ESG Disclosure Regulations are Strengthening in Asia Pacific
Environmental, social, and governance (ESG) reporting is growing in importance and urgency as the risks of climate change, social unrest, human health and safety, and reputational impacts from unethical conduct become more evident. These risks are driving investors and government regulators to examine the long-term resilience of companies from an environmental, social, ethical, and financial perspective. Businesses are also recognizing the value of ESG beyond mitigating risks: Sustainability is a company’s passport to the future, a way to drive innovation, and a lever to create a competitive advantage. Studies have shown that corporations prioritizing ESG performance tend to outperform their peers, are more resilient to supply chain disruptions, and produce better financial returns.
Along with this paradigm shift in ESG – moving from fringe to mainstream – regulatory schemes and mandatory ESG disclosure rules are emerging in regions around the world. Europe is commonly regarded as the leader, spearheading numerous policies for corporate sustainability and transparency. The EU Corporate Sustainability Reporting Directive (CSRD) and Green and Social Taxonomies, among other regional obligations like the UK’s Taskforce on Climate-related Financial Disclosures (TCFD) reporting mandate, are laying the foundation for regulated ESG reporting both in Europe and abroad. In the US, for example, the Security and Exchange Commission’s (SEC) recently proposed a new rule based on the TCFD framework that will govern and mandate emissions and climate risk disclosures. In Hong Kong and Singapore, similar ESG reporting requirements are coming into effect that will have implications for companies across the APAC region.
TCFD is guiding ESG reporting legislation across APAC
TCFD recommendations are gaining widespread recognition as the gold star of climate reporting. Many countries, including several in APAC, are choosing to adopt the framework as the basis for ESG reporting regulations. On a voluntary basis, TCFD has already gained significant uptake in APAC. Out of the 3,400 pledged TCFD supporters worldwide, 843 of the companies are headquartered in Japan, making the country a clear front-runner in climate-related risk disclosure. Other APAC markets are following close behind, including 144 Australian companies, 58 Singaporean companies, 60 Indian companies, 39 Hong Kong companies, and 39 mainland Chinese companies. With governments choosing to mandate TCFD and/or use it as the basis for their reporting recommendations, voluntary adoption of TCFD is being strongly encouraged to get ahead of incoming and existing regulations.
Let’s review some of the key ESG reporting activities by country
In November 2021, Hong Kong Exchanges and Clearing Limited (HKEX) published guidance to listed issuers on climate disclosures. The Guidance on Climate Disclosures will help companies assess and disclose their response to risks arising from climate change. All HKEX listed companies will be subject to this regulation, whether through mandatory disclosures or “comply or explain” provisions. The HKEX reporting obligation and guidance follow the recommendations of the TCFD. HKEX expects listed companies in relevant sectors (e.g., financial institutions) to be annually reporting in line with TCFD no later than 2025.
The Hong Kong Monetary Authority (HKMA) also recently released the supervisory policy manual for climate risk management. It provides high-level guidance for financial institutions to build climate resilience by incorporating climate considerations into governance, strategy, risk management, and disclosure. HKMA is requesting that financial institutions disclose in line with the TCFD framework no later than 2025, with initial disclosures occurring no later than mid-2023.
The Singapore Exchange (SGX) announced climate disclosure rules in December 2021. These reporting rules require every issuer to prepare an annual sustainability report, and guidance is also aligned with TCFD. Reporting will become mandatory for companies in the financial, agriculture, food and forest products, and energy industries beginning in FY 2023. For companies in the materials and buildings and transportation industries, reporting becomes mandatory beginning in 2024.
Japan’s Corporate Governance Code already recommends that all companies listed on the Tokyo Stock Exchange to produce sustainability reports to disclose opportunities and risks related to climate change. As recently as April 2022, Prime Market listed companies became obligated to meet TCFD requirements. Japan’s Financial Services Agency is also working on a proposal for mandatory climate risk disclosure and updated disclosure guidelines. This new rule is expected to be more enforceable and extensive than the current approach that is in place.
Australia does not currently have any mandatory sustainability reporting rules in place, but like other countries, the corporate governance codes do recommend publicly listed companies to disclose environmental and social risks. Several initiatives are underway that signal demand for Australia’s ESG reporting regulation. In 2020, the Australian Sustainable Finance Roadmap was issued, and the Australian Accounting Standards Board is working on sustainability reporting and is engaging with the International Sustainability Standards Board’s (ISSB) drafts for sustainability-related financial information and climate-related disclosures.
In 2021, the Securities and Exchange Board of India issued a requirement for the top 1,000 listed companies in India to prepare Business Responsibility and Sustainability Reports (BRSR). The new format of report builds upon past requirements to bring sustainability reporting to the same level of importance as financial reporting and is based on internationally regarded reporting frameworks, including GRI, SASB, and TCFD. Standardized quantitative and qualitative disclosure guidelines for ESG issues are in the works for future enhancements of the BRSR.
In 2021, The China Securities Regulatory Commission issued guidelines for publicly listed companies to cover environmental and social topics in their annual reports. It encourages companies to voluntarily report their sustainability risks and impact, such as emissions, biodiversity, and social risks. It is expected that these recommendations will be transformed into compulsory reporting by the end of 2022 and will likely follow closely the globally recognized reporting framework, GRI.
The Challenges and Opportunities of ESG Reporting for Business
Mandatory ESG reporting comes with a learning curve for organizations of all industries, geographies, and sizes. But one thing that is common among organizations is the critical importance of collecting clean, accurate ESG data.
Unlike financial reporting, where data is standardized and limited to a few commonly understood key performance indicators, a company’s performance on ESG and climate risk is comprised of hundreds of thousands of quantitative and qualitative data points. And, when the boundary of disclosures is extended into the Scope 3 category of emissions (emissions that are produced by a company’s indirect activities including supply chain operations), the need for data expands further. Truly comprehensive climate disclosure requires companies to work with a vast network of stakeholders, both inside and outside of the organization, to get an accurate picture of their impact and risks.
Understandably, data is a challenge as many companies ramp-up to full compliance with incoming climate disclosure rules. However, digital tools offer solutions to this problem, allowing organizations to centralize data management efforts and put advanced technology to work in order to process, analyze, and report this information.
A.S. Watson, a global health and beauty retailer, had committed to a 2030 Sustainability Vision for energy, greenhouse gas, and material use, but lacked a centralized tool to monitor, benchmark, and communicate the sustainability performance of its more than 16,400 sites in 29 markets globally. With Schneider Electric, the company implemented EcoStruxure™ Resource Advisor across all markets to collect data from its retail stores, offices, warehouses, and manufacturing sites.
This digital data management and reporting tool allowed the company to streamline and analyze sustainability, renewable energy, and GHG data across all facilities from a single online platform. As a result, it was able to benchmark ESG performance across a global portfolio, driving sustainable growth and a culture shift around sustainability, providing actionable insights to develop a robust sustainability program, and enabling its parent company to comply with the new HKEX reporting framework.
As this customer example demonstrates, the reach of reporting regulations extends beyond just the obligated listed companies. Subsidiaries will also need to comply, and unlisted companies should pay attention to what is being mandated today. Regulatory actions for listed companies will likely inform the future regulations for all organizations or requests from downstream customers. As businesses get more sophisticated and expand the scope of their ESG programs and reporting practices, they will begin to map and measure the impact and risks of activities in the value chain. As this value chain mapping process progresses for many organizations in Asia Pacific, upstream and downstream supply chain partners can expect to receive increased pressure to build more sustainable practices and increase their climate reporting transparency.
At Schneider Electric Sustainability Business, our expert team of consultants is keeping a close watch on emerging ESG reporting regulations around the world and what these will mean for businesses. Our advisory services and software are designed to help companies at all stages of ESG maturity grow and accelerate their progress. We invite you to connect with us to understand more about how these regulations may affect your organization and what you can do today to prepare.