The New World of ESG Compliance and Communications in Asia Pacific
Patrick Yu, GM, SVP and Senior Partner, FleishmanHillard Hong Kong
The global landscape for environmental, social and governance (ESG) reporting is in the midst of rapid transformation, driven by new standards and evolving regulations while pressed by broad-based demand for greater transparency and accountability, and all set against a backdrop of a growing number of investment decisions being shaped by ESG considerations.
Investors of all stripes (institutional, pension, private equity etc.) plus other stakeholders want clarity and consistency in the ESG audit process so they can make the correct investment decisions. Many already undergo due diligence on ESG credentials before putting money into funds, M&As or other company financings, but they want to use standardized measures as a foundation.
In our new report, The New World of ESG Compliance and Communications in Asia Pacific, we look at the new standards benchmarks for ESG Reporting from the International Sustainability Standards Board (ISSB). We also take a look at the readiness of companies and different jurisdictions to adopt them.
The stakes are high. Bloomberg Intelligence reports that ESG investable assets surpassed $35 trillion in 2020 and could reach $50 trillion by 2025 – that’s about one-third of projected assets under management globally. For fund managers and investors to be absolutely confident in the integrity of the ESG products they sell or buy is paramount.
In our Future of Asset Management in Asia report released earlier this year, we found that 80% of investors place a high value on strong ESG product offerings, especially those in mainland China (90%) and Hong Kong (80%).
Why effective ESG communication is essential
In June, the ISSB issued its first two standards that set a new global benchmark for such reporting. In parallel, regulators in the U.S., EU and Asia Pacific are moving ESG disclosures from voluntary to mandatory. The moves add up to rapid change and genuine progress in ESG reporting.
Essential to this are effective ESG-related communications – a true business imperative. Besides meeting compliance requirements, companies must craft compelling ESG narratives that satisfy diverse stakeholder expectations.
Many companies are in fact well underway in upgrading their ESG reporting processes. Almost all (99%) of S&P 500 companies voluntarily publish ESG reports in some form, while 85% of Hong Kong-listed companies disclose details of climate-related risks and mitigation measures. That said, disclosure is not uniform across jurisdictions, of which few require independent auditing of claims.
The two new ISSB standards cover general sustainability-related risks and opportunities, and climate-related disclosures. Both are voluntary and apply after Jan. 1, 2024, with implementation by jurisdictions in Asia Pacific and the EU likely by 2025.
In Asia, Hong Kong Exchanges and Clearing (HKEx) became one of the first in the world to announce plans to align with the new ISSB standards, which include new mandatory climate-related disclosures that supersede the current “comply or explain” system. In Singapore, the stock exchange is taking a phased approach to mandatory climate reporting, applying these rules in stages across different industry sectors.
ESG implications and next steps
It’s clear that investors increasingly seek sustainable investments in response to greater awareness of climate change, energy security and ethical finance. Fortuitously for them, higher ESG performance is also seen to correlate with lower risk and better long-term profitability.
So, what are the implications for business leaders in the Asia Pacific?
- Regulatory changes and investor demand for new reporting standards mean sustainability information is rising to an equal footing with financial information.
- Stricter reporting guidelines and investor scrutiny mean ESG is more integral to corporate communications strategies, so it is vital to develop a strong narrative.
- Regulatory trickle-down will hit businesses caught up in the supply chain of companies that need to be ESG compliant, with the key sticking point being Scope 3 emissions.
- Regulators worldwide are committed to interoperability and seek an alignment of ESG standards to ease the reporting burden for companies and aide investor decision making.
- Companies doing business in Asia Pacific are rightly focused on compliance with ESG reporting standards and regulations as disclosure moves from voluntary to mandatory.
We recommend eight steps to prepare for ESG-driven transformation:
- Begin now: ESG reporting is more and more urgent; companies have limited time to comply.
- Explore sentiment: perception studies help identify investor sentiment and views on corporate ESG performance.
- Build trust: assess your data for alignment with applicable mandatory and voluntary frameworks and identify gaps and actions.
- Talk to investors: integrate ESG messaging for more active investor relations.
- Tell compelling stories: refresh and update narratives and communications materials around ESG.
- Inspire collaboration: use internal communications to improve staff knowledge of relevant ESG standards.
- Plan for the worst: prepare for ESG-related risks such as a greenwashing accusation, non-compliance or action by consumer or shareholder activists.
- Stay on track: monitor the development of global and local ESG standards.
Asia’s multiple jurisdictions create opportunities and challenges in ESG compliance and communications. Having a trusted advisor will help you navigate the complexity of the ESG landscape in the future.