capital Limited (AIC).
At the Datacloud ESG Summit in Oslo, Norway, Berney joined Capacity’s Saf Malik to discuss ESG innovation in Asia.
There is a necessity, Berney says, particularly in China and India – two countries that represent a population total of 2.8 billion people to innovate in order to reduce greenhouse gas emissions.
And in China, progress is being made.
On July 4, Frans Timmermans, executive vice-president of the European Commission and Ding Xuexiang, first vice premier of the People’s Republic of China (PRC) held the fourth China-EU High-Level Dialogue on Environment and Climate (HECD) in Beijing, in an attempt to deepen cooperation on the global green transition.
A joint statement published by China and the EU at the event noted that “green is the distinctive colour of EU-China cooperation”.
During the HECD, the parties discussed environment and climate priorities in terms of domestic implementation, as well as bilateral and multilateral cooperation.
The EU and China agreed that domestic implementation efforts would need to be extended and amplified in order to effectively address the triple planetary crises of climate change, pollution, and biodiversity loss.
Historically, the EU and China have achieved some success in climate engagement. For example, in July 2021, China launched its national emissions trading system after nearly a decade of cooperation within EU-funded capacity-building projects, while in November 2021 at COP26, the EU and China reached a common-ground taxonomy.
While both China and India have strong domestic markets, this could prove to be a challenge in reducing greenhouse gas emissions, Berney says.
In India, he believes that the hyperscalers are “driving the ship and setting the standards”.
Therefore, if service providers and the government cannot deliver the standards that have been required then that means that there are choices for the biggest companies operating in the market.
But because of the provincial nature of India and the sudden competition being set up in the country, ESG is very much on the agenda now when it wasn’t so much five years ago, Berney says.
Paul Davies, partner at Latham & Watkins a law firm, that advises the businesses and institutions that “power the global economy” thinks quantifying the importance of sustainability in Asia is not straightforward – in particular without considering aspects such as how 'sustainability' is defined and the demographic in question.
“Whether sustainability is important to the general population is a different question from its importance to businesses, regulators or governments, for example,” he says.
“Particular jurisdictions across Asia are some of the most exposed to the physical impacts of climate change, such as extreme weather events which have had and will continue to have a severe human and economic impact.”
However, across the region, Davies says, there will be differing levels of concern towards the topic of sustainability, which is unsurprising given the region’s huge geographical, economic and social diversity.
Regulation
But do the regulations in place allow for innovation to take place?
Reports in recent years have indicated that Asia lags behind the rest of the world in ESG ratings. An ESG rating measures a company’s exposure to long-term ESG risks, these risks involve issues such as energy efficiency, worker safety and board independence.
Market participants on the continent have called for stronger regulation believing the market to be hampered by the fact that it is so fragmented with multiple regulators in different jurisdictions. Farhana Sharmeen, partner at Latham & Watkins says that some stakeholders argue that increasing regulation can stifle innovation.
“This is particularly challenging as increasingly, innovation is a key driver to navigating sustainability."
Sharmeen says a key challenge is balancing the move from fossil fuel-derived energy sources whilst enabling equitable economic growth.
“Regulation needs to reflect this dichotomy of balancing sustainability goals with growth in order to be effective in the region,” she adds.
Berney believes it would be unfair to “blanket” Asia and compare it as a region to the West with regards to ESG.
This, in his view, is because countries such as India, China and Malaysia are moving fast and will have no choice but to create sustainable infrastructure.
The comparison is especially unfair as Japan is already being innovative in terms of creating a regulatory environment and encouraging new data centres and infrastructure providers to deliver innovative solutions. Berney believes this is the same for both Hong Kong and Singapore.
Environment at the forefront
Sharmeen says that in general, governments and regulators across Asia have begun to use targets, policies and regulation across ESG topics to make progress towards the sustainable future of the region.
“For example, most countries across the Asia Pacific have revised their climate targets and around one-third have net zero commitments,” she says.
“Typically, the ‘environmental’ aspect of ESG seems to be at the forefront of initiatives across the region compared to social and governance issues.”
This, Sharmeen believes, will likely continue in the coming years as the region’s reliance on heavy carbon industries means that regulatory and policy developments are key to accelerating energy transition.
“The growing number of climate-focused funds and sustainability reporting frameworks are being developed to highlight this trend.”
Davies says that considering regulatory developments, a number of stock exchanges and market regulators have implemented or are developing disclosure requirements for listed companies, including varying levels of ESG reporting for listed companies in Hong Kong, India, Indonesia and Japan, among others.
Further, he adds, a number of countries including Singapore, Indonesia, Malaysia, South Korea and Thailand have a form of green or sustainable taxonomy in place.
“There is also the ASEAN taxonomy for sustainable finance which aims to serve as a common language across the ASEAN jurisdictions (covering 10 member countries across South-East Asia) regarding labelling economic activities.”
The ASEAN taxonomy aims to consider the region’s specific circumstances with respect to energy transition, and for example, recognises efforts toward the early retirement of coal-fired power plants as a transition activity.
Future developments
Berney believes Asian regulators are driving ESG innovation with greater intervention. But he notes that the approach on the continent is “If you don’t comply, it’s not that you just get a fine, you don’t get to play”.
As for a particular regulatory framework that will work, Berney doesn’t think there is one set model, but if there was it would be a middle ground between what is happening in Europe and Asia.
In terms of regulatory developments, a number of regulators across the region have already responded to the release of the International Sustainability Standards Board (ISSB), indicating the expectation that the ISSB standards will be integrated into a number of local requirements across Asia.
Sharmeen says regulators in Hong Kong have been working to align disclosure standards with the ISSB standards prior to their release, including proposing to mandate all issuers to introduce new climate-related disclosures aligned with IFRS S2” – Climate-Related Disclosures.
In August 2023, a steering group co-chaired by the Hong Kong Monetary Authority (HKMA) and Securities and Futures Commission (SFC) announced they are developing a “comprehensive Hong Kong roadmap” to adopt the ISSB standards.
In Singapore, Sharmeen says, a consultation paper in July 2023 proposed to “mirror the ISSB standards in local mandatory climate-related disclosure”. Singapore aims for listed companies to start using ISSB-aligned climate disclosures from the reporting year 2025.
Using the ISSB standards across the region may help to enable a consistent comparison of sustainability reporting across sectors and geographies.
Further, as ESG reporting matures, organisations are likely to increasingly integrate sustainability-related issues into strategy and finance planning.
