Asia braces for new ESG standards

IFR Asia 1301 - 02 Sep 2023 - 08 Sep 2023
6 min read
Morgan Davis

A new set of sustainability reporting standards laid out by the International Sustainability Standards Board this summer is set to unify approaches to reporting globally, but implementation is expected to differ across Asia Pacific.

The ISSB was established by the International Financial Reporting Standards Foundation in November 2021 to develop international sustainability standards as a sister organisation to the International Accounting Standards Board. At the end of June, the ISSB announced new standards to create a common basis for companies to make climate risk reports.

Mandatory use of the standards, which cover general sustainability and climate-related disclosures, will go into effect in some jurisdictions beginning in January, with others rolling out the rules in following years.

The Stock Exchange of Hong Kong said earlier this year that it would have new disclosures in alignment with ISSB, with a proposed effective date of January 1, and Singapore has proposed mandatory climate reporting in line with ISSB from 2025 for listed issuers and 2027 for large non-listed companies. China has not made a formal announcement about ISSB adoption but has signalled support and ISSB opened an office in Beijing this year.

“ISSB will gradually have an impact in influencing national governments to implement sustainability reporting,” said Justin Tan, corporate and securities partner in Mayer Brown’s Singapore office. “ISSB provides clear direction and guidance to national governments on how to implement sustainability reporting, and also to APAC companies on what to expect down the road so they can better prepare.”

At the moment, reporting and verification of sustainability-related disclosures by companies in Asia Pacific is scattershot. Companies comply with different local regulations and use international bodies like the Global Reporting Initiative for guidance.

But the lack of unified standards can create confusion, in particular for investors. More sophisticated investors generally have their own in-house approaches for analysis, while smaller investors may be forced to take third-party ratings and assessments at face value. ISSB will give all investors the same type of data to work with, and will make in-house assessment easier, said Luying Gan, head of sustainable DCM for Asia Pacific at HSBC.

Nneka Chike-Obi, head of APAC ESG ratings and research at Sustainable Fitch, said ISSB will be useful guidance for companies to see what investors expect from their reporting, as it operates outside of local regulations. Conforming to ISSB standards will allow companies in Asia Pacific to report at the same level of detail as their peers listed elsewhere.

“A lot of the time, they’re not as aware of what the international standards are for these kinds of things,” said Chike-Obi. As ISSB becomes more integrated into global markets, companies that do not comply may find themselves at a disadvantage when courting investors, she said.

HSBC's Gan believes the adoption of ISSB will support green and sustainable bond issuance as well, as companies will have the groundwork in place ahead of time. At the moment, some companies may not do detailed ESG reporting until they are preparing to sell a green bond.

“Even though you are not considering a labelled transaction for now … it doesn’t mean you can forget about [ESG],” said Gan.

Not every company will need to follow ISSB initially, as mandatory reporting will be limited to listed companies that need to fall in line with stock exchange requirements. And local regulators and exchanges may not require ISSB to be implemented to its full extent, giving a bit of wiggle room as to how much data need to be provided.

“If you’re issuing local currency bonds, labelled or not, in Japan, Malaysia, China, markets where they are happy to buy those things … it’s going to be harder to know if there is going to be as much interest in rapidly adopting [ISSB],” said Chike-Obi of the unlisted companies that will not be subject to mandatory reporting.

There will be hurdles to implementation globally, and many companies are already nervous about being able to provide the information demanded.

“Another layer of reporting requirement adds to [companies’] burden,” said Gan, explaining that small and medium enterprises especially may need more time and help to meet the standards.

Mayer Brown’s Tan said there will be differences in the timing of implementation and the thresholds used to determine who must report. He expects “significant differences” in the implementation of standards across the region. “These often need to be tailored so that they are appropriate and do not impose too heavy a burden or have unintended consequences,” he said.

Chike-Obi said companies are not against ISSB in principle, but their resources and experience may need to be scaled up significantly in order to keep up with the reporting. For example, manufacturing companies may need to hire someone familiar with emissions standards. Giant conglomerates that have multiple businesses will need people who understand each area of their company.

“These things are quite detailed,” said Chike-Obi. “Just figuring out where are the places within my organisation that I need to source this information from, that is a complicated question.”

She added: “It’s not going to move as quickly as some people, especially investors who want this information, want it to.”