Disregarded by many initially as being a tick-box exercise, environmental, social and governance (ESG) criteria is now firmly embedded into the investment and operational processes at asset managers and global banks. Although adoption of ESG is most advanced in Europe, Asia is not far behind.
Reports suggest that global ESG assets under management (AuM) could triple to $6.5 trillion between 2020 and 2025, with Asia accounting for $500 billion of that, corresponding to a quintupling of ESG AuM in the region since Q3 2021.1 So what is driving investor demand for ESG, and how are service providers responding to it?
1 Invesco – April 8, 2022 – ESG opportunities and challenges in Asia
Asian regulators address ESG
Asian markets are often disparaged for being laggards – relative to Europe and North America – on ESG, but this criticism is without merit. The region is committed to achieving net zero, which is why a number of local regulators are imposing ESG disclosure requirements on investors and issuers alike.
The Monetary Authority of Singapore (MAS), for example, subjects retail ESG funds to additional reporting obligations while Singapore Exchange (SGX) recently instructed listed companies to provide climate reports from 2023. Similarly, Hong Kong’s Securities and Futures Commission (SFC) strengthened its own disclosure rules for ESG funds back in 2021, while the local stock exchange – Hong Kong Exchanges and Clearing Limited (HKEX) - has insisted that publicly traded companies publish information about their ESG policies. In addition, China has introduced a set of voluntary ESG guidelines for domestic companies, using metrics which are broadly aligned with draft rules issued by the International Sustainability Standards Board.
Elsewhere, Malaysia’s Central Bank is prioritising climate change risk too, with plans to subject financial institutions – including banks and insurers – to added climate reporting requirements, climate stress testing and climate risk weighted capital requirements.
At a regional-level, efforts are underway to encourage greater standardisation around ESG. For instance, ASEAN established its own sustainability taxonomy, which seeks to provide a common framework around the financing of sustainable activities. Following on from the taxonomy, ASEAN has also published its Sustainable and Responsible Fund Standards (SFRS), a consultation document focusing on issues, such as disclosure and reporting of sustainability objectives, ESG investment processes, the use of reference benchmarks and naming conventions.2 Regulators in the region - including the Philippines Securities and Exchange Commission (SEC) - are already consulting on the document’s contents.
All these initiatives throughout Asia are ultimately fuelling increased investor interest in ESG products.
2 Responsible Investor – February 16, 2022 – Philippines reveals first look at proposed ASEAN sustainability funds standard
Data and ESG – the gargantuan elephant in the room
Although regulators in Asia - and globally - are looking to create a semblance of order and standardisation in the rapidly growing ESG market, progress continues to be hampered by ongoing issues around data quality and clarity.
One of the biggest problems is that ESG data is highly fragmented, especially in Emerging Markets, which can make it difficult for issuers and investors to report on ESG. While regulators and industry standard setters in the region are introducing ESG reporting rules, this is happening at different paces and with local market nuances. This lack of a joined-up approach is creating inefficiencies and complexities.
The same is true of ratings agencies, many of whom adopt their own methodologies and frameworks when dispensing ESG scores. In some instances, a single company might receive different scores from multiple ratings agencies. For example, Tesla was recently excluded from the S&P 500 ESG Index following claims of racial bias and crashes linked to its autopilot vehicles3, yet MSCI gives the electric vehicle manufacturer an ‘A’ rating.4
However, service providers are working on ways to better systematise the vast troves of ESG data. Some fin-techs are leveraging artificial intelligence (AI) tools to organise ESG data more effectively. Others – including STACS in Singapore – are using Blockchain technology to aggregate, record, and store ESG certifications and corporate data from verified sources on a single registry.5 This information can then be used by financial institutions for various ESG purposes.
Within Securities Services, there is certainly a role for banks to act as aggregators – providing a consolidated view of ESG data for institutional clients. There is an opportunity here to facilitate client needs in terms of ESG reporting – whether it’s internal reporting requirements or external reporting for their regulators and end-investors. As the ESG market matures, aggregators will become increasingly important.
3 Reuters – May 19, 2022 – Tesla cut from S&P 500 Index and Elon Musk tweets his fury 4Barron’s – May 20, 2022 – Tesla got dumped from an ESG index. One critic calls the move ‘a true indictment of sustainability ratings’ 5Fin Tech Singapore – STACS officially launches ESGpedia powering MAS’ ESG registry
Becoming a driving force
Clients – including asset managers, asset owners, global custodians and brokers – are all collectively taking ESG seriously. Many are now inserting questions on ESG into their respective vendor due diligences. Those providers with compelling ESG strategies will be the ones who attract mandates moving forward.
Inside its Securities Services arm, Standard Chartered is actively engaged on matters related to ESG. At an industry level, the bank is a signatory to the Global Principles for Sustainable Securities Lending and is a member of the International Securities Services Association’s ESG Working Group, where it is looking at ways to better share information and educate people on the topic of ESG.
A growth market
ESG is becoming more ubiquitous in Asia, as a more investors take sustainability issues into account. It is also being enabled by the introduction of new regulations and pan-Asian standardisation initiatives. However, ESG does face challenges around its data, and these do need resolving if the market is to reach its true potential.
