ESG’s Future In Asia

The global sustainability trend has hit a snag the last two years. In the US, the movement to incorporate environmental, social and governance (ESG) standards in business and investing is facing a backlash driven by a collection of vocal business and political figures. In the European Union, on the other hand, commitment to stakeholder-style capitalism—and to environmental considerations in particular—remains strong.

The future path of ESG though, may well depend on choices made by the rest of the world, and particularly Asia. Why Asia? Although its per capita emissions are below those of the US and EU, the populous Asia-Pacific region (APAC) is currently a massive carbon producer. Asia is also rapidly becoming a pivotal player in the search for solutions to the climate crisis, and has the resources to achieve it.

“China and India produce one third of the world’s carbon emissions; the former makes over 60% of the solar panel supply and owns the bulk of the rare earth minerals required to manufacture EV batteries,” notes Drew Bernstein, co-chairman of accounting firm Marcum Asia. “Moreover, the region feels the effects of global heating more than anywhere else.”

Africa is certainly pinched between its huge burgeoning energy needs and massive financing gap. Latin America, grounded in agriculture, is investing in sustainable transition, but is a relatively small part of the world economy. By contrast, APAC is the behemoth, anchored by the mature economies of Japan and Australia and primed for future turbocharged growth by the Association of Southeast Asian Nations (ASEAN), which is forecast to be the world’s fourth-richest economic bloc by 2030.

Although its per capita emissions are below the US and EU, populous Asia is currently a massive carbon emitter, generating 17.2 billion metric tons of carbon dioxide via energy production in 2021 (51.2% of the global total), versus 4.5 billion from the US (13.6%) and 3.7 billion in Europe (11.1%), according to the International Energy Agency.

Lee, DBS: Issuers recognize the need to establish green credentials or risk being locked out of capital markets.

Asia’s wide range of economic development—from frontier markets such as Vietnam to the highly developed economies of Singapore and Japan—means that while the region’s energy and growth needs are significant, it also commands the wealth needed to finance change. Furthermore, cultural expectations in most Asian countries lean toward a strong role for governments in corporate affairs—and for stakeholder-capitalism approaches that seek long-term stability through balance among the needs of employers, employees, customers, citizens and even nature.

“We’re keenly aware of the growing importance that regulators, customers and stakeholders—including banks—place on ESG, climate change, and carbon emissions, in both managing risks and identifying opportunities,” says Gopul Shah, director of corporate treasury and structured trade finance at Singapore-based Golden Agri-Resources, (GAR) a regional agricultural giant specializing in palm oil. “There’s now a clear expectation for companies like GAR to disclose, comply, or explain what we’re doing in critical areas such as sustainable sourcing practices, investments in traceability or mapping and mitigating our carbon emissions.”

Together, these factors are making themselves felt on three fronts: a wave of new and more aggressive environmental reporting regimes across the region, a lively fintech business facilitating reporting connected to the new regulations, and a growing and innovative market in sustainable finance.

Regulators Forge Ahead

Thus far, the approach that Asian governments and corporates are taking to the business of sustainability resembles the European model more than the American. Consider Singapore and Hong Kong. Five years ago, lax environmental regulation and disclosure were among the attractions of these economies. Now, ESG regulation in both is tightening to meet international guidelines. Yet, the two jurisdictions continue to attract corporate interest as bases of operation and corporate treasuries, both from multinationals outside the region and from within APAC.

In fact, these two are effectively leading the ESG regulatory wave that is beginning to sweep the region. In North Asia, Japan is slated to adopt new sustainability disclosure rules by March 2025 consistent with criteria set by the International Sustainability Standards Board (ISSB). China’s three main stock exchanges—Beijing, Shanghai, and Shenzhen—recently unveiled new sustainability reporting guidelines that will require hundreds of large and dual-listed companies to disclose ESG-related information, including energy use, climate change, ecosystem and biodiversity protection, and supply chain security, starting in 2026.

“Mandatory reporting is expected to significantly impact Chinese companies, pushing them to prioritize and transparently report on their sustainability efforts,” says Polly Milne, project director at the Sustainability Group consultancy, based in London. This amounts to “a significant step towards increased corporate transparency and environmental responsibility that will align China with ESG disclosure rules in other countries, including the UK, Australia and Singapore.”

To be sure, not every jurisdiction is proceeding at the same pace. South Korea’s Financial Services Commission announced late last year that it was postponing mandatory ESG disclosure rules for listed companies until 2026 or later, citing delays in the US and other countries and requests from the Korean business community for more time. But new rules are coming nonetheless, initially for companies listed on the Korea Composite Stock Index that have more than 2 trillion South Korean won (about $1.5 billion) in assets.

But the US, where legislation under consideration excludes Scope 3 (supply chain) emissions, is looking more like a global outlier. “The international standard for ESG reporting is the ISSB, which includes Scope 3 emissions reporting as mandatory,” explains Benjamin Soh, co-founder and CEO of regional ESG-focused fintech Stacs. “In Asia, regulatory reporting will be adopted according to this standard for all listed companies.”

In measuring progress and meeting such goals, Asia benefits from a leading edge in technology—environmental as well as financial technology. Hong Kong-based Intensel, for example, uses satellite imagery and big climate and asset databases to provide real-time portfolio analysis.

Another entrant is ESGpedia, a digital platform developed by Stacs, a Singapore-based data and technology company that aims to bolster several green and sustainable-finance efforts, including ASEAN’s Single Access Point for ESG Data, a digital one-stop shop for corporate sustainability information; and the Monetary Authority of Singapore’s Greenprint ESG Registry, a blockchain-based network that is part of a wider effort “to harness technology and create a data-centric ecosystem to support the financial sector’s sustainability agenda.” As sustainability-focused regulations roll out across Asia, tools created by companies like Intensel and Stacs are expected to play a key role facilitating compliance.

Per Capita CO2* Emissions By Region
North America 10.5
Oceania 9.9
Europe 6.9
Asia 4.6
South America 2.5
Africa 1.0
*CO2 from fossil fuels and industry, tonnes. Source: Our World In Data

Shaping Sustainable Finance

As this suggests, APAC is also expected to drive the next stage of growth in sustainable finance, which has surged from less than $100 billion in 2015 to $4.6 trillion worldwide in 2022, according to Precedence Research, which predicts 20% annual growth for the market through 2032, when it could reach $29.1 trillion. “Much of that growth will come in [APAC] as it catches up with Europe and North America and, in some areas, overtakes them,” Societe Generale predicted in a January research note.

Investment bankers and institutional investors in the region expect the new environmental reporting regimes to reinforce North Asia’s existing preeminence in green and impact bond issuance and spawn a new boom in sustainable issuance in East and Southeast Asia. For Asia’s CFOs, challenges and opportunities abound: The former involve meeting a rising level of government regulation aligned with ever-converging regional green taxonomies; the latter involve an increasingly deep and sophisticated sustainable loan, bond and derivatives market.

Cross-border issuance within Asia gives corporate treasurers the opportunity to diversify their investor base while tapping a growing sustainable-funding market. In March, CapitaLand Investment (CLI), a Singapore real estate firm, issued its inaugural sustainability-linked Panda bond, with a three-year tenor at 3.5% per annum, raising one billion renminbi (about $138.7 million), the first such from a company based in the city-state. The deal was 1.65 times oversubscribed, indicating a strong underlying demand for sustainability-linked debt from Chinese investors.

Meeting key performance indicators (KPIs) linked to the interest rate on a loan or bond can deliver substantial bottomline benefits, the discount depending on the market, the bank and the corporate making the deal. “In Asia’s emerging markets, the discount could be as high as 25 basis points per annum,” says Stacs CEO Soh. “You’re saving a lot of money down the road.”

Another advantage of sustainability-linked issuance is that funds can be used for refinancing purposes. In the CLI deal, coupon payments are linked to a reduction of CLI’s energy consumption intensity at its properties in China, targeting a 6% decline.

These benefits are key for RGE, a Singapore-based, privately held multinational with global assets valued at more than $30 billion. RGE has business segments in palm oil, pulp and paper, viscose fiber, and energy provision. “To drive real sustainability impact and ensure that all our businesses have skin in the game,” says Patrick Tan, RGE’s head of banking, “we have committed 100% of our financing to sustainability-linked loans (SLLs).” Proceeds will support the growth of the company’s core businesses as well as its expansion into new initiatives such as sustainable aviation fuel. “SLLs are ideal for us as they are aligned to our DNA as well as our businesses’ sustainability goals,” Tan adds. “In 2023, we issued around $1.14 billion in SLLs and we expect to seek a similar or bigger funding amount this year to support our growth.”

From an issuer’s point of view, sustainability-linked bonds (SLBs) carry another attraction: callability. According to an International Finance Corporation February 2023 report, 65% of the outstanding global corporate SLB market is likely to be called, versus 23% of green bonds—with 69% tied to reduction of greenhouse gas emissions, followed by increased use of renewable energy—and step-ups for missing ESG-linked KPIs are relatively low, at a 25 basis point average.

“Issuers recognize the need to establish green credentials or risk being locked out of capital markets. However, not every issuer has eligible green assets that can be tagged to use-of-proceed instruments like green bonds,” says Clifford Lee, global head of Investment Banking at DBS. “SLBs play a critical role in bridging that gap by supporting companies as they undergo the green transition.”

The Ratings Game

The lack of standards for ESG factors in business remains a point of contention. GAR illustrates why: The company has been an early adopter of standards set in Singapore and has started implementing international Taskforce on Climate-related Financial Disclosures (TCFD) recommendations and reporting Scope 3, land use and forestry emissions. Do those efforts earn it high marks? Depends whom you ask. A- from Refinitiv, BB from MSCI and High Risk from Sustainalytics.

Elsa Pau, founder and CEO of Hong Kong-based BlueOnion, a fintech company that promotes responsible investing, argues that the diversity of views is healthy: “Different ESG ratings agencies look at companies from fundamentally different perspectives.”

Others, like Karl Schmedders, professor of finance at IMD business school in Lausanne, complain that inconsistency masks the compromises in the business model: “Why do the agencies that provide those ratings get involved? They in essence want to make money, and the enterprise enables greenwashing.”

Here, banks may be able to lend help to corporate clients as arbiters and assessors. “For commercial banks, ESG ratings serve more as a point of reference,” says RGE’s Tan. “For corporates that are transitioning to a greener future, banks may be better equipped than a standard set of ratings to dissect and identify factors that move the needle.”

As DBS’ Lee notes, ESG ratings can be useful in demonstrating a company’s adherence to ESG principles and exposure to ESG risks. However, as ESG ratings remain in an evolving stage of development, many companies continue to rely on their respective ESG financing frameworks to showcase ESG plans to investors.

“While banks expect sufficient ESG transparency from their clients to ensure they can address climate change or transition risks and opportunities, this is still one among many factors that lenders consider,” says GAR’s Shah. “Corporate credit rating, business risk and management profiling, cash flow, industry risk, governance and relationship history continue to remain primary considerations for lenders.”